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Too many people are waking up nowadays, finding that the Adjustable Rate Mortgage 'good deal' they bought a few years ago isn't such the good deal they thought it was, now that it's adjusting upwards. Assuming that they would be able to re-finance to a similar rate and continue on after the adjustment is what got MANY people into dire financial straits.
Are you in that boat?? Facing a home mortgage that is about to (or already has) taken on the personality of the shark in "Jaws"?? It's not going to get any easier by ignoring the problem and hoping it swims away.
The thing about financial problems is that if you don't address them immediately, they have a bad tendency TO GET MUCH WORSE.
Take the Shark by the Snout
Realize that it's time to face the problems and start dealing with them. Here's a number of things to do to try to prevent the mortgage company shark from eating your home, money, and time.
Keep in touch with the Lender - Remember, the lender is in the business of 'lending money' not 'owning property', they don't want the house back, they want the mortgage payments. Keeping them appraised of your situation and the fact that you are trying to work through it is paramount to keeping a good relationship with them.
- Renegotiate the Loan - If you have a good history with the lender, but can't make the new payments, they might renegotiate the rate or loan to accommodate you and your existing payment rate.
- Suspend/Reschedule Payments - (Called 'Special Forebearance') Sometimes you just need a little time to catch your breath. In some circumstances, the lender will re-schedule the loan and extend the 'honeymoon' period before they start proceedings, again assuming you have a good relationship.
- Partial Claim - In some cases, you might be able to get an interest-free loan from HUD to cover the missed payments. Again your lender can help here and provide the details. It's worth asking about.
Get Outside Help - With the upswing in mortgage defaults, there's more organizations than ever before that are trying to help the consumer to get through the tough times. Contact them and get as much information about their offerings, programs, and tips/ideas as you can. Some resources are;
- HUD-approved Housing Counselors
- FHA Guide to Foreclosure Information and Prevention
- HUD Brochure - "How to Avoid Foreclosure"
- Freddie Mac - "AVOIDING FRAUD" VIDEO
- DEPARTMENT OF VERTERANS AFFAIRS
- PRO-BONO LEGAL ASSISTANCE
- Freddie Mac - Disaster Relief Guidelines
- Freddie Mac - Military Servicemembers information for foreclosure
- The White House - Fact Sheet: New Steps to Help Homeowners Avoid Foreclosure
Get rid of the House - If all else fails, you ARE going to lose the house to foreclosure. It may take upwards of a year for all the processing, which should give you ample time to try everything to get back on your feet. However, at some point, it can become clear that there's not going to be anything you can do to recover. At that point, the emphasis should shift from 'saving' the house, to 'transitioning' the house. Working to make an already painful situation as pain-free as possible.
- Try to Sell the House - Selling the house to someone else can solve all the pending problems, if you can get enough out of it to cover your existing debt. (You can also sell for less than you owe, called a short sale, but this must be approved by the lender, and you STILL will owe the difference). Get with a realtor and get a REALISTIC assessment of the value of the house, and the selling market. Today sucks to sell houses, so this might not be a workable option.
- Let the House Go Back to the Lender - Depending on the state, there are slightly varying ways of doing this. The preferable way is to sign a Deed in Lieu of Foreclosure, which is a document turning the home completely back to the lender, the lender then cancels the debt. These aren't very different from a foreclosure according to sources, as they affect your credit similarly, but they're faster and less paperwork intensive.
A Warning
Not like things aren't bad enough already, there is something else to be wary of. With the number of mortgages going to foreclosure, a whole sea of people trying to defraud these families is springing up. Companies that promise to "Stop the Foreclosure" for a fee. Many times these people/companies are doing exactly what you would be doing anyway. Other times they're out-and-out ripoff schemes trying to bilk you out of more money during a weak and turbulent time. Remember the old saying;
If it seems too good to be true, it probably is.
If you want to try one of theses services, make sure you CHECK THEM OUT CAREFULLY. There are no sure-fire ways, other than paying what you owe, to get rid of a foreclosure, no matter what anyone says.
This article will be featured in the "Home Finance: All you need to know about home ownership" series.
This post is part of a writing project headed up by Rocket Finance exploring different aspects of the sub-prime crisis, lending practices, and foreclosures. Visit Rocket Finance on Friday for Home Finance: all you need to know about home ownership, a carnival of entries in this project.
