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Foreclosure costs lenders money too, which means a home loan workout is possible. Here is a step-by-step guide to working with your mortgage servicer to negotiate forbearance or modification.
Mortgage companies say foreclosure is the last thing they want, because seizing a delinquent borrower’s house costs money. It follows, then, that the key to keeping your house is to make it less expensive for the lender to work with you than to foreclose. How do you go about working out a plan to keep your home? When you fall behind on payments, you improve your chances of getting cooperation from the mortgage servicer by following these guidelines.
The mortgage servicer collects monthly payments, passes them along to the homeowners insurance company and tax collector, and makes phone calls and sends letters when borrowers fall behind. Academic researchers have found that in about half of foreclosures, the delinquent borrower never talked to the servicer.
Getting borrowers to respond is one of the biggest challenges servicers face, according to William Rinehart, vice president and chief risk officer for Ocwen Financial Corp., a large servicer of subprime mortgages in West Palm Beach, Florida. Fear, embarrassment, and shame keep delinquent borrowers from talking to servicers. Many of these borrowers are financially unsophisticated, so the whole process feels intimidating, and they convince themselves that ignoring the problem will make it disappear. It won’t.
Delinquencies and foreclosures have been rising nationwide for more than a year. As mortgage lenders lay off loan officers, mortgage servicers hire debt collectors and loss-mitigation specialists. Ocwen’s loan resolution department has grown to 123 full-time employees, up from about 70 a year earlier. Teresa Bratcher, Ocwen’s director of foreclosure prevention, says the company trains its collectors to approach borrowers with empathy, recognizing that most of these people didn’t choose the circumstances they’re in.
Tip: Answer the phone and open your mail, but don’t agree to any terms until you read the next tip.
Respond to the mortgage servicer, but don’t let yourself get rushed into a promise you can’t keep. Before making a deal with the servicer, describe your situation to an attorney, Realtor, accountant, or a knowledgeable mortgage person. When you’re in danger of foreclosure, those are perilous waters, and you want a good adviser who can serve as an intermediary with the lender.
Another option is a housing counseling agency or a consumer credit counseling service. A good place to start is the NeighborWorks Center for Foreclosure Solutions website. NeighborWorks counselors will make referrals to local agencies. Michelle Lewis, president of Northwest Counseling Service, an agency in Philadelphia that offers mortgage counseling, encourages people to get help with the process wherever they can, noting that borrowers can try to handle things on their own, but they need to proceed carefully.
Tip: Choices for guidance include consulting an attorney, a Realtor, a credit counselor, or a housing counseling agency.
Northwest Counseling Service helped Bernie Watson keep his rowhouse in the Germantown section of Philadelphia. Watson, who is in his 50s, bought the house in 1990 and refinanced the mortgage in 2000. He didn't realize the new servicer wasn't escrowing the property taxes. Taxes went unpaid until the mortgage was sold to another servicer late last year. To get Watson current on his taxes within a year, the new servicer almost tripled his monthly payment, from $532 to $1,436.85, beginning in February.
Watson couldn't afford that, so he sent in as much as he could every month, well over $500. He later found out the servicer applied his entire payment to the tax bill and none of it to the loan balance. So even though Watson sent a check every month, the servicer said he was missing all of his payments. Watson got a foreclosure letter along with an "Act 91 notice," required by Pennsylvania, which listed housing counseling agencies. He chose Northwest because its office was closest.
Northwest connected Watson with Samantha Arens, a housing counselor with the Philadelphia Unemployment Project. She helped Watson get approved for an $11,300 loan from the state's Homeowners' Emergency Mortgage Assistance Program, or HEMAP, after he had previously been rejected. The loan brought Watson current on his taxes and mortgage. He repays HEMAP $25 a month, a rate that won't pay off the loan until Watson is in his 90s. More likely, it will be repaid when the house is eventually sold.
Watson lost 40 pounds during the ordeal. He suffered sleeplessness and headaches. It's hard to believe things would have gone as smoothly without help.Mortgage servicers offer two broad types of workouts, depending on whether the borrower’s troubles are short-term or long-term. Before negotiating with a servicer, know which category your problem falls into.
