If the borrower has committed to staying in the property and fighting through the difficult period of pending foreclosure many lenders and their servicing agent are offering possible solutions. Early on, with mortgage lates, borrowers are being contacted with possible workouts solutions to get written up on their payments. However, many mortgage products with accelerating payments make it difficult for any mortgage borrowers to recover. In the past, forbearance was the tool of choice to be utilized for a borrower to get cached up with payment arrears. For example, if a mortgage payment of $ 1,500 / month is three months down and soon to be four, the mortgage company may take this arearage of $ 1,500 x 4 = $ 6,000 and spread it out over say a years time and a catch up payment of $ 6,000 / 12 = $ 500 / month. The regular payment of $ 1,500 / month needs to be made plus the $ 500 / month in the forbearance portion for a total of $ 2,000 / month to get caught up and avoid foreclosure. In the past, this might have worked, now however, many borrowers are being crippled with accelerating payments of the first of say an Option ARM, or a 2/28 ARM that is adjusting way up and forbearance will not do the job. Rather, in many cases, a whole new loan product has to be put in place to even have a chance of rectifying the adverse mortgage situation.
Now the "old" forbearance has been modified to become even more flexible. Mortgage companies, with the current inventory of unsold homes, do not want to foreclose and end up taking an even bigger hit when and if the home sells after foreclosure. The writing has been on the wall for many lenders in this past year, work out the loan or eat huge losses. If someone is in the home and making payments, it can soften the massive write-downs that will follow in this extremely soft market.
Things were going OK for Jim and Terri until the auto accident that put Jim out of work and laid up with a broken leg and a disc problem. What savings they had had burned through in less than a month. The auto insurance covered very little of the medical bills and Jim's insurance at work carried a sizable deductible. The biggest challenge came for their family when Jim was not able to work for what was preceded for six months. The luxury items were the first to go. Because Jim was upside down on his car that was total there was not enough insurance settlement to pay for the debt. Jim was still on the hook for the difference and monthly payments were being demanded by the auto finance company. Jim's attorney shared that there might be a chance for some type of settlement until he discovered the driver of the other car that had caused the accident was not insured due to a recently lapsed policy. The insurance carrier was not going to pay anything. Jim's attorney, a high school buddy, was going after the assets of the fault driver but it would take some time to even begin the process. Jim and Terri had worked hard for five years to buy their first home and were just getting ahead when the auto accident occurred. With several months passing, the young couple was not able to pay even the minimum payment of their four credit cards. The mortgage payment had not been made for the past three months. The phone was now ringing off the hook for medical collections, the auto finance company and the mortgage company was now threatening to foreclose. Terri took a part time job in addition to her full time job as an office manager at a collection agency. She knew that game inside out. With two kids it was becoming very clear that bad things were under way and if something did not happen to turn the situation around, her family would be moving back into a small apartment again with trashed credit to boot.
Fortunately, Jim and Terri's families were close by and could help out with nursing while Terri worked. Both of their parents were of modest means and not able to offer any financial help but were happy to pitch in with the kids and some of the maintenance work around the house. Jim was flat on his back with recovery time many months down the road. Jim had the phone close to his bed and he had been showing telephone calls for bill collectors and such. On a Friday, Jim received a call from the mortgage company that held their loan and at first Jim was going to ignore it. Jim figured he had quite enough "gut calls" for the day. The caller was in the process of leaving a message on the answering machine and was going on at length over the details of a plan from the mortgage lender that would help Jim and Terri get back on their feet. In the middle of the message, Jim lifted the phone and spoke with the caller. It was a friendly voice. Jim spent almost an hour on the phone with explaining his situation and sharing the tale of woe and their streak of bad luck.
The caller's name was Toby and after the conversation concluded, he suggested he would call back by Monday and would give Jim and Terri a concrete proposal to try and mediate the mortgage short fall. After Jim hung up, he could only wonder if anyone could help him out of this financial mess. Sure enough, Toby called back Monday with a proposal. Toby explained his mortgage company decided to be very proactive with customers who had fallen behind and found it in their best interest to try and bridge the gap between their current situation and possible foreclosures. Another hour was spent going over Jim and Terri's family budget just to determine the short fall and rank what items could have quickly cut to generate a better monthly cash flow. At the conclusion of the call, Toby suggested that if Jim and Terri could tighten up their budget and eliminate in the short term, cable, cell phones, eating out, sell the one remaining car that had some equity and get a transport vehicle the bank would substantively help with the payments. This would allow Jim and Terri to bridge to a time when Jim could get back on his feet and return to work. Since the loan in question was an FHA loan, the lender was going to advance an interest free loan in the amount equal to twelve months of principal and interest payments including taxes and insurance. This was made possible by the lender making a "partial claim" to the FHA insurance fund, that is borrower funded, to help Jim and Terri get back on their feet. This was not a gift.
Every penny would need to be paid back down the road. When borrowers use the FHA program they usually pay 1.5% of the mortgage amount up front called the UFMIP (Up Front Mortgage Insurance Premium) plus they pay .5% of mortgage amount spread out common monthly payments. The bulk of these insurance premiums are by and large used for foreclosure actions. Loans that are insured by FHA pay the lender the difference of the foreclosure sale and the loan balance plus costs. This can be 25% to 30% + loss for FHA. The thinking here by FHA is that if they can extend a hand and get these folks back on their feet in say a years time, it would be saving FHA a ton of money. This proactive approach is showing positive results. Jim and Terri designated on the proposal and in time were able to work out their financial situation and Jim was able to return to work. FHA was made whole in time; the credit card companies canceled the accounts and agreed to take smaller payments for as long as necessary to get them settled at a reduced nominal interest rate. Terri was a good negotiator. Jim's attorney was able to get a jurisdiction and squeeze enough money out of the ticked driver and get some funds from the uninsured motorist fund. This allowed Jim to payoff the "up side down" portion of the total vehicle with enough additional cash to buy an older pick up truck with the reminder monies.
Terri was able to give up her part time job and the family slowly pelled themselves up by the bootstraps and they got back on their feet. The trailing medical bills were negotiated down after several over charges were discovered and a low monthly payment was set up. All in all, Jim and Terri considered themselves lucky in that the mortgage company moved forward to offer a workable plan to save their home. It could have gone the other way very easily.
Lenders have recognized that the "bottom line strategy" of trying to work with borrowers who are in trouble pays off. From specifically trained customer service representatives, like Toby, who are engaged counselors and not just adversaries. A customer service representative armed with tools like forbearance plans, to reworking old loans to new loans, to FHA, Fannie Mae, Freddie Mac, all pitching in to help resolve and mitigate any salvageable financial situations. The borrowers will need to make an effort to meet the lender half way and do what they need to do to keep their home. For any homeowner, financial disaster can be just a car crash away. Fortunately, lenders are now stepping up their efforts to help families in trouble with paying their mortgage. Again, bottom line, the lender and the borrower can win.