Fighting to Keep the Roof

Fighting to Keep the Roof
Strapped Owners Find Help From Their Lenders


Ernestine Witherspoon managed to hang onto her house in Northeast Washington even after she lost her job and fell far behind on her mortgage payments.

Her lender, Countrywide Home Loans, was weeks away from seizing the house when Witherspoon called, explained her situation, and worked out a plan to repay the $9,800 she owed. She scraped together $3,600 -- only because she landed a new job -- and Countrywide then tacked $25 onto her monthly payments for the life of the loan to make up the difference.


"I was treated well," said Witherspoon, 51, a secretary at a Maryland hospital. "But when you are in the position I was in, you have no choice but to accept the lender's terms if you want to keep your property, and that makes you feel very, very vulnerable."

Witherspoon benefited from the increasing willingness of lenders to help troubled borrowers stay in their homes. After easing lending standards in recent years, mortgage companies are facing a rising tide of late payments and defaults, driven by subprime borrowers with blemished credit or other factors that make them a risk to lenders. More than two dozen subprime lenders have shut down, and the rest of the industry is seeking ways to limit the damage.

"We would much rather work with a borrower than go through the foreclosure process," said Steve Bailey, Countrywide's senior managing director of loan administration. "We lose money on a foreclosure, the borrower is out of their home, and nobody is happy. The math works against us."

The lenders' new leniency works in favor of some borrowers. But to take advantage, homeowners have to move quickly, even if calling a mortgage company seems intimidating or stressful. Many people facing foreclosure simply "shut down" out of fear, says J. Michael Collins, a housing specialist with PolicyLab Consulting Group in Ithaca, N.Y.

"The more stressed people are, the less they're willing to seek help and the less they feel that lenders are helpful," he said.

If homeowners can overcome their anxiety and act soon enough, they have more options that can help avoid foreclosure. Those include refinancing the house, altering the terms of the original loan, filing for bankruptcy protection or even selling the house at a loss. But borrowers lose leverage, credibility and precious time when they try to dodge the lender, as more than half of them do in foreclosure cases, according to a survey by Freddie Mac, one of the largest investors in U.S. mortgages.

"As soon as you see trouble coming, that's the time to take action," said Ric Edelman, a financial planner in Fairfax.

The Equity Factor

If you're a financially troubled borrower, there are a few steps you should consider before contacting your mortgage company, especially if you have not missed a payment. Think about refinancing or taking out a home-equity loan, if you have equity in the property.

If refinancing won't work, identify every opportunity to raise cash. Sell your childhood toy collection on eBay. Rent out a room. Seek help from your church. "Do whatever it takes to raise money. You don't want to tell a creditor that you're having a problem if you can avoid it," especially if all you need is a one-time fix, Edelman said.

Telling a lender about your financial woes could put you at a disadvantage if you have equity in your home, said Jack Guttentag, professor of finance emeritus at the University of Pennsylvania's Wharton School and author of the Mortgage Professor column.

"The lender may tell you to come back after you've missed two payments," Guttentag said. By that time, your credit is shot, making it tough to borrow money elsewhere. If the lender then forecloses, that lender is protected against loss because the equity in your home could cover the loan balance and foreclosure-related costs, he said.

The riskiest borrowers typically don't have much equity, often because they have put little or no money down to buy their homes or have taken out second mortgages. As the housing market has softened, and home prices stagnated, those borrowers have found it hard to sell or refinance their way out of trouble.


Even if they could refinance, many borrowers with subprime loans face steep penalties if they pay off their loans early. Meanwhile, in response to the mortgage crisis, lenders have tightened their standards and made it harder for risky borrowers to qualify for new loans.

"It's a paradox, but the borrower who gets into trouble and has no equity is in a stronger negotiating position with the lender than the borrower who has equity," Guttentag said.

Work With the Lender

If refinancing is not an option, take a look at your mortgage statement and call the company that manages your loan. That call should be made quickly. The more time passes, the more a homeowner's credit tanks, limiting a lender's ability to work out a payment plan.

Lenders tend to be most amenable to the possibility of a forbearance, in which they suspend or reduce payments for a few months and then tack on portions of those payments to future ones. They will also consider lowering monthly interest rates, extending the life of the loan or altering the loan in some other way.

"Borrowers should seek modifications," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "But the modification should not just keep the wolf away for a while longer. It should actually create an affordable loan."

So far, the number of mortgages modified has been modest. But the numbers are expected to rise substantially as more adjustable-rate mortgages begin to reset at higher rates at year's end, says Rod Dubitsky, an analyst at Credit Suisse.