Sometimes the difference is easy to spot. Rinehart points to a hypothetical example: someone facing a $2,000 repair bill for a new car engine has to choose between making mortgage payments and fixing the car they need for work. That’s a short-term problem because the borrower’s income doesn’t change and the repair bill is a one-time hit. Temporary disability that reduces income for a few months is another short-term problem.
In other cases, a borrower might become permanently disabled, get divorced, or become widowed. Those usually count as long-term problems. Add a sharply higher rate on an adjustable-rate mortgage, and the situation can turn into a crisis. Sometimes it’s hard to know how long a problem will last. A layoff might mean a one-week job search or a yearlong hunt. An injury or illness could linger longer than expected. In those cases, it’s still a good idea to contact the servicer.
Tip: Each situation is unique. Understand your situation before agreeing to a plan.
For short-term problems, the mortgage company is likely to offer a forbearance. Most commonly, this means adding a set amount to each month’s payment so the borrower can keep making payments until they get back on track. At Ocwen, a forbearance plan can run as long as 36 months.
Lewis explains that any forbearance agreement should be forward-moving, meaning it covers the full mortgage payment plus a portion that pays down the arrearage over time. Borrowers should avoid a payment plan that involves less than a full monthly payment whenever they can afford otherwise, since that only adds to the amount owed.
Longer-term problems that reduce income, such as disability, are sometimes solved by loan modifications. In theory, any term of a mortgage can be modified, including the rate, the final payoff date, or even the amount owed. Lewis describes modification as a solution for homeowners who have no real prospect of maintaining their current or projected mortgage payment over the long term, built around the expectation that their income won’t change much over the next 20 years.
Rinehart considers modifications extreme measures that servicers approach thoughtfully and use sparingly, since the goal is generally to recover the maximum amount of principal and interest for the investor who owns the loan. In some cases, the servicer may conclude that foreclosure will cost the investor less than modification would.
Keep All Correspondence (Even the Envelopes). Before negotiating a deal, gather everything you need, starting with all correspondence from the servicer, including anything unopened. Don’t throw away envelopes: postmarks can sometimes decide whether you’re eligible for relief.
Collect everything that relates to income and expenses, including:
Behind every mortgage delinquency, there’s a story. Learn to tell it succinctly. Sit down and write out the circumstances that led to the default.
Tip: Be prepared for tough questions. At Ocwen, loss mitigation specialists are trained to ask tactfully whether there’s a way to reduce expenses like a car payment. A counselor at a housing counseling agency might ask more directly whether you want to keep the luxury car or the house. Know your answers before the pointed questions come.
This point could just as easily come first: make sure you reach the people at the mortgage servicing company who can actually help you. A servicer has two groups of employees who deal with delinquent borrowers. The first is the collections department, whose job is to get money out of you and bring your payments current.
The second group is the loss mitigation specialists. These departments go by different names depending on the servicer, including foreclosure prevention, loan resolution, and delinquency customer service. It can be difficult to reach loss mitigation if collection agents are discouraged from transferring calls, which is one reason a helper, such as an attorney or housing counselor, can make a difference. An attorney tends to get collectors’ attention; a housing counselor often has contacts inside the loss mitigation department.
When you finally get through, tell your story, answer the questions about income and expenses, and request an application for forbearance or modification. Ask directly what you’re eligible for. Lenders will often push for an agreement on the spot, but Lewis cautions against agreeing to anything immediately, since borrowers can end up committing to terms they can’t actually afford. Fill out an application, let the lender make an offer first, and take 24 hours to consider it. Talk it over with an adviser. Accept the offer if it’s a good one; otherwise, make a counteroffer.
Plan to reach an agreement, but prepare yourself for the possibility that you’ll still have to move. If you turn over the deed in lieu of foreclosure, agree to a short sale, or are forced out through foreclosure, you’ll need to consult a lawyer and possibly an accountant.