LENDERS' WORKOUT PROGRAMS OFFER HELP FOR BORROWERS IN TROUBLE

Whether it's from a job loss, medical emergency, mortgage-payment hike or simply personal-finance mismanagement, a small but growing number of homeowners is falling into foreclosure every year.

For most people who fall behind on their mortgage, their first instinct is to avoid all contact with the lender. But that's a mistake, consumer counselors and others say, because it's likely those financial problems will only get worse, making it harder to work out the best repayment terms.

Many borrowers don't realize that lenders are as eager as homeowners to avoid foreclosures, which cost lenders $40,000 to $60,000 per house, according to industry estimates. Most lenders offer "workout" programs where they work with the borrower on repayment plans that meet the borrower's financial circumstances.

"Going to the lender is ideal. The sooner, the better," said Erica Sandberg, a spokeswoman with the Consumer Credit Counseling Service of San Francisco, certified by the U.S. Housing and Urban Development Department to provide housing counseling.

Lenders agree. "It's never too early and never too late to call your lender," said Loretta Abrams, vice president of consumer affairs for HSBC North America.

And, "any of our borrowers can approach our workout staff," said Tim McGarry, spokesman at Washington Mutual. "It's always our goal to keep people in homes. Foreclosure is a bad outcome for us as a lender."

Justifiably nervous

But plenty of borrowers -- about half, according to some focus-group research -- are afraid that divulging their money woes to their lender will prompt the lender to accelerate the foreclosure process.

That fear is not surprising: Often, when borrowers fall into financial difficulty, their first contact with the lender may encourage them to run in the other direction the next time the phone rings. That's because many lenders, if a borrower is 30 to 60 days' late, initially have the collections department call.

"A collection agent's job is really to get you to pay. They want to know when you're going to pay, how much you're going to pay, how you're going to pay," said J. Michael Collins, a principal at PolicyLab Consulting Group, LLC, a market-research firm focusing on consumers' financial decisions, in Ithaca, N.Y. "It's a very ... aggressive approach."

It's not until the borrower is close to defaulting on the loan that lenders move the account to the "loss mitigation" department, staffed not by collection agents but by people trained to work with the borrower to prevent foreclosure, Collins said.

Some lenders already understand this issue. "Lenders who are working with borrowers who have a history of credit problems, they understand that the first time you make contact with that borrower when they're in trouble, you've got to facilitate a cooperative relationship," Collins said. "But what a lot of lenders are used to is more of a market where people have more income. There's no real good reason for somebody not to pay" is the standard thinking.

Still, Collins says he sees a shift happening, with more prime-market lenders realizing the importance of making that initial contact with the borrower a cooperative one.

Maybe that's because some see delinquency and foreclosure rates getting worse before they get better, thanks to more people holding loans with adjustable rates set to move higher. In some cases those adjustments will push up monthly mortgage bill 30% or more.

More foreclosures coming?

Adjustable-rate mortgages are a growing portion of the mortgage-loan market, accounting for about one-fourth of all home loans nationwide, and three-fourths of subprime home loans in 2005, according to a recent report by ACORN, an advocate for low- and moderate-income families.

"While foreclosure activity continues to remain slightly below historical averages, the number of properties in some stage of foreclosure from January to July has increased by 39% compared to the same period of 2005," said James Saccacio, chief executive officer of RealtyTrac, a foreclosure-tracking company, in a recent press release.

First-quarter data from the Mortgage Bankers Association shows delinquency and foreclosure rates essentially flat, and still a small portion of the overall loan market. But there's been an up-tick in late payments among borrowers with subprime credit.

About 4.41% of all loans were late 30 days or more in the first quarter compared with 4.31% for the first quarter in 2005, according to MBA. That delinquency rate includes homes in the foreclosure process.

For loans held by borrowers with subprime credit, 12.02% of adjustable-rate loans were delinquent, up from 10.25% a year earlier, according to the MBA, which says its survey covers about 80% of residential mortgage loans in the U.S.

"When these people get faced with their first increased payment and their payment goes from $600 to $1,200, that's very difficult for folks to deal with," Collins said. Some borrowers "had no idea their payment was going to go up this much," he said, citing his research with focus groups of borrowers in default on their adjustable-rate mortgages.

And it's not only working-class people who are surprised, said Douglas Robinson, a spokesman for NeighborWorks America, a nonprofit company that works on housing and community-development issues.

"We're seeing more and more middle-income homeowners who are in trouble, particularly on the coasts -- the Boston, New York, California markets where home buyers may have stretched just a little bit to get into that house in those high-priced markets ... and for whatever reason they miscalculated the increase that would occur," Robinson said.

Consumer counseling agencies also say they've seen a rise in the number of people coming to them with mortgage-related problems.

"We're seeing a surge in the people who are calling because they have [adjustable-rate mortgages] and they can no longer afford the monthly payment," said Sandberg, of CCCS in San Francisco. "They end up behind on their credit-card payments. Then they can't refinance the mortgage because their credit is damaged. Then they're stuck with these high mortgage payments and damaged credit."

Meanwhile, the number of homeowners seeking help from her agency in preventing a foreclosure jumped 125% in the past two years, said Betty Parker, housing coordinator for the Consumer Credit Counseling Service of North Central Texas. "We see well over a hundred foreclosure preventions a month," she said.

What to expect

The good news is lenders do want to work with borrowers. If your lender's collection department is still calling you, consider working with a third-party housing counselor.

You can reach housing counselors by calling 888-995-HOPE, a number recommended by NeighborWorks America. Or you can call 866-845-2227 to reach one of 1,000 housing counselors certified by the National Foundation for Credit Counseling.

Be sure to confirm the U.S. Department of Housing and Urban Development has certified those counselors.

"It's better if they're working through an agency. I think the lender will be more responsive," said Ron Chicaferro, executive vice president of Thornburgh Mortgage, in Santa Fe, N.M.

When you start negotiating, your lender will likely offer you one of its "loan workout" options, which tend to be about the same across lenders, though some lenders are more willing to work with borrowers than others. "Some of them are great and some of them are ... a little more challenging," Parker said.

One option is a repayment plan, where any late payments are spread out and added to your regular mortgage bill. Another common option: Forbearance, where mortgage payments are reduced or suspended for a set period of time.

Some borrowers are eligible for mortgage modification, essentially a rewriting of the loan to extend its term or to reduce the interest rate.

Then, there's the short sale: In a situation where the borrower is simply unable to maintain the mortgage payment, the lender will sometimes allow the borrower to sell the house for less than the outstanding balance on the loan.

The borrower has to arrange the sale, but gets to walk away without a foreclosure on record (though the seller may owe taxes on the portion of the loan that the lender has forgiven). The lender doesn't have to deal with foreclosure proceedings or with selling the house.

Plenty of Web sites offer valuable information:

Tips on avoiding foreclosure, from CCCS of San Francisco

The Hope for Homeowners site also has tips

The NeighborWorks America site also has useful information

Also, check your state and city Web sites for "consumer affairs" or "consumer services" - they often list homeowner assistance programs, said Abrams, of HSBC.

-- August 22, 2006

By Andrea Coombes

From MarketWatch