Discussing Mortgage Delinquency

Q. If a borrower falls behind on his or her mortgage payments, what can be done?

A. Contrary to popular belief, lenders really do want to work with delinquent borrowers to prevent them from defaulting on their obligations. The cost of foreclosure for a lender can be as high as 20 percent or more of the remaining principal balance. And a delinquent loan on the books as a nonperforming asset continues to cost the lender money. That's why most lenders see foreclosure as a last, and most times very unattractive, resort.

It's important that the borrower who's behind on payments not take an ostrich-like approach. Instead of sticking one's head in the sand and ignoring the situation, it's best by far to be proactive and immediately contact the lender to discuss the problem, knowing that the most desirable solutions are typically those exercised in the early stages of delinquency.

Of course, the lender will want to know what caused the loan payments to fall behind, whether or not that cause has been remedied, and how the situation can be gotten back on track. For example, a borrower with delinquent payments caused by a temporary job loss but is now employed again, may only need a few additional months to catch things back up. Conversely, a borrower with a severe long-term illness might need to make other arrangements.

Lenders could offer assistance in the form of accepting partial- or interest-only payments for a period of time, or deferring payments entirely for several months (known as a moratorium). These unpaid amounts would be added to the end of the loan. The borrower should also ask the lender under what circumstances someone else could assume the loan. This solution could bypass a formal foreclosure, removing the current property owner from the picture and supplying the lender with a stronger borrower.

Q. Do homeowners have any protection against mortgage lenders who harass them for late payments?

A. Of course they do. Though lenders have the right to contact consumers to request the money owed them, consumers are protected under the Fair Debt Collection Practices Act against calls that exceed the type or frequency specified by law. Because reporting violations must be backed by proof, the borrower should keep a record of all contact with the lender along with the respective outcomes.

Q. Does a delinquent borrower have any other alternatives if the lender isn't willing to work with him or her?

A. If the loan has Private Mortgage Insurance (PMI), or is an FHA or VA loan, there may be other options for the borrower to explore. PMI companies insure conventional loans against loss. So if the borrower can no longer make the mortgage payments, the PMI company stands to lose as well. As a consequence, many PMI companies have focused their efforts on pre-foreclosure work-out programs, designed to intercept a defaulting loan and work it out before formal foreclosure proceedings begin. 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 were forced to pay an entire claim for loss. A work-out program could therefore create a more equitable solution than foreclosure for all interested parties.

Because foreclosure can be expensive, not only in terms of payments lost but also in pre-foreclosure property maintenance fees and other costs of property repair, the FHA and VA have also instituted pre-foreclosure work-out programs for their delinquent holdings. There are five options available from the Department of Housing and Urban Development (HUD) to help FHA borrowers avoid foreclosure, including various financial incentives available to lenders. They are:

  • Special forbearance. The lender may be able to arrange a repayment plan based on the consumer's current financial situation – including a temporary suspension of payments (as noted above).
  • Mortgage modification. The lender agrees to add the borrower's back payments, interest, and penalties onto the principal and re-amortize the balance over the term of the loan. HUD requires, however, that the new monthly payment be lower than the current payment. This is accomplished by lowering the interest rate or extending the loan term, or both. The rationale is that while the borrower may be paying more over time because of the higher loan principal, the lower payment should be easier to keep current.
  • Partial claim. The lender may be able to obtain an interest-free loan from HUD to bring the borrower's payments current.
  • Pre-foreclosure sale. This allows the borrower time to sell the property and pay off the mortgage before foreclosure. It also encourages the borrower to keep the property in good repair in order to maximize his or her possible equity from the sale.
  • Deed-in-lieu of foreclosure. As a last resort, the buyer may decide to voluntarily 'give back' the property to the lender. The lender, of course, must agree to this, which generally means that the value of the property must be enough to cover the outstanding loan plus costs to market the property. The borrower loses any accumulated equity, but avoids foreclosure and its associated fees.

Likewise, the VA realizes that base closures, layoffs, and the like not only have adverse effects on borrowers, but can also add substantial costs to guaranteeing VA loans in general. The VA pre-foreclosure program is designed to eliminate formal foreclosure and work out loans in trouble. As with all other loan situations, the veteran behind in payments should contact the lender. The lender will evaluate the situation, and if it appears that time, effort, and money can be saved by implementing a work-out program, the regional VA office will be notified. If the regional office agrees and is willing to guarantee any shortfall, the work-out is approved.

The bottom line to working out alternatives when mortgage payments become delinquent is for the borrower to be proactive by contacting the lender as soon as possible, and be forthright with the lender about his or her current financial situation. Much more often than not, the lender will do its best to help.

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