Behind on The Mortgage: What is a Delinquent Borrower to Do?

We've posted this once before, but given the number or search queries, emails, and phone calls we are getting asking the question posed in the title, we thought it was worth re-posting a summary of David A. Smith's excellent advice on what to do if you are, or are in danger of, falling behind on your mortgage payment.

Read the whole thing, there is a lot of insight on WHY these steps are important, but here are the high points, quoted directly, from the piece:

1. Announce the problem — in writing. Don’t wait for the lender to come calling — once you know you’re going to miss a payment or two, tell your lender this.

2. Come clean on your financial resources. When queried about your circumstances, come clean....Most people who can’t pay hide assets, fib about their situation, or at the very least hem and haw. Few things create more credibility than owning up to the situation — and credibility is one of your most precious assets.

3. Figure out what you can pay. Even if you can’t make full payments, you can make some partial payment. Figure out what it is. Tell the lender that.

4. Make regular partial payments. Even if you can’t pay 100%, pay something — every month. And make it the same amount. That regularity is soothing to the lender, and establishes a baseline that adds to your credibility.

5. Keep detailed records of everything. Not only should you keep copies of all your correspondence to the lender, keep the lender’s back to you. Judges and others are very sympathetic if you come in waving a sheaf of communications where you show you were a responsible borrower, trying to get the lender’s attention, and the lender just kept sending you form notices.

6. Find a real person inside the lender. Companies are abstract entities; job titles are uniforms we put on each morning and doff each evening. In between, a company is represented by individuals...Your goal is to puncture the anonymity barriers...

7. Propose rescheduling your debt, including lowering your mandatory payments. You’re delinquent, you can’t pay everything you owe, but you’re paying something. You’re seeking a piece of paper, signed by you and your lender, that specifies a breathing interval.

8. Explore refinancing. Loan payments have two elements, interest and principal. Both of them can change — meaning lower — in a refinancing.

9. Offer to chip in new equity. A lender facing a bad loan assumes that (a) the property will be her only good collateral, and (b) before she can get to the collateral, she’ll have to spend a bunch of money getting the borrower out of the way. If a lender thinks there’s new equity capital that can come in — from family, friends, or government, in short, from anywhere — that’s an automatic differentiator in your favor.

10. Look for financial help. Fortunately for the United States, we have a widely distributed network of assistance providers, particularly for homeowners. Credit counselors are one starting point; so are federal, state or local housing finance agencies all over the country.

11. Sell the property. Eventually, and sometimes even when all the preceding things are going on, you may wish to list the property for sale. If you do this, only good things can happen: You may get an offer that covers your debt and allows you to recoup equity, If you are marketing the property and you can’t get anyone to take it off your hands, that too is great evidence you can use to persuade your lender to give you a workout respite.

12. Consider bankruptcy. Sometimes nothing works. Sometimes the right answer, financially ugly though it may be, is to let the property go. However, as I wrote 18 years ago in my second bout with workouts (my first was in 1976), there are some unusual times when bankruptcy is the best survival strategy.

What's a Delinquent Borrower to Do? [AHI - David Smith]

01/04/08 at 11:48 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Foreclosures, How To, Personal Finance, Sub-Prime

From the NYT: Inside the Countrywide Lending Spree

Any consumer with a functioning BS detector who has seen (over, and over, and over again) number one mortgage lender Countrywide's televised ads - you know the ones, with a smarmy, guy next door spokesmodel, pitching everything from option ARMS to debt-consolidation Home Equity Loans - probably recognized that there was more at work there than simple "we're here to help" salesmanship.

Case in point, this piece from Sunday's New York Times, on Countrywide's unseemly sales practices, which exposes a corporate culture built around separating its customers from as much of their money as possible:

“I want to be sure you are getting the best loan possible,” the sales representatives would say.

But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees.  Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans ...Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers...

Now, without begrudging any organization fair profit from its toils (I think we are all adult enough to comprehend that the mortgage business, or any other, is not a public charity,) Countrywide does appear to have set up an organization devoted to deliberately, systematically, and professionally screwing its customers, rather than providing a fair exchange of goods and services.  Borrowing from their Slogan:  Nobody Can do What Countrywide Can.
Inside the Countrywide Lending Spree [NYT]
Photo: Bloomberg

08/27/07 at 09:27 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Consumer Protection, Financing Options, First Time Buyer, Industry News, Personal Finance, Rip-Offs

Consumers, Well Acquainted with Mr. Frying Pan, Rush to Meet Mr. Fire

If you have any notion that our collective national jones for borrowed money at any cost and nearly any terms will be behind us once the market, the government, et al. deals with the mortgage mess, you might want to re-think things.

For instance: You might assume, super-smart blog readers that you are (you are!), that the consumer, faced with stagnant incomes, flat-to-declining home values, rising interest rates, and tougher credit standards, would curtail spending.  Right?  Well...not so fast.  Instead, it appears that consumers less able to tap home equity to feed spending habits are turning to credit card debt:

As Mortgage Equity Withdrawals decrease....(click for big)

The graphic above represents MEW, or Mortgage Equity Withdrawals (cash out refinances, Home Equity Loans, etc.) [Source: Calculated Risk, Dr. James Kennedy)

Credit Card Balances are Rising...

