For homeowners, it's a nightmare scenario: You lose a job or fall seriously ill. You no longer have the money to pay the mortgage. Your lender contacts you, asks what's going on and demands that you pay up, pronto.
Suddenly, you are on the icy, downward slide to default, foreclosure and loss of your home, your equity and your credit standing.
Thousands of American homeowners experience this nightmare every year, but a new study documents an important countertrend: More than half of all homeowners who fall behind on payments on loans owned or are insured by the three largest players in the mortgage market are being offered financial rescue plans designed to save them from the horrors of foreclosure.
The study, co-authored by Richard K. Green, a George Washington University professor, and Amy Crews Cutts, deputy chief economist for mortgage giant Freddie Mac, examines the extent and effectiveness of these mortgage lifesaver plans, known in the industry as "loss-mitigation" techniques. The good news: They are, more than ever before, frequently offered to borrowers in trouble. And they really work.
Barely a decade ago, according to the study, most homeowners who missed two or more payments on their loans were treated as goners, heading for inevitable foreclosure. Only a small percentage of them were contacted by their lenders or loan servicers with offers of alternative, home-saving courses of action.
Today, by contrast, more than half of all seriously delinquent borrowers with loans owned or insured by the biggest mortgage players -- Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) -- are contacted, evaluated and offered repayment or "workout" options. Even more significant: Borrowers who agree to enter a formal repayment plan are 80 percent less likely to lose their homes than those who do not. Even among lower-income borrowers, who have a tougher time pulling out of financial crises, 68 percent of repayment plan participants save their homes.
What are these rescue plans, and why are lenders now offering them so widely? The study identifies five primary alternatives:
* Partial reinstatements. Let's say you miss two or three monthly payments because of an unexpected, short-term income loss. The lender agrees to a plan whereby you resume your regular monthly payments and pay off the amounts you missed in mutually agreeable chunks over a period of time, such as one year. All moves toward foreclosure are canceled.
* Short-term forbearance. This allows for the suspension of up to three payments, or a reduction in payments due for up to six months, to help you get back on your feet. After the forbearance period is up, you agree to a stretched-out repayment plan covering all the payments you missed.
* Long-term forbearance. It's the same idea as short-term forbearance, but deals with more serious delinquencies and allows suspension or reduction of payments for four and 12 months.
* Loan modifications. These involve permanent, contractual changes in one or more terms of the mortgage itself. For instance, the lender might agree to lengthen the loan payoff period or to reduce the interest rate on the note. The financial institution recognizes that you are committed -- and able -- to avoid foreclosure with the help of modest changes in the structure of the original mortgage.
* Partial claims. In certain cases, the FHA "advances" -- that is, pays -- the arrears owed by a delinquent borrower to bring the loan account current. In exchange, the borrowers sign a promissory note secured by the property to repay FHA when they sell the house or pay off the mortgage.
Why are Fannie, Freddie and FHA, working through the lenders who originate and service mortgages for them, making such energetic use of foreclosure alternatives? Part of the reason, no doubt, is a genuine desire to help customers avoid the tragedies associated with foreclosure. But self-interest also is at work.
According to the study by Green and Crews Cutts, loans that go to foreclosure cost lenders and investors nearly $60,000 on average in lost interest, property management fees, legal bills and resale commissions. Foreclosure is a sinkhole not only for homeowners, but also for their lenders.
What's the significance here for you in the event of an unexpected financial emergency?
Thanks to the spread of win-win home rescue plans, you are far more likely than ever to be offered a plan to help you get past your problem and keep your home. And since 80 percent of homeowners who enter a repayment plan manage to avoid foreclosure, you would be smart to accept your lender's offer.
E-mail Kenneth R. Harney at firstname.lastname@example.org.