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When you run into a financial problem that forces you to miss a mortgage payment or two, where do you turn for relief?

There’s an important answer to that question that has already saved tens of thousands of Americans from the nightmares of foreclosure in 2002 alone.

The answer is simple: You talk to your mortgage lender or servicer--the company to whom you send your monthly payments--as early on in your financial crisis as possible. You ask to talk to the company’s "loss-mitigation" or "workout" specialists, who are highly likely to have a forebearance or loan modification plan that fits your situation.

Virtually all mortgage companies have created large-scale programs during the last several years designed to resolve financial problems faced by their borrowers, rather than forcing them into foreclosure.

Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all now require mortgage companies nationwide to do whatever is feasible to keep troubled borrowers in their houses and out of foreclosure.

"We don’t want anybody’s home," says Bill Garland, president of Utah-based Fairbanks Capital Corp., a giant national mortgage servicer."Everybody loses when there’s a foreclosure."

That’s because foreclosures are costly--often entailing heavy payouts by lenders for legal fees, realty brokerage commissions, repairs, property taxes, maintenance and security measures. Borrowers lose their homes and equity at the same time, and often incur surprise federal tax liabilities when lenders forego portions of the debts owed them.

"Loss-mitigation," which in 2002 for the first time ever has kept more than half of all delniquent homeowners in their houses and out of foreclosure, is a relatively recent development in the mortgage industry. Traditionally, borrowers who fell seriously delinquent on their loan payments--three months behind or more--virtually always ended up in foreclosure proceedings. Those who didn’t end up on the courthouse steps often handed over the keys to the house via a "deed in lieu" of foreclosure or a "short sale" designed to satisfy most of the debt.

As recently as the mid-1990s, giant organizations like Fannie Mae, Freddie Mac and the FHA were foreclosing on 75 percent of their seriously-delinquent borrowers. But today, more than 50 percent of their customers are kept out of foreclosure through "loss-mit" programs. Techniques used include:

  • Allowing borrowers to add multiple months worth of missed payments onto their loan balances, and then paying off the arrearages month by month through small additions to the regular payments.
  • Recasting loans to reflect borrowers’ temporarily--or permanently--changed cash -flows. Some lenders restructure the note to allow lower payments for a period. Others lower the note rate. Still others simply take the unpaid balance and add it as a lump-sum payment due from the proceeds of a future sale of the property.

    Borrowers whose situations cannot be aided by loss-mitigation options don’t qualify; they still proceed to foreclosure or deeds-in-lieu as they would have traditionally.

    Freddie Mac and Fannie Mae began aggressive loss-mit programs in the late 1990s. Congress mandated that FHA require participating lenders to push forebearance and workouts over foreclosures several years ago. Now the programs are all bearing fruit. In fiscal 2002 alone, for instance, FHA saved billions of dollars by working out more troubled borrowers than it foreclosed upon.

    FHA paid out $5.5 billion in claims on 64,000 foreclosures during the year; but it paid out just $98 million in claims to keep 73,000 borrowers in their homes via workout arrangements, according to Joseph McCloskey, the agency’s top loss-mit expert.

    "It’s truly a win-win situation," says Fairbanks Capital’s Garland, whose firm uses sophisticated scoring software to spot--and design workout solutions--for homeowners heading for serious financial troubles.

    So the word that needs to go out to home buyers through Realtors, attorneys and others who advise themis this : Talk to the lender at the first sign of trouble. The odds are strong that there is a forebearance or loan modification solution that works for you. And for your lender.

    The Bush administration’s proposals for reform of the country’s real estate settlement proceures have drawn a record 25,000-plus responses from lenders, mortgage brokers, Realtors and others---many of them critical.

    The Department of Housing and Urban Development was hit with a paper blizzard of counter-proposals last week as it closed the official 90-day public comment period on its proposed changes to the Real Estate Settlement Procedures Act (RESPA) regulations. If adopted in final form in 2003, the rules will govern millions of home purchases and refinancings annually nationwide.

    The proposals, originally issued by HUD Secretary Mel R. Martinez last July, would:

  • Force lenders and brokers to guarantee greater accuracy in their "Good Faith Estimates" of closing costs provided to loan applicants. Some settlement-sheet items under the lender’s control would be subject to "zero tolerance" for increases, while other items that are "shoppable" by the applicant could not increase by more than 10 percent over initial estimates.
  • Require full disclosure of mortgage brokers’ fees and identify commonplace "yield spread premiums" pocketed by brokers as a lender payment to the borrower that can be used to lower closing expenses.
  • Create a totally new optional format in the real estate finance marketplace--a "guaranteed mortgage package" in which the interest rate and all fees are bundled and locked from the date of application to the closing date. The packages would be designed to foster more effective shopping by consumers on all the cost items associated with a mortgage.

    Each of the proposals drew heavy fire from the industry groups most directly affected by them. Mortgage brokers, for instance, sent HUD the vast majority of the 25,000-plus comments, and were virtually unanimously in opposition to the tougher broker-fee disclosures. Brokers were especially incensed that their own heavier disclosures would not be matched by any additional fee disclosures by mortgage bankers or depository lenders. The latter are considered "secondary market" participants under RESPA, and are not subject to disclosure requirements for loan officer compensation, according to HUD.

    One broker, Julie Henderson of US Lending Co. in Redding, CA, complained that "by artificially identifying a yield-spread premium as a ‘lender payment to the borrower’...you (HUD) expose just about every mortgage broker in America to class-action lawsuits." Henderson said that she "can just see a whole host of class-action plaintiffs asking (their brokers) ‘where is my check from the lender?’"

    The 800,000-member National Association of Realtors applauded HUD’s goal of toughening and tightening good-faith estimates, but came out swinging against HUD’s guaranteed mortgage packaging concept.

    Calling it a "radical approach to reform," NAR said "there is not enough evidence of consumer and industry benefit to move forward" immediately with the packaging idea. NAR said its members are concerned that packaging closing costs will inevitably favor large banks and hurt smaller settlement service providers. By extending an exemption from RESPA’s anti-kickback restrictions to packagers, said NAR, the guaranteed mortgage concept could both "reduce the quality of services provided (to consumers), and ultimately lead to higher closing costs."

    The Mortgage Bankers Association of America and banking trade groups generally favored the packaging plan, but asked for delay or changes on the toughened good faith estimates. Consumers groups such as AARP welcomed both the guaranteed package approach and more accurate good faith estimates, but offered HUD technical suggestions for improving them.

    HUD’s time frame on the reforms? Officials at the agency say they would like to wrap up their reviews of the 25,000 comments late this year or early in 2003, and then issue a final rule sometime in the Spring. Between now and then, say groups opposed to the changes, look for Congress to weigh in on the issues--and possibly to block any HUD move to put the new rules into effect.

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