Source: Wall Street Journal, Credit Crunch Moves Beyond Mortgages, August 22nd, 2007
http://online.wsj.com/article/SB118773982869404682.html

Talk about frying pan to fire.  And, of course, with average credit card interest rates at already levels (13-18%) that make the ugliest sub-prime loan on the planet a bargain, Credit Card Issuers are raising rates:

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers.

In part because of, you guessed it, rising mortgage defaults:

Nationally, credit-card delinquencies are relatively low at 4% and haven't risen significantly in the past three years. However, in certain markets, especially those that have been hit hard by a decline in home values, delinquencies have spiked higher.

Might it just be that the "problem" is not mortgages, or credit cards, or [insert any other way to borrow], but the fact that for far too long undisciplined lenders have been catering to undisciplined borrowers, across the entirety of the lending universe (from hedge funds down to your neighbor.)

It's like a trillion dollar game of chicken, and we have a hard time imagining how it ends well for many of the participants.  While we'd like to be able to say the undisciplined lenders and borrowers will get their respective comeuppance, many of the disciplined will be caught in the undertow.
Credit Crunch Moves Beyond Mortgages [WSJ]
Advance Q2 Mortgage Equity Withdrawal Estimate [CR]

08/23/07 at 11:27 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Economy, Interest Rates, Personal Finance, Sub-Prime

Real Estate Commission Weirdness, Deconstructed

If you've ever struggled to understand how exactly real estate agents are paid, and where the incentives are, check out this Dynamite post over at a Funmurphys, by regular guy and recent home seller Carl Drews, who unpacks the four essential "weirdnesses" of a real estate transaction.

The whole post is worth a read, but it really boils down to the fact that through practice, custom, and sometimes law, the real estate commission system under which the industry operates - where all commissions are paid by the seller - is one very few consumers truly understand, and results in all manner of perversely misaligned incentives.

Weirdness #1: Commissions are not split 50-50 by the buyer and seller agents. 

Weirdness #2: The Sellers pay the buyers agent to "intentionally, deliberately, professionally negotiate against them."

Weirdness #3:  Absent a written agreement otherwise, the Licensed Agent that first physically shows you a home has all rights to the commission should you buy it.  Does not matter if you were "just looking" and wanted to pick your own agent later.

Weirdness #4: There is no discount for "unattached buyers" in the typical listing contract, and all commission goes to listing agent.  (So much for the theory that you will have more negotiating power if you work directly with the listing agent rather than using your own agent.)

How Real Estate Commissions Work [Funmurphys, via Bloodhoundblog]

08/21/07 at 09:38 AM Permalink | Comments (5) | TrackBack (0)
Filed Under: Personal Finance, Real Estate Negotiation

Banned in Minnesota Today: Trigger Leads

One of the better pieces of legislation to come out the East side sausage factory this year is a law banning the sale of what are known as "trigger leads" (more on this here, and here.)

[The] new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person’s credit history was requested in connection with a mortgage loan application.

In other words, until today, any time you applied for a mortgage, or had a mortgage lender run your credit report, that information, along with whatever other data was available in your file (credit score, current address, telephone number, loan balances, etc.)  was immediately sold [Edit for Clarification: Sold by the credit repositories - Experian, Equifax, Trans-Union, not your lender, who has no control over this], over and over again, to all manner of sketchball lenders from coast to coast, which would then use that data to solicit you for a loan, often using shady tactics ("your lender asked us to call you because our rates are better" for instance.)

Though we have always recommended shopping for a mortgage lender to work with, this should be done on your terms, rather than having your data indiscriminately sold to whoever will write the check.  Trigger leads are a breach of consumer privacy, and absolutely one of the more onerous practices the credit industry engages in.  Good law.
Mortgage Privacy Law Summary [leg.state.mn] 

08/01/07 at 09:39 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Credit, Industry News, Personal Finance

Despite Concern, Lenders Still Pushing Option ARMS

Lenders Like Quicken Still Aggressively Pitching Option ARMS

As the ad posted above played on CNBC this AM, we thought to ourselves, "Self, I can't believe these guys are pitching option-ARMS this way.  Talk about stupid."  Then, as if on cue, we see a piece in today's Real Estate Journal that points to growing concerns about the the option ARM market.

Investors aren't panicking over option ARMs, but they are signaling greater concern about how well borrowers will cope with the eventual jumps in payments that many face...[snip]...For some borrowers, option ARMs are ticking time bombs.

These loans, in our view, are suitable for a only very small slice of the borrowing public; specifically, those of very high credit quality with high net worth, who use it as a tool to manage cash flow. An option-ARM should NEVER be used simply to be able to afford a mortgage that under normal circumstances would be out of reach; that is just stupid and asking for disaster.

