Help for Delinquent Borrowers

The current housing crisis has affected millions and millions of homeowners. With rising prices across the cost-of-living board only being exacerbated by an ever-falling dollar, upward-adjusting mortgage rates are predictably the last thing that many borrowers want to see. Even a minor change in a borrower's financial position after acquiring a mortgage can be troubling, and once he or she begins to fall behind in the house payments, problems can quickly multiply.

However, contrary to popular belief, most lenders really do want to work with delinquent and potentially defaulting borrowers. A delinquent loan on the books as a nonperforming asset costs the lender money. But the expense of foreclosure for a lender can be as high as twenty percent or more of the loan's remaining principal balance. That's why most lenders tend to view at it as an absolute last resort.

It's important that the borrower who's behind on payments not adopt a wait-and-see attitude. Being proactive and immediately contacting the lender to discuss the situation is crucial, because the most attractive alternatives available are typically those exercised in the early stages of a mortgage default. Needless to say, the lender will want to know what caused the payments to fall behind, whether or not that cause has been taken care of, and how the situation can be put back on track.

For example, a delinquent borrower whose situation was brought on by a temporary job loss but is now employed again, may only need a few additional months to catch up the payments. Conversely, a borrower suffering from a severe long-term illness might have to explore other options. In such a case, the lender might be willing to assist the borrower by temporarily accepting partial- or interest-only payments, or deferring payments altogether (a moratorium) for a period of time (of course, these amounts would be added back into the principal amount owed). The borrower should also ask the lender under what circumstances someone else would be allowed to assume the loan. This solution could bypass a formal foreclosure process by removing the current owner completely from the picture (both financially and credit-wise) and supplying the lender with a stronger replacement borrower.

If the lender is not willing to work with the delinquent borrower, there may still be other avenues of assistance. If the loan has Private Mortgage Insurance, or PMI, the lender is at least partially covered against financial loss. This consequently means, however, that if the borrower can no longer make the mortgage payments, the PMI company stands to lose money, as well. So, many insurers have focused their efforts on pre-foreclosure work-out programs, which are designed to catch the defaulting loan and "work it out" before formal foreclosure begins. Their rationale is that if they can find a way to help a new, stronger buyer get into the property by merely paying the lender some of the defaulting owner's back payments, they stand to lose less than if they paid an entire claim for loss. A work-out program might therefore create a more equitable solution for all parties concerned.