"Right now, many people experiencing a reset have a lot of equity because of home-price appreciation at the end of 2005," said Dubitsky. "By the end of this year, fewer and fewer borrowers will have equity to refinance or sell their homes."

Lenders say it's in their interest to work with borrowers. Servicing a healthy loan costs them about $50 a year, and managing a delinquent or foreclosed one costs them about $1,000 and $2,000, respectively, said Robert Lacoursiere, an analyst at Banc of America Securities.

However, that does not mean there's a solution for every troubled borrower. Homeowners whose incomes cannot support their mortgage may get nothing more than a sympathetic ear -- if that -- from whoever handles their mortgage. The ultimate solution may be to walk way from the house.

"There's no incentive to work out payment arrangements if it only delays the inevitable," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site.

Instead, the borrower may be able to arrange a "short sale." With the mortgage holder's permission, a borrower can sell a home for less than the amount due on the loan and turn over the proceeds to the lender.

If the lender has reason to believe it can extract more value from the house, possibly by negotiating lower commissions from the agent involved, it may ask the homeowner to give it the deed of the house, surrender ownership rights and leave the property. This transaction is called a "deed in lieu of foreclosure."


To entice homeowners to leave quickly, some firms might even offer "cash for keys" -- a small sum of money that can help defray moving costs.

For lenders, all these deals typically reduce the cost of taking possession of the house.

In return, borrowers can shed their loan obligations, spare themselves the humiliation of a public foreclosure notice and protect their credit record. A short sale and a deed in lieu of foreclosure are far less damaging to a consumer's credit than an outright foreclosure.

But pay attention, says Richard Gottlieb, a consumer financial services attorney at Dykema Gossett. "A lender has every right to proceed against a borrower for the balance due on the mortgage loan," he said. "A borrower with significant assets is still at risk."

As a practical matter, most lenders will accept whatever money they get from a short sale or a deed in lieu of foreclosure, but borrowers need to make sure when they walk away that they are released of all financial obligations for the loan, consumer advocates said. That release should be put in writing.

If the lender forgives the shortfall, that has tax implications because it is considered income for the borrower, said Steven M. Buckman, a real estate attorney in the District. "And any time you have income, you have to pay income tax on it, federal and state." Lenders are required by law to report canceled debt to the IRS, and borrowers should be sure to get a statement of how much was forgiven on the loan.

A Last Resort

Anita McKenzie's lender suggested she do a short sale. But McKenzie does not want to walk away from her home. She said when she bought her townhouse in Germantown less than a year ago, she believed her agent and broker, who told her she could immediately refinance into a more affordable mortgage.

The refinancing never came through, leaving her stuck with a $3,650 monthly payment on her $40,000 salary. McKenzie fell behind on her payments. She's in danger of losing her house this summer.

"I don't know what to do except file for bankruptcy," said McKenzie, who has been working with HomeFree-USA, a housing counseling agency in the District.

McKenzie's counselor advised against it. Like many consumer advocates, she argues that bankruptcy proceedings should be used as a last resort because they damage a filer's credit, though less so than a foreclosure.

But in some situations, a bankruptcy filing makes sense, says Steven Ramsdell, a bankruptcy attorney in Alexandria.

"For people who have missed house payments, their credit has usually been dinged up already," Ramsdell said. "The credit ramifications of saving a house through bankruptcy should not be a deterrent if they can in fact save it."



Before filing for bankruptcy protection, consumers must attend credit-counseling sessions held by designated groups throughout the country.

Once they do, said Ramsdell, the kind of bankruptcy protection most effective in saving homes is Chapter 13, which immediately halts a foreclosure sale and freezes all collection actions for debts that predated the bankruptcy filing.

The court then approves a repayment plan that determines which creditors get paid back and when.

Under that arrangement, a person has up to five years to pay missed mortgage payments, essentially forcing the lender into a repayment plan and forcing a time frame that most lenders would not otherwise accept, Ramsdell said.

But while trying to make good on past debt, filers must keep up with their regular mortgage payments and other living expenses. For people without sufficient cash flow to make those payments -- plus contribute to the late ones -- this course of action is futile, Ramsdell says. It also makes no sense to file for bankruptcy protection when the house is worth less than the mortgage balance.

"If you owe $480,000 on a house that's worth only $400,000, it may not make sense to hang onto the house," Ramsdell said. "That's a hard thing for people to accept."
(Dina ElBoghdady, Washington Post)