How to avoid mortgage default
Before the collectors call, try to work with a lender, explaining any
financial calamity causing missed payments
By Jim Wasserman - Bee Staff Writer

Last Updated 12:01 am PDT Monday, March 19, 2007
Story appeared in BUSINESS section, Page D1

Trouble begins with a slow-motion descent toward your first missed
mortgage payment. It's a queasy feeling thousands of Sacramento-area
homeowners know too well as their houses slip away.

Judy Thompson sees it when clients realize what their home loan really
is. A Stockton-based housing counseling specialist for the nonprofit
group By Design Financial Solutions, Thompson calls it the "Oh-my-God
look. My loan officer didn't tell me that."

There are many stories now. An Antelope man loses a $50,000 government
contract one month after buying his house and immediately can't afford
it. An Arden Arcade woman refinances the entire value of the house
she's owned nine years and can't make the payments. A Sacramento-area
dad takes a 1.5 percent "teaser rate" loan and sinks when the family's
house payment doubles in the first year.

So what should you do if you're in trouble? Put off car payments to
make the house payment? Max out credit cards and exhaust the savings
account? Stop eating out and drop cable TV? Foreclosure? Bankruptcy?
Short sale?

Increasingly, these are the questions of real life nearly two years
after a collapse of the most exuberant housing boom ever seen in
Sacramento.

Experts say how you deal with impending loan trouble goes a long way
to ending it in the best way possible. Most important: early contact
with the lender and being wary of the mail and phone offers of help
that follow public posting of a default notice, which usually come
after a couple of months of missed payments.

Alternatives to foreclosure are many, and banks prefer working with
you to taking back the house.

"Sometimes it's necessary, but it's a last resort," said Tim McGarry,
spokesman for the Seattle-based lender Washington Mutual Inc.
"Foreclosure almost always represents a loss for the lender."

Not every homeowner in trouble has an escape route. Some homeowners
have mortgages that charge thousands of dollars to change the loan
terms. Others with adjustable rate loans may face still higher monthly
payments in the future.

But experts say that there are some key steps homeowners facing
mortgage trouble can do:

· Get moving on a solution or get help before it's too late. Many
people burrow their head in the sand and wait until they've missed two
or three payments to start a workout plan.

· Write a hardship letter to your lender putting your situation in
writing. It should be specific about what caused the delinquency with
dates and a time frame. Make it detailed, but be concise.

· Don't give up and walk away from your house before trying to find
some kind of solution. And don't assume a short sale -- a process by
which the bank agrees to sell your home for less than you owe -- is
your only way out.

· Be polite and work with the lender to find a solution you both agree
on, whether it be extending the repayment period, suspending the need
for payments for a few months, borrowing from family members or
tacking the missed payments on the back end of the loan.

Antelope resident Elizabeth Tufts faced two choices when, following a
divorce, she found herself with a home worth less than what she and
her former husband paid for it in 2004.

"In my case, it was either a short sale or have the house go into
foreclosure," Tufts said.

The young working woman was behind on house payments and lacking the
income to keep up. In an oversaturated market she couldn't find a
buyer.

Eventually Tufts found her least painful ending through Derek Kirk, an
Elk Grove-based real estate agent who specializes in short sales. Kirk
persuaded the bank to accept less than it was owed due to Tuft's
hardship.

But Kirk said too many people have a misconception they'll be approved
automatically for a short sale. Banks largely aren't saying yes unless
the hardship is related to a lost job, bankruptcy, divorce, death,
medical crisis, relocation or some other financial difficulty, he
said.

"It's got to be something that involuntarily happened to the person to
put them into a worse financial position," he said.

That usually eliminates homeowners who have seen their interest rates
adjust higher or took a loan they couldn't afford. It rules out people
who didn't read their loan papers before signing and investors who
bought a house expecting to flip it for a quick profit.

In involuntary hardship cases, Kirk said, banks typically want "two
years of tax returns, pay stubs and bank statements, the divorce
decree, the bankruptcy filing. For medical hardships, they want
letters from doctors."

"It all goes to the bank, and they review it and if you have a
legitimate hardship, nine out of 10 times they'll move forward with
the deal."

Troubled sellers should ask about potential tax implications of the
deal. In some cases sellers can be taxed on the loan amount forgiven
by the bank. Still, short sales usually aren't as hard on an
individual's credit rating as foreclosure, experts say.

Foreclosure stays on a record for seven years, and it may be four
years before a buyer can use regular interest rates again. Missing up
to three mortgage payments also stays on a credit record for seven
years. It may be several years before a borrower can buy again without
getting the higher-cost "subprime" loans given to people with spotty
credit records.

Thompson, who offers free counseling to troubled homeowners through a
U.S. Department of Housing and Urban Development grant, said most
people begin examining their options after the lender calls.

"Generally speaking, you begin by talking to a collection department,"
she said, "and it's telling you you're behind and you need to catch
up. They can offer repayment plans."

Thompson's agency, with 11 offices in metropolitan Los Angeles and the
Central Valley, advises people to stay calm and polite even if
collection departments behave otherwise. It also advises keeping a log
of each call since homeowners frequently will talk to different people
within the institution.

"You'll proceed to the (lender's) loss mitigation department as you
become more delinquent," Thompson said. "They will send out a workout
package for the client to fill out to see what options they can do."

That may mean paying back what's owed at once, which is called
reinstatement. It may mean temporarily suspending payments, a process
called forbearance. Recasting allows borrowers to add what they owe to
the loan and start fresh. A home equity loan consolidates other
expenses to lower monthly bills.

Refinancing, a common option when markets are rising, is tougher when
they're falling. Many borrowers don't have enough home equity to
refinance, lenders say. Refinancing also could become more difficult
as government regulators press lenders for tighter standards to
prevent still more defaults.

McGarry said Washington Mutual considers short sales, forbearances up
to 12 months when conditions warrant and reworking loans into 40-year
payment schedules.

If nothing works, bankruptcy protection may be the ticket to keeping
your house, said Sacramento attorney Peter Macaluso. A bankruptcy
specialist, Macaluso said owners who used 100 percent financing with
an 80 percent first loan and 20 percent second loan for the down
payment can sometimes avoid obligations to pay the second, depending
on how the bankruptcy filing is structured.

"In the last five years I didn't do but one or two," he said referring
to home-related bankruptcies. "In the last six months I've probably
done 10, and I know my fellow cohorts are doing the same."

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