A Mortgage You Can Pay

The best way to fight blight: Keep homeowners in their homes.

Sandra Graves broke her leg in spring 2007, just as the adjustable-rate loan on her $85,000 home spiked to 11 percent. By summer of the following year, the 52-year-old contractor and home decorator had burned through her savings and fallen months behind on her mortgage.
“I couldn't go up ladders,” said Graves. “That got me behind on my work.”

The dream house in Hamilton, Ohio, that she'd designed inside as a log cabin teetered on the brink of foreclosure.

But when the county finally sent her a foreclosure notice, they also included a lifeline: a list of credit counseling agencies in the area. Graves made a call—and found a solution almost 2.7 million distressed homeowners have discovered: the mortgage workout.
In a typical workout, also called a loan modification, the bank lowers its interest rate or monthly payment, extends the amount of time the borrower has to pay off the loan, or both. Any past-due payments get bundled into the new loan. Here's how it works:
1. The homeowner consults a credit counselor. You can find a certified one through the National Foundation for Credit Counseling. The agencies themselves are funded by grants, so the service is free. (Be suspicious of any counselor charging an up-front fee for advice. In many cases, such fees are illegal, and it may be a scam.)

2. The counselor goes through the homeowner's monthly budget and expenses. It helps to bring financial records like pay stubs, tax filings, bills, and mortgage statements.

3. The counselor calls the bank to discuss a "restructuring." Sometimes the bank might contact you: Citibank plans to contact 500,000 borrowers at risk of default to make sure they can repay their loans. JPMorgan Chase is reviewing loans, totaling $70 billion, to 400,000 homeowners.

4. The bank proposes a modification. Often it asks for a good-faith initial payment—usually some portion of the past-due payment, which can run from as little as $500 to several months' back mortgage payments. The process usually takes 30 to 60 days from beginning to end. (In fewer than 10 percent of cases, a homeowner might be so far behind on payments that the counselor can't help.)

In Sandra Graves's case, a local credit counseling service negotiated a $733 down payment on her $11,000 debt with Chase bank. Chase bundled the rest into a new loan and reset her interest rate to a fixed rate of 4.75 percent for the next five years and 6.75 percent after that. Her monthly payment dropped from $1,034 to just $577.

"People think there isn't any help, but there is," says Tonya Collister, the housing director at Consumer Credit Counseling Service of Springfield, Missouri. Last year, her office worked with nearly 700 homeowners who were behind on their mortgages; 685 kept their homes.

From Reader's Digest - March 2009

 

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