The coming holiday season is shaping up as the toughest in decades for homeowners who are strapped for cash, but who don't want to go into serious default on their mortgages.
One out of 18 American homeowners already is delinquent by 30 to 60 days on his or her mortgage payments. One of every 190 mortgaged homes in America is in the process of being foreclosed, according to new data compiled by the Mortgage Bankers Association of America.
Home-loan defaults and foreclosures have been rising all year, and they could get even worse during December and January, say mortgage-market economists. But there's no need for hundreds of thousands of homeowners to be in such hot water with lenders, or on the verge of actually losing their houses to foreclosure.
Discussions with financial counselors, mortgage insurers and lenders familiar with the problem nationwide suggest that there are far more techniques to avoid serious jeopardy from home-payment defaults this winter than many consumers might guess.
Some of the techniques are new, creative and not well-known.
For example, a national mortgage-insurance firm based in Philadelphia has developed a plan called "Lifeline," which is aimed at helping local lenders and homeowners avoid the horrendous financial and personal costs of foreclosure.
Commonwealth Mortgage Assurance Corporation, which has regional offices in San Jose, Denver, Dallas and Houston, will now make up deficiencies in qualified homeowners' monthly payments to lenders.
Here's how Lifeline works:
Let's say a young executive lost his job because of a plant closing, and had exhausted his savings and other funds that could help handle the monthly debt on his townhouse.
Let's say also that the savings and loan association that gave the executive his mortgage was not able to "forbear" -- that is, go along with a loan default for very long. The S&L's sole way out of the problem would be to initiate foreclosure proceedings, a process that in some states could trigger a public sale of the home in as little as 60 days.
Under the Commonwealth Lifeline plan, that foreclosure could probably be avoided. Commonwealth would make good on all uncollected principal and interest payments that the young executive failed to make to the lender.
Even if no payments whatsoever were made on the loan for months -- or only partial payments for a year -- the local lender would be guaranteed full interest and principal to bridge the gap, as long as there was no foreclosure. Once the executive got back to work, and could begin making up lost ground, Commonwealth would work out a mutually agreeable repayment plan.
Commonwealth gets no direct fee other than an interest-bearing second lien on the house to secure its own growing debt. The interest on the second mortgage would be moderate, or roughly the rate charged by the Federal National Mortgage Association (Fannie Mae) for its second mortgages. The Commonwealth rate is currently below 14 percent.
In short, Commonwealth advances money solely to prevent foreclosures, but doesn't attempt to make a profit on that money.
Commonwealth developed the profit plan for two "absolutely good business reason," in the words of Chairman David C. Woodward.
First, since it is a mortgage insurer -- that is, it underwrites lenders against losses from foreclosures on non-government-insured loans -- Commonwealth wants to try to help get borrowers off the foreclosure track whenever possible. An insured local lender may lose very little from a homeowner's foreclosure (and might even get the benefits of removing an old, low-yielding, single-digit mortgage from its books).
For Commonwealth and other private mortgage insurers, however, foreclosures mean insurance claims and sizable losses. Anything that cuts the rising number of foreclosures -- even if it costs the company a little cash -- is worth the extra outlay, in Woodward's view.
Second, the Lifeline plan brings new business to Commonwealth since only those borrowers whose lenders use Commonwealth mortgage insurance can qualify for the assistance. Borrowers whose loans have been underwritten by other firms effectively miss out on this extra service, even though they may be paying the same premium rates.
Other private underwriters may introduce plans like Commonwealth's in the coming months, according to a spokesman for the Mortgage Insurance Companies of America, a Washington-based trade group. So far, though, only Commonwealth offers the foreclosure avoidance service.
Not all Commonwealth-insured borrowers qualify, by the way. But those in default with reasonably good prospects to get back to work, or to otherwise make good on their debt, are potentially eligible.
If you are such a homeowner, or if you know one, this could be a less traumatic holiday season than you and the mortgage economists thought.