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PERSONAL FINANCE

Communication Is Key in Avoiding Foreclosure

Mortgage: Delays and modified terms may be available, as long as lenders are informed.

September 12, 2002|KATHY M. KRISTOF | TIMES STAFF WRITER

Home mortgage foreclosures are running at a pace not seen in 30 years. But strapped borrowers who confront their problem head-on may be able to avoid losing their homes to foreclosure.

"There are a number of things we can do," said Thomas Johnson, director of default at Wells Fargo Home Mortgage. "We can do anything from allowing the borrower to work out another repayment plan to a loan modification where we cut the interest rate. Our object is to keep this person in the home."

The first thing overextended borrowers need to do is call their lender. Too often, people who have lost their jobs or find themselves drowning in debt hide from their lenders--and hide the facts from their families--because they're too humiliated to admit the truth, said Ralph Roberts, president of Ralph Roberts Real Estate in Detroit.

By the time they come clean, they are already drastically behind on their payments and potentially past the point where they can recover, he said.

"Most people go into denial and they don't do anything," Roberts said. "But every day it gets harder. Try not to get in the jam where you've already missed a payment. You have to communicate with your bank like you are supposed to communicate with your spouse."

If the problem is temporary--you've lost a job but expect to get a new one; you have an illness in the family or are in the midst of a divorce--the bank has several options:

* Payment moratoriums. The bank can suspend your loan repayment for a set period of time, said Johnson of Wells Fargo. Payment moratoriums--also called forbearance--can last three months to a year, experts say, depending on the borrower's situation. The missed payments can be added to the balance of the mortgage, or they may be segregated into a separate debt.

In some instances, lenders will charge interest on the missed payments. However, if the loan is backed by the Federal Housing Administration, the back payments may be interest-free and collected only after the first loan is repaid or the house is sold, said Laurie Maggiano, director of asset management and disposition at the Department of Housing and Urban Development in Washington.

In any case, the payment hiatus can give a borrower with a temporary problem enough breathing room to resolve it or sell the home.

* Modification of loan terms. Lenders often will refinance the debt to a lower interest rate for borrowers who can't quite meet current payments but could if the monthly amount were somewhat lower, Johnson said. Loans that are guaranteed by the Federal Housing Authority also may be modified by stretching out the repayment term, Maggiano said, thus lowering the monthly payment.

* Payment plans. Borrowers who have missed a payment or two may be able to work out a repayment schedule if the economic difficulty that put their loan in arrears is now resolved, Johnson said. For instance, Wells Fargo may divide up the amount of the missed payment and let the borrower catch up over 18 months by adding an extra amount to the monthly payment.

On FHA loans, HUD will lend the borrower the amount needed to get current without interest.

Borrowers also should take a close look at their budgets and see where else they can pare expenses, said Matt Coffin, president of LowerMyBills.com, a Santa Monica-based Web site.

"Immediately look at income and expenses and prioritize your debts," Coffin said. "Keep in mind that your mortgage is key to keeping a roof over your family's head. Credit cards and other unsecured debts can be put off to pay the mortgage."

Cut out luxuries and bargain-hunt for the necessities so you can show your lender the substantive steps you're taking to get on track, he said.

"If unsecured debt is part of your problem, seek assistance from nonprofit credit counselors," Maggiano said. "They can put you on a budget, and they are often successful in negotiating with creditors to reduce your debt."

If a borrower realizes that the financial difficulty causing his mortgage delinquency is not temporary, he needs to consider the best way to get out of the home, Roberts of Ralph Roberts Real Estate said.

If you have substantial equity and are in a strong real estate market, which currently applies to many parts of the country and certainly to Southern California, the best option is to list the house for sale, he said.

But if you have little equity--or owe more than the house is worth--you would, again, want to discuss the situation with your lender.

Lenders have two options: They can allow you to do a so-called short sale, which involves selling the house on your own for whatever it's worth. In these deals, the lender agrees to take that amount--even if it is less than the loan amount--and not pursue the borrower to pay more.

Or the borrower can turn over the house through a so-called deed in lieu of foreclosure. In this case, the borrower turns the deed over to the lender in exchange for eliminating the mortgage debt.

The transaction will put a black mark on the borrower's credit report, Johnson said, but it's not quite as damaging as a full foreclosure, in which the lender seizes a borrower's home outright for nonpayment of the mortgage.

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