By Nancy Trejos
Washington Post Staff Writer
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.
Their leniency only goes so far, however, and usually does not extend to the chronically late.
"The last thing any lender needs right now is a foreclosed property, but they need to have some belief that the borrower will live up to their promise," said Larry Pratt, president and chief executive of First Savings Mortgage in McLean.
Getting through to a decision-maker, however, might be tricky. Increasingly, mortgages are being pooled and sold to investors. So the company that gave you the loan may not be collecting the payments.
Wanda Leys, a certified nursing assistant, learned that when an illness in her family made her miss a few payments on her four-bedroom Capitol Heights home. She has now paid what she owes and is not being threatened with foreclosure, but she said she worries because her adjustable-rate mortgage will soon reset.
She decided to reach out to her lender, but her loan had been sold from one company to another, and she couldn't figure out whom to call. She sought help from the local nonprofit group United Communities Against Poverty, which tracked down the loss-mitigation department of her new loan servicer, she said. "What they do is they call and they negotiate," she said.
For borrowers such as Leys, refinancing to a fixed-rate loan might be the best long-term solution. However, you can't refinance if your property appraises for less than what you owe the bank. That is happening now in some parts of the country, including pockets of the Washington region, such as the Virginia exurbs. On top of that, many loans made to subprime borrowers have prepayment penalties.
And if you've missed mortgage payments, your credit score has most likely dropped, so you may not qualify as easily as you would have during the era of loose lending.
"You have to look at the lending environment overall in the industry, and it's not as easy to borrow at a low cost as it was two or three years ago," said John Snyder, a homeownership specialist at the national nonprofit group NeighborWorks America.
The Walkers can attest to that. Lately, they have been 30 days past due. Their credit scores have dropped to the low 500s, they said, far below the optimal high 700s to 800s.
The Walkers said they tried and failed to refinance with their lender, Countrywide Home Loans, and with another bank. They are hoping for a loan modification, which would decrease the interest rate or stretch the remaining balance over a longer period, thus reducing the monthly payment. They are also trying to refinance with the Neighborhood Assistance Corporation of America, which has teamed with Citigroup and Bank of America to pledge $1 billion for people at risk of losing their homes. In the meantime, their house is on the market for $279,000, which is much more than what they paid for it but what they believe they need to pay the lender, real estate commissions and closing costs.
"It's constantly on your mind: How am I going to keep this together and make it happen?" said Michael Walker, 32.
Countrywide does not discuss individual cases, citing privacy concerns. In an e-mailed statement, the company said that it has 2,600 home-retention specialists and that it has kept 35,000 homeowners from foreclosure this year.
"Nobody benefits from foreclosure," the company said. "As we do with any customer requesting assistance, a home retention specialist is working directly with this borrower to come to a workout solution."
Lenders are often more likely to grant a forbearance or a repayment plan than a loan modification. A forbearance is a suspension or reduction of monthly payments until the borrower regains financial footing. With a repayment plan, the missed payments are spread out over time. The borrower has to pay them in addition to the regular mortgage.
If none of these options works, it might be time to sell. If a borrower can't get enough for the mortgage and closing costs, he or she might try a "short sale," an arrangement in which the lender allows the sale of the property for less than is owed.
But the lender has to approve any offer and can counter it. If that happens, the homeowner has to get the potential buyer to agree to pay more. Often, the buyer walks away, said Jerry Boutcher, chief executive of Monarch Title, a settlement company in McLean.
If the lender accepts less than what is owed, the forgiven debt is considered taxable, he said. "Even if they get to the finish line, when they're told what the terms are, they say: 'That's crazy. Why am I going to do that? I'll have a tax liability," Boutcher said.
A cash-strapped borrower should also think about a "deed in lieu of foreclosure," which means giving the lender ownership rights without the shame of a foreclosure.
Two years ago, Jose Rodriguez, a federal employee, and his wife, a teacher, bought a $550,000 three-bedroom townhouse in Alexandria with a pay-option adjustable-rate mortgage, which allowed them to pay only a portion of the interest while adding the deferred payments to the principal.
They also got a second mortgage of $55,000. They refinanced that one with HSBC to obtain a fixed rate and now owe about $105,000 on it after tapping into their equity for renovations.
Rodriguez said he has always paid on time, but he suspects that will change in December, when the lender for the first loan, Countrywide, will begin requiring them to pay principal and interest.
"We are responsible people, we are working people, we have never been late," he said. "We're trying to resolve this before December. Once we get there, it'll get nasty."
They are selling the house and got an offer for $499,000, which would cover what they owe Countrywide but not the HSBC loan and closing costs.
They are now waiting for the lenders to agree to a short sale. If that doesn't work, Rodriguez said, they will consider foreclosure or bankruptcy.
Many counselors warn against filing for bankruptcy because it ruins the filer's credit, albeit less so than a foreclosure. But lawyers say filing for Chapter 13 would at least halt foreclosure. The court would then approve a payment plan proposed by the borrower and his or her attorney to take care of the mortgage and other debts, said Robert Grossbart, an attorney with Grossbart, Portney & Rosenberg in Baltimore. But the borrower must have enough money to keep up with the regular mortgage payment and other debts.
More help may soon be on the way. Many states, including Maryland, have set up task forces to devise relief programs. In the meantime, if you fear falling behind on payments, seek help from one of the many nonprofit groups that focus on troubled homeowners. And beware of mortgage rescue scams.
"The worst thing people can do is bury their heads in the sand," said Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, a legal advocacy group in the District. "The second-worst thing is dealing with people that are making promises that will make matters worse."