How to Avoid Foreclosure

How to Avoid Foreclosure

drgreenhouse1With home foreclosures reaching record highs and circulating news reports about heavyweight boxing champion Evander Holyfield and iconic TV host Ed McMahon fighting to keep their multimillion-dollar dwellings from reaching the courthouse steps, housing industry experts say borrowers can avoid a similar fate.

The rate of foreclosure starts and the percent of loans in the process of foreclosure are the highest recorded since 1979, according to the Mortgage Bankers Association (MBA), a national real-estate finance industry organization that tracks mortgage delinquencies and foreclosures.

The delinquency rate, which includes loans that are at least one payment past due–but doesn’t include loans in the process of foreclosure–was at 6.35% at the end of March, up 1.51% from the year before, according to the MBA. During the same timeframe, the percentage of loans in the foreclosure process was 2.47%, nearly double the 1.28% from the previous year. California, Florida, Nevada, Arizona, Texas, Michigan, Ohio, and Indiana are among the states hardest hit by foreclosure rates.

The amount of foreclosures began accelerating during the latter half of 2006 due to defaults on high-cost loans, such as subprime and adjustable-rate mortgages, or ARMs, made to high-risk borrowers, causing the U.S. housing bubble to burst and a credit crunch to ensue. With ARMs, the interest rate resets from a lower introductory, or teaser, rate to a higher percentage rate, causing a spike in the house payments.

Thirty-nine percent of foreclosure starts in this country involved subprime ARMs; 23% involved prime ARMs; 19%, prime fixed-rate laons; 11%, subprime fixed-rate loans; and 7%, FHA loans, according to the MBA.

By some estimates, 61% of the people who got subprime loans would’ve qualified for a cheaper, conventional, 30-year, fixed-rate loan, says Kathleen Day of the Center for Responsible Lending, a nonprofit consumer group, adding that a disproportionate number of black and Hispanic families received subprime loans.

Jeffery R. Hayward, a senior vice president at Fannie Mae, says some homeowners facing financial challenges dig themselves deeper by avoiding their mortgage lender.
“There’s a myth out there that if you run into trouble, don’t call the bank,” Hayward says. “[Not calling] is the worst thing you could do. If you run into trouble, you should call your mortgage servicer immediately,” Hayward says. “The servicer is really going to want to try to work your loan out. In some cases they won’t be able to, but you’re really not going to know until you call them.”

Given the volume of exotic loans in the marketplace, practicing diligence and patience is a must when contacting lenders. “Keep calling until you get somebody,” Hayward says.

Once making contact, lenders could offer to spread the defaulted payment over future payments, reduce the interest rate or loan balance, he says.

“If you have a bad subprime loan, a repayment is not going to help you. What you need is a workout plan,” says Day, explaining that a workout plan would reduce the loan to a fair market value or freeze the interest rate either