Getting Help Before You're In Too Deep

Q. Is it true that mortgage servicers will not help troubled borrowers until they stop making their payments? I am a home retention counselor, and I keep hearing from people referred to me that they have received no response from their servicer because they have not yet missed a payment. I would hate to advise people that they have to stop paying if they expect to get any help if that is not true.

A. I have heard the same from numerous people I have counseled. I have no reason to doubt them. The most common story is that they were told by the servicer to come back when they were two payments behind.

There are understandable reasons why borrowers who are delinquent receive more prompt consideration than those who are current on their payments. To the degree that servicers are faced with more requests for help than they can handle, they have to set priorities. The number of borrowers in trouble has ballooned, outstripping the efforts of servicers to expand their capacity to deal with them.

A plausible way to set priorities is in terms of the degree of urgency of the problem. A borrower 60 days behind in payments is closer to foreclosure, and if he is going to be saved, he needs faster action than a borrower who is current. So borrowers who are current get placed at the bottom of the list of people requiring special treatment -- if they make it onto the list at all.

This tendency is reinforced by the fear of free riders. Everyone would like a better deal on their mortgages, whether they have trouble making their payments or not. If loans are being modified to help borrowers, some who are not in financial distress will try to take advantage of the situation by pretending that they have problems. But potential free riders may not be willing to become delinquent because that would hurt their credit. By considering modifications only for borrowers who are already delinquent, the servicer reduces the number of potential free riders.

In addition, the practice of dealing only with borrowers who are delinquent keeps loans in good standing for longer. Consider the borrower who loses her job but has savings sufficient to cover the payments for some months. Investors would prefer that the borrower make the payment out of savings for as long as possible because she might find another job and avoid the need for any loan modification.

If I were a borrower with reduced income but good prospects of recovery, I would pay out of savings, avoiding the hit to my credit. If I considered the prospects of recovery to be poor, however, I would stop paying and conserve my savings. This would move me up on the servicer's priority list for special treatment. While it also moves up the hit to my credit, that would happen anyway as soon as my savings were exhausted.

If I did not have a problem making the current payment but would have a problem dealing with an anticipated payment increase, I would handle it differently. First, I would determine exactly how large the payment increase would be. If the increase stems from an interest-only loan reaching the end of the interest-only period, the new payment can be found using any monthly payment calculator. (There's one on my Web site, calculator 7a at http://mtgprofessor.com/mpcalculators/BasicLoanCalculator/BasicCalc.asp. Input a term equal to the remaining life of the loan.)

If the increase stems from a rate adjustment on an adjustable-rate mortgage, the new payment won't be known exactly until a month or two before the adjustment, but an estimate based on the current value of the rate index will provide a good estimate. Also on my Web site, I explain this in an article called "ARM Borrowers With Their Heads in the Sand." ( http://mtgprofessor.com/A%20-%20ARMs/arm_borrowers_with_their_heads_in_the_sand.htm.)

The next step is to develop a detailed budget that documents the point at which the expected payment is not affordable. The mortgage insurance company Genworth has a useful form on its Web site, http://hoa.mortgageinsurance.genworth.com.

Submit your document to the servicer well in advance of the anticipated payment increase. There is no guarantee that it will lead to a contract modification before your payments rise. However, it gives you a good shot to move up in the servicer's queue by providing the detailed information that servicers require. It also keeps you out of the hands of the modification hustlers who want to be paid upfront for doing what you can do yourself.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.

Copyright 2008 Jack Guttentag

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