As I wrote last week, foreclosures involving residential real estate jumped sharply in August. RealtyTrac, an Internet firm that tracks these numbers, reported a 24 percent increase over July. This includes owners who have been notified that they are behind in their mortgage payments, properties in the process of undergoing a forced sale, as well as homes that have been repossessed by a lender. Five states — California, Florida, Illinois, Ohio and Texas — accounted for half the increase.
While it’s easy to blame millions of adjustable rate mortgages (ARMs) that have reached the point where they re-set at higher interest rates, the reality is more complex. Certainly, California led the nation in terms of the number of “non-traditional” mortgages issued during the real estate feeding frenzy seen in the past few years. Especially popular were “interest-only” or “option” loans, which often included an ARM component. But when you look at the percentage of homeowners in trouble, California isn’t even among the top ten states.
That dubious distinction goes to Colorado, where one out of every 301 households is in some stage of foreclosure. (Compared to one out of every 977 households in California.) Likewise, Midwestern states such as Ohio, Indiana and Michigan have much higher foreclosure rates than average — and they never experienced anything like the double digit run-up in home prices seen on the West Coast, in states such as Nevada, and in other select areas of the country.
So, in a nutshell, wasup?
Sharon Beton, former mayor of Minneapolis and now board member of the non-profit Homeowners Preservation Foundation (www.995HOPE.org), says, ”Arms are just one reason.” Foreclosure can be triggered by a number of factors. One of the most common is job loss. Others include an economic downturn, a death in the family, a health crisis and divorce.
It’s important to recognize that a significant portion of foreclosure proceedings never actually end in the loss of the property. Everyone I spoke with emphasized that the last thing a lender wants to be is a homeowner. Mike Fratantoni, senior economist with the Mortgage Banker’s Association, said: “the bank’s interest is aligned with that of the borrower.” As Beton points out, lenders would prefer to avoid the costs associated with re-possessing or authorizing the forced sale of a home.
In other words, it’s in both parties’ best interest to avoid this, if at all possible.
The sole purpose of the Homeowners Preservation Foundation is to help financially struggling mortgage holders work things out with their lenders. The foundation — which was established several years ago thanks to a $20 million grant from General Motors’ residential funding division — offers a hotline you can call 24/7 because, as Beton explains, “sometimes you wake up in the middle of the night worried about how you’re going to make this month’s mortgage payment.” Its counselors have all passed a special training course certified by HUD, the federal Department of Housing and Urban Development. They stand ready to help you understand your options so you can approach your lender and work out a solution.
Here’s the only problem: you have to ask for it.
Unfortunately, “in 50 percent of the cases” a homeowner who receives a default notice from his/her mortgage company takes the head-in-the-sand approach. When/if they finally call the Homeowners Preservation Foundation, it’s in the eleventh hour and there are few, if any, options left.
If you are among the thousands of individuals worried about making mortgage payments, you need to understand that you have a much better chance of keeping your home if you contact your bank or mortgage company sooner rather than later. “Ignoring the notices or going into a state of denial,” says Beton, “is the worst thing they can do.”
In some cases, you know well in advance of receiving the first default letter that you’re going to be in trouble in a month or two. “If you get a lay-off notice, call your mortgage company at that time,” advises Beton. “You know the loss of your income is going to affect your ability to pay your bills.”
There’s no one-size-fits-all solution, or “work-out” in mortgage-speak. It depends upon your particular situation. If your problem is temporary (for example, you expect to land a new job in a month or so), the bank may agree to what’s called “forbearance” — it will allow you to postpone making any mortgage payments for a specific period of time. Or it might propose a re-payment plan that permits you to make up your missed payments by paying a little extra each month until you are caught up.
In other cases, you can re-finance. This involves negotiating a completely new loan with a different interest rate and re-payment period.
If your situation is truly hopeless, sometimes the mortgage company will permit a “quick sale.” In this case the homeowner sells the home for less than the loan amount and the lender considers the loan paid in full. The saving grace of this option is that you avoid having your credit rating slammed by having “foreclosure” stamped on your record.
Calls to the Homeowners Preservation Foundation’s hotline are “up sharply” in the past two months. Counselors handled 2,464 in August and 2,573 in September. In fact, more calls were received in these two months than in all of last year. Homeowners seeking advice live in all 50 states and Puerto Rico, but most of them came from Ohio, Michigan and Texas.
Thirty-seven percent of those phoning the foundation’s hotline had adjustable rate mortgage problems. However, an equal number had fixed rate loans. (The foundation did not have information about the remaining 26 percent of callers.)
If your home loan is an ARM that hasn’t seen its interest rate jump yet, the Homeowners Preservation Foundation says one of the most important things you can do is educate yourself. It recommends the following:
1) Dig out your mortgage agreement and force yourself to understand those mind-numbing pages of clauses and conditions. If you can’t understand them or you have any questions, call the foundation’s hotline and ask a counselor to walk you through them.
2) Avoid being surprised. Although your lender has to notify you before your payments go up, “this might not give you enough time to adjust your budget.”
3) Get real. Take a hard look at your budget and decide whether you can comfortably handle the higher payment.
4) Contact your lender. If you think your new payment will be more than you can handle or if you’ve already missed a few, discuss your options.
5) Get counseling. If you’re unable or unwilling to work out an agreement with your lender, seek out objective, third party advice.
This piece of advice is from Gail: be careful when choosing who to turn to. The Homeowners Preservation Foundation is non-profit. You can contact them as many times as you like. All of its services are completely free. In some cases, they will even contact your lender on your behalf. Their hotline is: 1-888-995-HOPE (1-888-995-4673).
Keep the faith,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.