- My Thoughts On This Whole Mortgage Crisis And Why I Don’t Feel That Bad @ My Two Dollars
- Why renting is right for us right now @ Mrs. Micah
- Why We Have an Adjustable Rate Mortgage @ My Dollar Plan
- Debt-To-Income Ratio and Why It Matters @ Moolanomy
- Catch a Falling Knife - Buying the Housing Slump @ Millionaire Money Habits
- Can we afford the Payments @ PaidTwice
- Pay off Credits Cards with a HELOC @ Debt Free Revolution
- So You Want to Buy a Fixer Upper @ Remodeling This Life
- Frugal Hacks For Your Home @ Being Frugal
- American Subprime Crisis—Should We Care @ Plonkee Money
- Mortgage escrow accounts Explained @ Cash Money Life
- Don’t Use Your House to Pay for Your Life @ Rocket Finance
- Why the Sub-Prime Crises has not Affected Canada Yet @ Four Pillars
- That Damned Rent vs. Buy Question @ Blueprint for Financial Prosperity
- Predatory Mortgage Lending and the Subprime Market @ Chance Favors
- After Foreclosure Guide to Housing: It Ain’t Easy @ DebtKid
- How to Avoid Foreclosure - The Definitive Guide @ Credit Withdrawal
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February 1st, 2008 at 9:16 am
Excellent resource! This should come in handy to a lot of people. The current situation is unfortunate, and it is tough to see people lose their homes, but even worse to see them get taken advantage of when they are vulnerable.
February 1st, 2008 at 9:34 am
I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Allen Taylor
February 1st, 2008 at 9:55 am
I was in the wholesale mortgage business until December 2006. My background is in Economics and Finance... Imagine my surprise when I was told that we could allow 100% financing with a borrower's STATED income and a 600 credit score. That defied all that I had learned and common sense. The theory was that, with home values increasing every year, the home would be worth more at the end of the initial 2 or 3 year ARM and that the home could be refinanced at a lower Loan to Value ratio (70-80%) and thus a lower rate and possibly a longer term.
Well, that did not happen and the rates are starting to adjust. Now, I have a stated income ARM myself (through 2013) but my credit score is 800+ and I have a plethora of assets. When my rate begins to adjust, the maximum adjustment is 0.5% per 12 months. These subprime loans have margins (the rate added to the index to get the fully indexed rate) of 4-8% and typically add this margin to the index on the first adjustment. The theory was that these margins would never be added to the current index because the borrowers would be out of the loan before the first adjustment after the initial 2 or 3 year ARM.
So, now we have these loans (that have been purchased by other institutions by the way) where the fully indexed rates are going from the initial 7-8% to 11-14%. That's a HUGE increase.
My solution is pretty simple. The institutions that currently own these loans will soon be in the Real Estate business because these people can definitely not afford paying these huge interest rates. So, the homes go to foreclosure and these institutions have a tremendous number of homes on their books where they are receiving ZIPPY, NADA, ZERO income off these loans. That's a pretty poor return on the loans they had purchased.
Forget about the FED lowering rates to help the crisis. These institutions took a risk on purchasing these loans and should be affected also. Instead of getting the 0% return on the foreclosed homes because the borrowers cannot afford the new terms, I think that the MARGINS on these loans should be evaluated.
If a subprime borrower's initial term called for an interest rate of 8%, the margin should increase the same as mine does (0.5% per 12 months). Sure, the institution that holds the loan will take a bit of a loss because they paid a premium for these loans (expecting the HUGE interest rate increase at the first adjustment). But, they will continue receive something from these borrowers. The borrowers who could afford 8% for the past 3 years should truly afford 8.5% for the next 12 months, then 9% for the next 12, etc.
On a $250k loan, increasing the interest rate from 8.0% to 8.5% would call for a Principle and Interest payment increase of $87.87 per month ($1,922.28 - $1,834.41). At least that is a bit bearable.
Now, take that same $250k loan and increase the interest rate from 8.0% to 14% (as is happening in many instances) and the payment increases by
$1,127.77 ($2,962.17 - $1,834.41). There is NO WAY the majority of these borrowers can afford such a jump. Therefore, FORCLOSURE is inevitable.
Like I said, the institutions that currently hold the loans will take a bit of a hit, but at least they won't own a slew of foreclosed-upon homes.
I'd love to hear your thoughts. And, feel free to post my comments in the appropriate blog on your site. If you do, please subscribe me to that section as well.
I feel better getting that off my chest!
Larry
February 1st, 2008 at 10:02 am
GREAT comments, and lots of helpful information there too. Good thoughtful solution to this mess we're in.
@Alan,
I'm glad you like the blog, Let me know if there's any subjects or topics you'd like to see more of and I'll see what I can. do. Thanks for the subscription.
February 1st, 2008 at 10:17 am
Thanks so much for putting these all together!
April 23rd, 2008 at 2:39 pm
Good blog -- especially "Take care of matters now before they get worse." (Makes me think I should quit reading blogs and get back to mopping up that washing machine accident.)
Larry, thanks for pointing out the difference in spreads for good credit loans versus bad. I didn't know the adjustments for subprime were also subprime, that is, categorically and inhumanly higher!
Would to God the idiots who wrote those loans were forced to rewrite them in a way they could be paid--even if the rewrite had to convert to 40 years.