Home Remedy

FREEZING RATES: AVOIDING FORECLOSURES
When it comes to federal mortgage relief, timing is everything for local homeowners.
Behind on your adjustable-rate mortgage payment more than 60 days? Don't bother.

Signed up for a two-year ARM before January 2006? Too early.
Bought another home as an investment rather than to live in? Don't qualify.

Already in the foreclosure pipeline? Out of luck.

If the Triad hopes to lessen the potential impact of foreclosures on the local economy next year, the mortgage plan unveiled Dec. 6 by the Bush administration is not going to lead the way, financial and consumer-advocacy officials said.

That's because only a small percentage of Triad homeowners likely fit the federal plan - that is, they have to be current on their subprime loan but at risk of falling behind when their two- or three-year ARM resets next year, raising monthly payments by hundreds of dollars. The plan would help qualified borrowers by freezing the rate on certain ARMs at the introductory "teaser" rate for up to five years. It also could help them refinance into more affordable fixed-rate mortgages through the Federal Housing Administration.

"I think the purpose of the plan is not to help everyone, but to stem the potential flood of new homeowners being put in a foreclosure situation next year," said Michael Walden, an economics professor at N.C. State University. "Using a sports analogy, the administration wants to contain the problem, not stop it."

If the local economic blow is going to be softened, the officials said, it will come down to two factors: Struggling homeowners must confront the reality of foreclosure and seek help, and mortgage lenders and servicers must voluntarily toss out more potential home preservers.

The Federal Reserve also endorsed new rules last Tuesday that stiffen the standards used by lenders to provide subprime loans, including not providing loans for consumers who may struggle to pay a mortgage.

Foreclosure is a "last resort that a lender wishes to avoid at all costs," said Scott Bauer, the chairman and chief executive of Southern Community Financial Corp. "It's bad for the borrower and the lender."

Local lenders said that the use of the following options is likely to increase next year:

- Reducing fees to refinance or convert ARMs into fixed-rate mortgages;

- Allowing borrowers to pay only the interest on a loan for a limited period to help them rebound financially or allow time to sell their home;

- Applying the delinquent amount to the end of the loan, giving homeowners time to catch up on their payments; and

- Providing a rental-housing voucher to families who are expected to lose their home.

"I would hope that no reasonable option is off the table to help homeowners facing mortgage delinquencies and foreclosure," said Phil Greer, a senior vice president of loan administration for the State Employees' Credit Union.

For example, SECU and an affiliate, Local Government Credit Union, have combined to help more than 500 members refinance subprime loans into more favorable products.

But Greer acknowledges that "there are limits as to what can be done."

There have been 1,902 foreclosure filings in the Winston-Salem area this year through Nov. 30 compared with 979 through Nov. 30, 2006, according to RealtyTrac, a real-estate company that specializes in foreclosure properties. There were 191 in November alone compared with 83 in November 2006.

The federal plan cannot help everyone who has an ARM, or those already in foreclosure, said Kathy Banks, the director of counseling with Consumer Credit Counseling Service of Forsyth County Inc.

"It is too late for a lot of folks," Banks said. "However, it should help those who fit the guidelines, even though the guidelines may be narrower than many would like."

Banks said that since June, the agency has assisted 572 clients with issues involving mortgages either in default or imminent danger of default. She said that most clients are reluctant to talk publicly about their situation.

"The counselors tell me that about 25 percent to 30 percent of clients seen are anticipating or experiencing an increase in their mortgage payment due to adjustable-rate mortgages," Banks said.

"In cases where the increase was pushing them over the edge, but they have had a stable payment history before that, we have been successful in negotiating a loan modification with the lender.

"One positive aspect is that many lenders are more willing to work with us now than ever before in seeking ways to avoid foreclosure," she said.

Most economists said that with more than 1.8 million ARMs scheduled to reset next year, the foreclosure crisis is likely to get worse.

The Mortgage Bankers Association said on Dec. 3 that the delinquency rate for mortgage loans on residential properties was 5.6 percent of all loans outstanding in the third quarter - a 21-year high. The percentage of loans in the foreclosure process was 1.7 percent of all loans outstanding - the highest levels ever, the association said.

The increase in foreclosures sweeps across all loan types, the association said, including prime fixed-rate loans and FHA loans.

Countrywide Financial Corp., which is struggling to survive because of the mortgage crisis, said that the No. 1 reason its customers have been defaulting is because their income was cut, according to The Associated Press. That accounted for almost 60 percent of its loan defaults through Oct. 30. Add sickness and divorce, and the total jumps to more than 80 percent.

By comparison, a mortgage-rate adjustment has caused fewer than 2 percent of defaults.

More foreclosures are bad news for homeowners with pristine payment records, said Peter Morici, an economics professor at the University of Maryland. "The value of their home can drop by tens of thousands of dollars, especially if they live in areas hit by foreclosures," he said.