The problem is, many lenders continue to offer sell aggressively pitch these loans as a magical affordability solution.  Look how low your payment can be! You can save thousands!

We are calling BS, think the practice is reprehensible, and Quicken (which holds itself out as a purveyor of sound personal finance solutions) ought to know better. Secure advantage? Yeah, right.
· Option Arms Emerge as Home-Loan Worry [REJournal]

04/19/07 at 12:42 PM Permalink | Comments (2) | TrackBack (1)
Filed Under: Financing Options, Industry News, Interest Rates, National & Abroad, Personal Finance, Rip-Offs

Home Equity as Retirement Savings: Not So Hot

Earlier today in the Linklube (see previous post) we linked to a paper from the Fidelity Research Institute that examines the role of home equity (as opposed to other types of investments) in financing one's retirement.  Now that we've had chance to read it in detail, we wanted to hit the high points for those of you that don't have the stamina to get through all 32 pages.

The conclusion, which may be counterintuitive to many readers:  Though owning a home is clearly a better option over the long haul than renting (obvious, that part) home equity as a strategy to finance retirement is a bad idea, and over the long term real estate is the worst performer (see chart at right, click for big,) among other investments such as stocks, bonds, etc. - barely edging out super-low risk treasury bills. 

There's also this: over-investing in real estate (either by over buying, or pre-paying a mortgage) is the wrong thing to do in planning to finance retirement.  From the article:

Another way to inadvertently “over-invest” in real estate may be by paying off a home’s mortgage early....a significant number of households are actually doing the wrong thing when they accelerate their mortgage payments. For certain segments of this group, it would be more beneficial to put these extra payments into their tax-deferred retirement accounts...

Among the other interesting data points (more in bullet form, plus a link to the report, after the jump) is the following chart, which compares real estate investment returns to other investments over time - fascinating stuff -  the whole report is worth a read.

Click Image for Larger Graphic

u1. Despite the recent run up in mortgage debt, net home equity stands at well over 50% of total home values - there is a LOT of equity yet to be tapped.
2.  The Median Price of New Homes has averaged a 5.9% annual appreciation rate since 1963.
3.  Returns on a dollar invested in real estate in 1963 have been only slightly better than returns on low risk treasury bills.
4. Real estate in the form of home prices has not had attractive risk and return characteristics over long periods of time.
5. Do NOT Over invest: Stretching to buy a much larger, more expensive house than a person actually needs could cost a “house-rich, cash-poor” homeowner a major “opportunity” loss in foregoing historically high-returning stock investments for lower-returning real estate assets.
6.  Another way to inadvertently “over-invest” in real estate may be by paying off
a home’s mortgage early.

Of course, even with careful and correct planning most of us will at some point have accumulated substantial home equity, and the paper goes on to discuss different tactics to deploy this equity to fund retirement - reverse mortgages, downsizing, Home Equity Extraction (cash out "re-fi" or HELOC.)

If you are serious about home onwership and retirement planning, this is a must read.
The Equity You Live in: The Home asa Retirement Savings and Income Option [PDF]

04/10/07 at 09:18 AM Permalink | Comments (3) | TrackBack (0)
Filed Under: Financing Options, Personal Finance, Reports & Research

Cool Tool: The Snowball Calculator

Ever heard of the "snowball method" to paying off debt?  Niether had we (though the concept was familiar, just not the catchy moniker) until we ran across this post over at lifehacker.  What is it, this snowballing?

Snowballing is all about paying your debts in the correct order. Generally speaking you should attempt to pay off the debts with the highest interest rate first.

Which makes perfect sense.  Pay off your high cost debts first while making minimum payments on all others.  Once the first debt is paid, apply the savings to the next debt on the list.  Rinse, repeat.  Problem is, this can be challenging to map out for many people, which is where the calculator comes in.  You simply type in some specifics about each debt you'd like to pay off, and the snowball calculator kicks out a nifty little printable schedule that you can follow. 

Good stuff, with one caveat: This is a GREAT tool for renters and aspiring homeowners, but if you own a home, you'll be debt free quicker and with less cost (contrary to what the snowball calculator says) using a small second mortgage to consolidate debt and apply the savings towards principal reduction [see the speadsheets to back this claim, after the jump]
· Snowball Calculator [us.whatsthecost.com via lifehacker]

First, The snow ball example, where we used a monthly debt reduction payment of $240.00.  The calculator says:

It will take you 39 months to pay off these debts if you snowball correctly. During that time, you'll pay $1,233.00 in interest. If you paid the same amount per month, but changed the order in which you paid your debts so you weren't paying the highest interest rates first, it would cost you an additional $152.00 in interest.

See the accompanying schedule (click pic to make big):

Now let's look at using a second mortgage for consolidation.  Using the same $240.00 pre-payment amount, will have one debt free in 30 months.  Behold (again, click image to make big):

See how that works? Nine months of interest saved, and a nice little tax writeoff to boot.

09/29/06 at 08:31 AM Permalink | Comments (8) | TrackBack (0)
Filed Under: Personal Finance