If you’re on the receiving end of the economic slowdown, or have experienced a recent death, divorce or a major illness, and are starting to worry about how you’ll make ends meet, don’t panic. Freddie Mac, one of the nation’s largest mortgage investors, pays its lenders to help borrowers who fall behind in their payments get back on schedule and avoid foreclosure.
Why do they do this? Because lenders and the end investor who buys your mortgage don’t make money if the loan goes into foreclosure, says Brad German, a spokesperson for Freddie Mac.
Losses on a foreclosed home can range from $5,000 to as high as $40,000, says Phil Comeau, Freddie Mac’s vice president of servicing and cash management.
“The amount of the loss depends on the geographic area and how much property values have declined,” Comeau explains. “If you bought your home in the northeast or in southern California in the late 1980s, your home value might just be getting back to what you paid for it.”
So selling the home might be a good long-term goal, but it won’t help you meet your mortgage payment that’s due next week. Instead, says Comeau, you should immediately pare back all non-essential expenses and get your lender on the phone.
“The lender can work with you. But a lot of times, borrowers are embarrassed or afraid or in denial about their true financial situation,” he adds.
According to Darius Grayson, director of default resolution for Freddie Mac, there are several options lenders can offer borrowers in financial distress.
“First, there is a repayment plan. If you are out of work for 3 to 4 months, perhaps for an illness, but are coming back to work, the lender can take those payments and spread them out over a 6 to 12-month period of time,” Grayson explains.
“If that doesn’t work, the other opportunity, if the investor agrees, is to capitalize the unpaid payments and add them to the principal balance of the loan. The loan is then reamortized to incorporate those payments,” he says, adding “This is called a loan modification.”
If neither the loan repayment nor the loan modification is workable, another option is for the homeowner to sell the home, even if the market value of the property is less than what is owed to the bank on the mortgage.
“Basically, the lender accepts what the property is worth (in lieu of full payment of the mortgage). From the investors point of view, this saves the investor the cost of taking the property through the foreclosure process,” explains Grayson.
But borrowers should be aware that in a short sale, part of your loan is being forgiven. The IRS considers forgiveness of debt a taxable event, and sees the debt as income. You may wind up paying tax on phantom income, notes Comeau.
If a short sale won’t happen that quickly, and if there are no other liens attached to the property, the lender may be able to do a deed in lieu of foreclosure.
“You can only do a deed in lieu if there are no (junior) liens on the property. Foreclosure wipes out junior liens on the property. If there are other liens, the lender can’t get clear title without going through foreclosure. But if there are no other liens, the deed in lieu of foreclosure is another way to keep the seller out of the foreclosure process,” explains Comeau.
The bottom line is that the sooner you deal with your inability to make your mortgage payments, the better off you’ll be.
“Call your lender’s customer service number and ask for loss mitigation. While those words don’t mean a lot to the consumer, the loss mitigation folks can help develop a workout plan for you,” Comeau adds.
If you can make a partial payment, you should let your lender know as soon as possible, Grayson adds.
Comeau and Grayson understand that borrowers are afraid to tip off the lender that they may default on the loan. But they say the lender won’t start foreclosure proceedings any earlier just because you call and ask for some help.
When you call the lender, be sure to explain what changed in your financial life. “For the vast majority of people, the problem isn’t that Mrs. Jones spent a lot of money at Nordstrom’s. It’s that Mrs. Jones has a medical problem or her kids do, or she’s divorced or her husband died,” Comeau notes.
The good news is that only a small percentage of loans go bad. Out of 9.6 million loans on Freddie Mac’s books, just 80,000 a year will be more than 90 days late with their mortgage payment. Of those, nearly 16,000 loans will end up in a workout.
The rest of the borrowers will either catch up on their payments or sell the home.