Foreclosure rescue: Saving a home
How a Cleveland family got into a mortgage mess and what they did to keep their house.
CLEVELAND (CNNMoney.com) -- When Darlene Stutzman visited the offices of the East Side Organizing Project, a community advocacy group in Cleveland, she didn't know if she'd be able to keep her home.
She showed up on a Wednesday - "intake day" - when ESOP offers group and individual counseling for borrowers trapped in bad loans. With qualified borrowers, they can also try to work out a compromise with lenders. The Wednesday sessions are well-attended with as many as 150 people showing up at their peak. Cleveland has one of the highest numbers of foreclosures in the nation.
Stutzman, a young wife and mother from suburban Parma, and her husband, Michael, got in trouble when he got sick and had to take an unpaid leave from work. She found out about ESOP when she called Cleveland's 211 government resources line. Michael, who was back at work, was unable to join her for the counseling session.
The first step Stutzman took at ESOP was to fill out a "Hot Spot Card" that asked questions such as: "Are you up to date on your loan?" "How much can you afford to pay each month?" and "Is your loan in foreclosure now?"
She and a group of five others then listened as counselors James Jones and Samantha Williams told them what ESOP could -- and couldn't -- do for them.
They learned the organization has partnerships with 25 different lenders. If a home is in foreclosure, ESOP may be able to halt the process almost immediately. Jones told them how their loans might be restructured for affordability.
But the best outcome some borrowers could expect, explained Jones, would be a short-sale or deed-in-lieu, where they'd lose their home, but without the black mark of a foreclosure on their credit history.
After the group session, the clients received individual attention. With her mortgage documents in hand, Stutzman met with counselor Jenelle Dame to go over her "Hot Spot Card" and answer other questions about how and why she got behind.
Previous brushes with payment problems, including a bankruptcy, had left her and Michael with less than perfect credit when they bought their house for $119,000 in April, 2006. But Michael had a good job as a machinist, and they were able to get financing from Countrywide Financial (Charts, Fortune 500).
Their first loan was a $97,000 adjustable rate mortgage (ARM) with interest of 8.75 percent, which is fairly expensive. The second mortgage, for $24,290, was a home equity loan at 12.875 percent. The Stutzmans paid about $1,250 a month, including taxes. And then the interest on both loans was set to reset at a higher rate, which would drive their monthly payments up substantially.
Stutzman said Countrywide told them that after a year, they could combine the two mortgages and refinance into a fixed rate. But because of Michael's health problems, he had to take an unpaid leave. The Stutzmans fell behind on their payments, and because they were in default, the lender would not make a deal.
Dame handles ESOP's Countrywide clients, making two regular weekly conference calls with the lender, but she said she's had little luck getting it to play ball. "We've discussed 26 solutions with Countrywide since June," she said, "and gotten no workouts."
But Countrywide has signaled a major policy shift. In October, it launched two programs to help troubled borrowers stay in their homes. In one, the company pledged to refinance, restructure or reduce rates for 52,000 ARM clients. Under the other program, the lender said it would restructure loans based on what borrowers could afford.
Stutzman wasn't aware of Countrywide's latest efforts. And Dame said she was skeptical when they were announced, thinking the plans were little more than publicity stunts.
Stutzman walked into her one-on-one on solid ground: She said she'd kept in touch with Countrywide during all her problems, trying to find a way out, despite getting shuttled from company representative to representative.
At one point, she told Dame, Countrywide agreed to a forbearance arrangement, granting the couple extra time to make up missed payments. They intended to dip into Michael's 401(k), but his company was changing hands, and the money was locked up during the transition.
The one-on-one ended on a mixed note. Dame thought the Stutzmans had a good case for restructuring, one that would have been attractive to many of the other lenders ESOP works with. But she had so little luck getting workouts from Countrywide, she still had strong doubts.
The next day, Dame suggested the Stutzmans' workout to Countrywide on one of her regular conference calls and waited for a response. A week later, she said, Countrywide agreed to the plan, along with those for 10 other ESOP clients. Dame contacted Stutzman, got her in touch with Countrywide, and they were able to reach a deal.
Countrywide converted the Stutzmans' ARM into a fixed rate mortgage at 8.75 percent. The second mortgage was entirely forgiven with the debt wiped out. The couple's loan payment would drop to $785 a month, plus taxes, and it would stay there, well within their budget.
Dame was surprised: While other ESOP partners have made similar concessions like loan forgiveness, it was the first time Countrywide did it for one of her clients.
But the plan made sense for the company, she said. A single foreclosure costs a lender an average of $50,000, according to a study from Congress' Joint Economic Committee. Countrywide may be losing money on its original deal with the Stutzmans, but it's still receiving payments, and it doesn't have to unload a house in a depressed market.
"It makes good sense, because Countrywide will be collecting on a loan that someone can afford to pay," said Dame.
Stutzman more reserved about the outcome. "It sounds good, but I think it's something that should have been done a long time ago," she said.