People who receive those past-due notices on bills don`t always hurry to open them. Instead, they may put the letter with other unopened bills on a desk or stuff it in a drawer.
But the only thing this ”out of sight, out of mind” strategy buys is trouble, particularly for homeowners whose mortgage is past due.
Instead, lenders agree, the sooner a homeowner admits to them that he or she is going to miss a mortgage payment, the better.
One or two missed mortgage payments may mean the borrower is ”in default” on the loan agreement, but it doesn`t have to lead to foreclosure. Consumer credit counselors and loan advisers at mortgage companies and banks tell borrowers that early communication with the lender on financial problems is one of the best ways to keep a default from turning into a foreclosure.
When borrowers are 45 days delinquent, lenders are required by the Housing and Urban Development Counseling Requirement law to provide borrowers with a list of HUD-approved counseling services and a toll-free number for referrals. Designed initially for HUD properties only, this law now applies to all loans on single-family properties.
Tom Goyda, a spokesman for Citicorp Mortgage Inc. in St. Louis, said Citicorp, like other lenders, sends a letter to customers when they have missed a payment and encloses a list of counseling services in that letter.
”We encourage our customers to tell us what`s going on as soon as possible,” said Goyda. ”We encourage them to seek help to get their finances in order, and we are required by law to provide them with a list of counseling services.”
A link to lender
Jerry W. Lewis, president of one such service, the Oak Park-based Consumer Credit Counseling Services of Greater Chicago, said the counselors act as a liaison between the borrower and the lender to structure a financial plan both can live with.
”We deal with any number of consumer debts that people are having trouble with; a delinquent mortgage is part of it,” said Marie Stevens, a counselor and case manager at United Charities Consumer Credit Counseling in Chicago. ”We advise them and help them work out a spending plan. We don`t loan money.”
In fact, giving troubled homeowners the money they need does not usually solve their problem.
”If you give them the money needed to catch up on mortgage payments or other delinquent accounts, they will be behind next month because the factors that led to their problems, such as unemployment or prolonged illness, may still exist,” said Stevens.
Instead, she said, United Charities tries to work out an arrangement with lenders to bring the borrower up to date with payments.
And the number of borrowers having trouble staying current with payments has increased as of late. In a recent National Delinquency Survey of the Mortgage Bankers Association of America, mortgage delinquency rates in the Midwest rose to 4.47 percent for the first quarter this year, up from 4.20 percent for the same period last year.
According to the association, the increase in delinquencies is consistent with the performance of the economy over the past year, which has included a rise in unemployment, sluggish income growth and soft home prices.
Letting things slip
While most consumers try to keep current with all their payments, Stevens said, some are afraid their credit rating will get ”messed up” and stay current only with small charge card companies, but are in arrears on their mortgage or rent.
These consumers simply have misplaced priorities, Stevens said, because mortgage lenders are very clear on their priorities-the top one being the performance of the loan they have made to the borrower.
Getting information on nonperforming loans (those on which the borrower has fallen behind on payments) is a priority for Citicorp, according to Goyda. He said that Citicorp first mails past-due notices to inform customers of missed payments. If there`s no response, the lender then makes phone calls to the customer-and sometimes even a personal visit.
”In the Northeast, we`ve had to contact some in person when they fail to respond to past-due notices or fail to return phone calls,” Goyda said. ”We try to communicate and want the customer to communicate what the problem is to us. The longer the customer waits to talk to us, the more difficult it becomes for us to work out an arrangement.”
Time restraints
And, timing means everything when a mortgage payment is late. Lewis said financial institutions are required by law to handle nonperforming loans within a certain period, so the amount of time the borrower takes to contact the financial institution about his or her problems can affect the lender`s ability to restructure the loan.
And, the type of loan can also be a factor in whether a loan restructuring will be allowed. For instance, Goyda said that most mortgages sold in the secondary market-and then purchased as a security by another institution-cannot be restructured.
”These loans have various guidelines the mortgage companies must adhere to,” said Goyda. ”The inability to remodify the loan may be one of them.”
Still, Goyda said, sometimes holders of secondary market loans can refinance them to obtain a new mortgage with terms that are easier for them to handle.
Delinquent borrowers may have other alternatives, too.
For example, if a homeowner has $100,000 outstanding on a 9.5 percent fixed-rate mortgage and is two months in arrears on mortgage payments, the homeowner owes about $841 a month in interest and principal plus any amounts escrowed for tax or insurance payments.
In some cases, the delinquent amount could be added to the outstanding loan balance of $100,000, and a new monthly payment could be arranged.
”It`s easier to pay the $1,600 or more due over 25 or 30 years for some delinquent home buyers,” said Goyda.
A forebearance agreement is another alternative for homeowners who are in the red.
In such an agreement, a customer makes scheduled increased payments to bring the loan current within a certain period of time, usually four to six months. By coming up with the money in the shorter time, the consumer saves money on interest he would pay if he had instead restructured the loan over 30 years.
”We decide which workout plan is best for the customer on a case-by-case basis,” said Goyda. ”For some, the forebearance agreement is more manageable. For others, spreading the delinquency over the full length of the mortgage loan is better.”
Bob Hoffmann, a vice president of Midwest Mortgage Services Inc., a subsidiary of First Chicago Corp., said if the reason for delinquency is more permanent, then a forebearance plan doesn`t do much good.
”We can modify the customer`s payment over a longer period of time, but this is only offered in a real case of hardship,” said Hoffmann.
Last resort
”We`ll do all we can for as long as we can. It`s not in our interest to foreclose on the property,” he said. ”Foreclosure happens only when all avenues have been explored.”
Goyda agreed. ”We don`t want the house,” he said. ”We prefer to work with a customer as much as possible so they can stay in their house.”
But foreclosure does become a real threat when borrowers don`t make an effort to work out an arrangement with their lender.
Pat Sraga, foreclosure manager at Talman Home Mortgage, said that when the borrower is at least 90 to 120 days in arrears and a new financial arrangement has not been made between the lender and borrower, a judgment is entered into court records on the possible foreclosure of the property. However, this process also includes a redemption period in which the borrower can reinstate the loan.
To do so, borrowers must contact the lender`s attorney to find out the total amount due on the loan and then make up for any delinquencies with one lump payment. If no new financial arrangements can be made because the borrower does not have the money, foreclosure is inevitable. The foreclosure is then publicly listed so investors who are interested in buying the property can do so.
Lewis reiterated that most lenders will make an effort to work out a plan with delinquent borrowers. ”The problem is that people don`t get to these programs soon enough,” he said.
If borrowers owe more money than they can ever make, then bankruptcy is another option, Lewis said, although the type of bankruptcy they declare should depend on the amount of equity they have in their home.
Lewis said Chapter 13 (reorganization) bankruptcy allows the consumer to pay the mortgage, but Chapter 7 (regular) bankruptcy does not.
”Chapter 7 won`t save the house, but Chapter 13 will,” Stevens added.
”With Chapter 13 you`ll be allowed to keep the house and work out a new arrangement with the mortgage company.”
But people must remember that ”bankruptcy goes on your credit record for 10 years,” Lewis said. ”You have to weigh the risks of claiming bankruptcy. If a lot of money has been invested in the house, naturally, you don`t want to lose it, so you look at the alternatives.”
Goyda said financial institutions are more sympathetic to the borrower who has lost a job or is dealing with a family illness.
”The workout programs we offer are not for the credit junkie,” said Goyda. ”This isn`t for the person who bought a house as big as they could, have all their credit cards to the limit, own matching husband-and-wife BMWs, and have all their kids in private schools. That is a horse of a different color and we`re less lenient.”
