Kinder, gentler lenders
Mortgage servicers are finding ways to treat delinquent borrowers more patiently to avoid foreclosures.
NEW YORK (CNNMoney.com) -- The light at the end of the subprime tunnel seems a long way off, but some lenders are trying to get there without losing too many customers.
A flood of hybrid adjustable rate mortgages (ARMs) comes up for reset this fall - peaking in October with more than $50 billion due, with more delinquencies than ever expected. Foreclosures could explode, which would hurt everyone on the food chain: Borrowers lose their homes; lenders lose their payments; local governments lose tax base; and neighborhoods lose resiliency.
Rather than head straight to foreclosure though, many lenders are finding ways to help troubled borrowers -- although assistance is still less than universal.
"Servicers are beginning to understand that they're better off renegotiating," said Bruce Dorpalen, director of housing development for the Association of Community Organizations for Reform (ACORN), a non-profit community development group. Their average loss on a foreclosure for a lender is now $58,000, he said.
Lenders are beefing up mortgage mitigation departments and instructing staffs to offer more concessions, according to Vicki Vidal, Senior Director of Government Affairs for the Mortgage Bankers Association (MBA). Many of the concessions have been around for years, but they're now getting more play.
The first is a simple forbearance. Lenders allow delinquent borrowers to repay arrears later.
Say a borrower has a one-time money drain, like a large hospital bill. If he's $2,400 behind, the lender will accept an extra $200 a month for the next 12 months. Or, it can tack the $2,400 on the end of the loan, either as a one-time payment or as extra months of bills.
Forbearance is less useful for borrowers facing hybrid ARM resets. They may have fallen behind after their initial "teaser rates" expired, and their payments jumped. Forbearance can't help because the new payments are simply unaffordable.
Lenders can modify the mortgage, however, by changing the loan's length or its interest rate; they can even switch it to a fixed-rate loan from an ARM, all of which lower payments. Borrowers who've demonstrated good credit by keeping current with their bills during lower rate years are the likeliest candidates.
Another mitigation option is open only to delinquent borrowers with mortgages issued and insured by the Federal Housing Administration (FHA). They may be eligible for partial claim payments, one-time payoffs from the FHA's insurance fund that wipe out arrears.
Other foreclosure prevention options may help save borrowers' credit, but they don't keep them from losing their homes.
A deed in lieu of foreclosure has owners signing their deeds over to lenders, allowing them to walk away without obligation. You lose the house, but it doesn't appear as a foreclosure on your credit report.
Lenders can also encourage "short sales," third-party transactions in which new buyers offer less than the mortgage debt in exchange for properties. The practice has been around, but what's new, according to Vidal, "is that companies are looking more closely at how deep they can go."
In the past, a substantial difference between the loan balance and the third-party offer would derail a short sale. But with prices falling and inventories growing, lenders are more willing to accept lower short-sale prices.
An ounce of prevention
Even before emergency efforts are needed, lenders are taking new steps to keep borrowers out of trouble. Many are joining non-profit agencies, such as ACORN and NeighborWorks to reach out to risky borrowers.
Doug Robinson, a spokesman for NeighborWorks, said, "Lenders, like Countrywide in particular, have stepped up their borrower outreach efforts. They want to contact borrowers before the problem grows unsolvable."
Amy Schur, ACORN's national campaign director, said her organization is working with 35 mortgage servicers on a home ownership preservation initiative. Partners include the biggest names in mortgage lending: Countrywide (Charts, Fortune 500), Citibank (Charts, Fortune 500), Wells Fargo (Charts, Fortune 500) and JP Morgan Chase (Charts, Fortune 500).
"It's a case-by-case system where we all work very hard to get the best outcome for home owners," she said. In some cases, lenders have even forgiven arrears and just allowed borrowers to resume payments.
Counseling often focuses on lifestyle changes: helping a borrower figure out how to cut back on unnecessary or wasteful spending. That's sometimes enough to free up sufficient cash for the mortgage payment.
Some lenders are even hiring employment specialists to find new jobs for clients, according to Vidal.
The biggest hurdle, however, is simple communication. According to NeighborWorks, nearly 50 percent of all owners of foreclosed properties never once talked to their lenders before losing their home. If they had, the outcomes may have been different.
Next victims of the credit squeeze
4 Smart ways to use your home for financial gain; 4 dopey ones too.
Do you plan to sell your home on your own? Have you already done so? If you'd like to share your story for an upcoming feature in Money Magazine, e-mail Josh Hyatt at email@example.com.