Fending Off The Mortgage Crunch
Sunday, September 2, 2007
When Michael and Kimberly Walker wanted to buy a house three years ago, they had no money for a down payment, but that didn't matter. They took out two loans -- one for $167,000, the other for $40,000 -- and ended up with a three-bedroom townhouse in the Loudoun County town of Purcellville.
Having relied on an acquaintance to put together their financing, they didn't pay much attention and were surprised to learn later that the interest rate for their first mortgage would increase after two years. The rate on that loan is now 10.8 percent but will reset to 11.8 percent in a couple of weeks. Their monthly payment for both loans is $2,058 plus taxes.
Combined, they expect to make about $59,000 this year, he as an equipment operator for a construction materials company, she as a case-management clerk at the county's circuit court. They have a 5-year-old son, credit card debt and two car loans. They no longer go out to dinner, buy clothing or go to movies. Still, they have not been able to pay their mortgage on time in the past six months. "It's just adjusted to where we can't keep control of it," said Kimberly, 28.
As the housing market weakens and lenders tighten their standards, people like the Walkers are struggling to figure out how to fend off foreclosure. "The answer is never easy, and it's getting harder every day," said Ira Rheingold, executive director of the National Association of Consumer Advocates.
During the real estate boom, many mortgage companies were willing to make loans -- often adjustable-rate mortgages with low introductory rates that increase after two or three years -- to people with spotty credit, known as subprime borrowers, or with no money for down payments.
In the first three months of this year, the percentage of U.S. mortgages entering foreclosure was the highest since 1979, according to the Mortgage Bankers Association. Now lenders, consumer advocates and the government are trying to contain the damage. Last week, President Bush announced that the Federal Housing Administration would begin a program to allow homeowners who have good credit but can't afford their mortgages to refinance to FHA-insured mortgages.
Ultimately, though, it's up to the homeowner to take charge because once the foreclosure procedure begins, it can be swift, lawyers said. "If folks sort of anticipate they are going to have trouble making mortgage payments, it's always best to call the servicer before you fall behind," Rheingold said. "Once you are behind, it's going to spiral."
There are plenty of ways to avoid foreclosure: Refinancing, persuading the lender to modify the terms of the loan, selling the house or filing for bankruptcy protection, to name some. But there are also plenty of pitfalls, such as tax implications and long-term damage to your credit. "None of these options are great," Rheingold said.
So what should you do if you have one of the 2 million mortgages that are scheduled to adjust in the next two years?
First, several consumer advocates and attorneys said, make sure you understand your loan. Surprisingly, many Americans don't know what kind of mortgages they have, consumer advocates said. If you need help deciphering it, call a housing counselor or lawyer.
If you have already missed payments, don't ignore your lender. "Don't refuse to take letters. Don't refuse to take phone calls," said Diane Cipollone, a lawyer at the National Fair Housing Alliance. "The sooner the homeowner contacts a counselor or attorney, the better their options are."
One thing in your favor is that lenders don't want to foreclose, for the simple reason that it costs them money. "Banks don't want to be in the business of owning real estate," said Andrew Berman, associate professor of law and director of the Center for Real Estate Studies at the New York Law School.