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Return to Lender
By Paul Petillo
Not a day goes by when some mention of the housing market finds its way onto some news broadcast.
If it is a local show, chances are the talk is all about your local economy and possible negative effects that could spill over into the taxpayer¹s laps. If it is a business show, the talk has been about sub-prime lenders, institutions that offer loans to high credit risk customers and the subsequent loss of financial backing for these businesses both on Wall Street and on main street. And if you are watching the national news, the sensational nature of the broadcast finds the most downtrodden examples of foreclosures, often freezing a troubled borrower from making the right first move.
In the next week we will take three different looks at mortgages and housing. But there are several key things that need to be understood before we move on.
First and foremost, despite how they might appear in relation to recent years, interest rates are still historically low. Unfortunately, many folks with mortgages that are adjustable or were written creatively over the last several years will find little solace in that tidbit of news.
Truth is, rates are low. The problem lies in getting those rates.
Back in the eighties, another stressful time in the housing market (they tend to run in cycles wait long enough, and this downtrend will reverse itself as well), a good friend, Roger Smith was constantly facing foreclosure. Each time the bank called to discuss his payment and threaten him with eviction; he would not loss his cool.
Instead, he would invite them to foreclose. He would tell them that every house on the block is for sale. He would then suggest that they work with him. Often, that "work" involved some sort of covenant forgiveness. In the leveraged loan markets, a parallel universe of lending but on a much larger scale, some loans are written acknowledging the fact that borrowers do not always have great months.
Mr. Smith had some bad months and because he was frank (a stretched truth often was applied) and honest (also a grey area where the mortgage money might have been better spent on repairs rather than loan servicing), the bank made some arrangements. Often this would come by way of extended months at the end of the loan. No problem for Mr. Smith. Once the house was repaired, he put it back on the market.
While few of us have the brass to pull off such a maneuver, the principal behind it was right on the money.
The first mistake many people make with any sort of financial transaction that turns sour is to avoid the confrontation. Immediate and upfront communication with your lender is the best medicine. Once the dialogue begins, often some sort of equitable solution can be reached. Suffice to say, not much has changed from Mr. Smith¹s eighties housing market and now. Higher interest rates were making it difficult to get into houses and those that did often succumbed to double-digit rates. Yet, banks did not want those houses back. Lending institutions like banks make money when the loan is active and up-to-date. Your mortgage once it is written is packaged with other loans and sold to investors who are looking for a low risk return. Mortgaged-backed securities, loans secured with actual property, are just what some investors are searching for. Those investors want you in your home as well. When you make the payment to the lender, they get a slice of the payment as well. There are estimates that the cost of foreclosures can run as high as $40,000. This is a loss that includes not only foreclosure costs but also upkeep, any needed repairs to the property and the eventual sale, all costs that the bank would just as soon avoid. This so-called crisis will affect about 15 million homeowners before the cycle runs its course. This cycle begins with the borrowers who bought homes with low monthly payments in the first one-to-two years of the mortgage. Often referred to as teaser rates, these loans were often sold to buyers with good credit who assumed, for one reason or another, that they would move before the loan began to reset itself into a more traditional type mortgage. Falling housing prices in a previously hot market may have created a financial bump in the road but often, these buyers can renegotiate the loan and wait out the storm. These folks, with the ability to pay and the equity needed to remain in a good position to bargain need to contact the lender three to four months in advance of their loan resetting. Don't wait for the lender to contact you. By the time you receive notice, there is too narrow a window to adjust the loan. If you are having trouble pinpointing the exact date, here is a handy little calculator to help. Remember, you will need to have the equity in your home and the financial wherewithal to continue to make payments in order to qualify and opt for the best-fixed rate available. But if you are not in a position to refinance, Mr. Smith's "walk away" approach might be the next best thing. If you know that the value of your home does not offer you any equity and possibly may have gone negative, this might be the best option. You will have credit issues for the next seven years (so secure any alternative shelter such as an apartment before you bluff the bank and your credit is still somewhat intact). But credit issues can be fixed when the largest loan is no longer affixed to your daily bills. A second strategy gives the lender some motivation to work with you and your circumstance. Ask your lender for a deed in lieu of foreclosure. Often referred to as a DIL, the borrower (the mortgagor) must contact the lender (the mortgagee) within ninety days of default. The borrower cannot have the financial ability to pay the mortgage nor can the property be worth more than the loan. In its simplest form, a DIL allows the property to be turned back to the lender and both parties part ways. The last option involves forecasting your financial future. Perhaps you foresee a windfall, an inheritance, or a big bonus in the near future. Better yet, you know that you will be selling the home in the next several years for whatever reason. This, along with some equity in the home, sets you up for a temporary buy-down. This is another form of adjustable rate mortgage with a pre-determined fixed rate adjusting each consecutive year until it reaches the refinanced maximum, a rate that is often slightly higher than the best rate available. Up next, how to find a mortgage in these difficult times.
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