It's Better Not to Foreclose, Home-Loan Giants Find
By Kenneth R. Harney
Saturday, November 9, 2002; Page H01
A milestone of potentially huge importance to anyone who owns a home and pays a mortgage was reached without fanfare last month: For the first time, all three of the biggest players in the U.S. home-loan field kept significantly more of their seriously delinquent borrowers in their houses, rather than forcing them out through foreclosure.
The Federal Housing Administration, Fannie Mae and Freddie Mac all managed to "work out" more delinquencies with nonpaying borrowers during the past year than they foreclosed upon. FHA was especially impressive: For the first time in its 60-plus-year history, it paid more insurance claims during fiscal 2002 designed to help delinquent borrowers keeps their houses than claims associated with foreclosures.
As recently as the mid-1990s, the vast majority of homeowners who were seriously delinquent on their mortgage payments ended up in foreclosure. But today, it is less than half. FHA, Fannie and Freddie have instituted national "loss-mitigation" programs, under which seriously delinquent borrowers get their loan terms reshaped rather than proceed to foreclosure.
Though all three loss-mitigation programs are designed to keep homeowners in their houses, they have enormous financial benefits for the mortgage companies, too. This past year, FHA, the government's prime mortgage insurance program for first-time and moderate-income buyers, paid $5.5 billion in claims on 64,000 foreclosures. Yet it paid just $98 million to help keep 73,000 financially troubled borrowers, who might otherwise have ended up in costly foreclosures, in their homes with recast loans.
For decades, said Joseph McCloskey, FHA's top loss-mitigation specialist, "the assumption was that if a loan went into default, the homeowners were on their own. If they could pull themselves out of whatever trouble they were in, fine. But if not, they were headed for foreclosure."
Now, under a mandate from Congress, the agency reaches out to borrowers through mortgage servicers to deal with financial problems early, before the missed payments grow too heavy to handle, McCloskey said.
Fannie Mae and Freddie Mac, private companies chartered by Congress, also have aggressive programs for delinquent borrowers . Phillip E. Comeau, a Freddie Mac vice president in charge of loss mitigation, said that in the mid-1990s, 70 to 75 percent of seriously delinquent borrowers lost their homes to repay their debts. Today more than 50 percent enter loss-mitigation programs and avoid foreclosure.
Fannie Mae's director of loss mitigation, Danny Smith, said 93 percent of delinquent borrowers who participate in the company's resolution program are able to remain in their houses and eventually repay their arrears. More than 52 percent of seriously delinquent borrowers choose workouts. Last year, of the nearly 31,000 borrowers who fell seriously behind on their mortgages, 16,000 resolved their problems without foreclosure, Smith said. As recently as 1997, only 1 in 3 Fannie Mae "problem" borrowers avoided foreclosure or loss of their homes.
What are the options available in workouts? There are several plans offered to FHA borrowers, depending on the severity of their problems:
• Special forbearance. When a homeowner falls behind on payments because of temporary job loss or illness, FHA may agree to accept lower payments for a time. But once the homeowner's cash flow improves, the arrears must be made up with gradually increasing payments. About 47 percent of FHA loss-mitigation cases are handled this way, McCloskey said.
• Loan modifications. When a financial problem is for a longer time, but the borrower's reduced cash flow is relatively stable, FHA may modify terms of the mortgage, perhaps even lowering the interest rate. To pay off the debt, the term of the mortgage may be extended and the arrears may be paid off in small monthly amounts during the remaining term of the loan. About a third of FHA workouts take this form.
• Partial claims. When the unpaid amounts are high but the borrower looks like a solid long-term bet to pay, the FHA may pay arrears in a lump-sum insurance claim. The borrowers are responsible for repaying the money when they sell the house in the future.
The upshot of all this for financially troubled mortgage borrowers: Be aware that thanks to the widespread adoption of loss-mitigation programs by major lenders and insurers, the first step to saving your house is now clearer than ever. When you see a problem on the horizon, contact your mortgage servicer immediately.
Don't let the situation spiral out of control. Work it out early and keep your home. |