Local officials said that there has been a significant increase in foreclosure as a result of consumers buying a bigger home than they could afford, or being misled into taking the wrong mortgage loan.

They said that there are plenty of examples of consumers who qualified for a fixed-rate loan but chose or were talked into an ARM because of a 1-to-2 percent initial lower rate. Some of those homeowners are struggling to refinance because the value of their house is now below the value of the loan.

The Bush administration said that as many as 1.2 million homeowners nationwide could qualify for the mortgage-relief plan. Consumer-advocacy groups counter that as few as 145,000 may qualify because of restrictions that include credit scores, equity in the home and when the loan was taken.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., said that "a loan-by-loan calibration of what each borrower can pay will take too much time and too many resources."

"This increases the likelihood that a loan-by-loan approach will mean more foreclosures and loss of value to borrowers and investors," Bair said.

Officials said that the biggest obstacle with the federal plan, as well as individual efforts to resolve mortgage delinquencies, is getting homeowners to acknowledge that they need to take the first step. Many homeowners with ARMs are not aware of when their rate resets - even though it often represents a steep monthly increase in payments.

"Some borrowers never talk to their lender or servicer, including when they have been given written notice of being behind on their loan payment," Greer said. "There's no doubt that the less equity that a homeowner has in their home, the less effort they are going to make to keep the home from foreclosure.

"That's even though losing your home is a blemish on their credit record for several years."

Spence Cosby, the president of Sidus Mortgage Corp., said that it "takes a lot of counseling and intense work on the borrower and lenders' part to pull a home out of foreclosure" once it enters the pipeline. Sidus is a subsidiary of Yadkin Valley Financial Corp.

Marcus Schaefer, the president and chief executive of Truliant Federal Credit Union, said that the credit union offers reduced origination fees that average more than $1,000 in savings for homeowners trying to convert an ARM into a fixed rate.

"We are currently looking at loan programs to help ease the pain for members in these ARMs," Schaefer said. "That includes a graduated payment plan to give members some time to build up income without an immediate sharp payment increase so they can ultimately refinance into a traditional program."

Wachovia Corp. offers a graduated ARM loan whereby the minimum monthly payment increases a small percentage each year "so that there is not as much of a payment shock when the ARM resets," said Don Vecchiarello, a spokesman for Wachovia's mortgage division.

Declining home values nationwide are hampering newcomers to the Triad, said John Eller, the owner of Village Mortgage Inc. in Clemmons. "They can't afford to buy until they sell their previous home," he said. "You also have local people struggling to move up in home value for the same reason."

Eller said that despite worries about tighter lending requirements, most conventional mortgage loans - including no-down-payment products - are available to qualified consumers.

"But some people are almost afraid to buy now because they're afraid the housing market is going to collapse, or they feel they must have a much higher credit score to qualify for a loan with less than a 20 percent down payment," Eller said.

Lack of personal responsibility has played a huge role in the foreclosure problem, said Matt Davis, the director of public relations for Members Credit Union.

"Subprime lenders made risky loans that they knew, or should have known, the borrower could not possibly repay if the rate upwardly adjusted," he said.

"Investors in mortgage-backed securities knew, or should have known, that in exchange for the potential for high gains, they were risking taking losses on their investments. Some borrowers allowed themselves to sign loan deals without fully foreseeing or understanding the true risk of their implications.

"Free-market economists would argue that we should let the chips fall where they may," Davis said. "As a not-for-profit financial cooperative who values compassionate corporate citizenship, we will do anything within our means to help any of our 52,000 members who have been caught in this crisis."

Bauer, the chairman and CEO of Southern Community, said he believes that the federal mortgage plan will serve as a wake-up call to homeowners with ARMs.

"Hopefully it will help convince homeowners to take a look at their mortgage paperwork and make a call if they determine that the reset could affect their ability to afford their home," Bauer said.

AVOIDING FORECLOSURE

Credit-counseling agencies recommend four strategies for avoiding foreclosure:

1. A repayment plan is geared toward consumers who are up to three months behind on their mortgage payment. The plan allows a homeowner to pay extra each month so that the terms of the loan are not changed.

2. A loan modification is a written agreement between the servicer and homeowner that changes one or more of the original loan terms, such as the interest rate, term of the loan or type of mortgage.

3. A forbearance applies to people who have experienced a major financial setback, such as one-time medical expenses or a temporary loss of income. Borrowers must be able to prove that they have a new job or a new source of income to resume making their regular monthly payments in the future.

4. A partial claim serves as a second loan for anyone with a loan guaranteed by the Federal Housing Administration. The mortgage loan is brought up to date by securing up to 12 months of past-due principle, interest, taxes and insurance in a separate, interest-free note. The note is payable when the original mortgage is paid off.

SOURCE: CONSUMER CREDIT COUNSELING SERVICES