Budget Basics
Many Scramble to Fend off Foreclosures
The Dallas Morning News Co.
May 7, 2007
Credit-counseling firms, which usually deal with consumers with credit card troubles, are seeing an influx of homeowners with subprime adjustable-rate mortgages seeking to stave off foreclosure.
"Nearly all of our agencies are reporting an increase in clients coming in for some kind of foreclosure-prevention counseling," said Susan C. Keating, chief executive of the National Foundation for Credit Counseling. "Many of these consumers are really financially devastated by what has happened with their interest rates and an increase in their monthly payments, which are now fundamentally unaffordable."
Some credit-counseling firms have established hotlines to help those homeowners. "Counselors try to help them figure out best steps, and if the client needs face-to-face counseling, they direct them there," Ms. Keating said. "We have generally heard that consumers are reluctant to call their lenders. They're ashamed; they're concerned."
Delinquent borrowers would benefit from credit counseling, but many are unaware of their options because they avoid lenders' mailings and phone calls, John C. Dugan, U.S. comptroller of the currency, said in a recent speech.
If you feel you will have trouble paying your mortgage, contact your lender immediately. Don't wait until you're missing mortgage payments. Your lender may be willing to work with you if you're candid early on about your situation. Subprime mortgages are issued to consumers with poor credit histories or high debt. They played a big part in fueling housing sales and enabled credit-challenged consumers to become homeowners. But as adjustable rates on those mortgages reset upward and housing values fell, it put severe strain on those borrowers, who were financially on the edge to begin with. As a result, subprime lenders have been in distress nationwide and in Texas. Some have gone out of business or scaled back operations.
Credit-counseling firms that haven't yet seen a surge of subprime mortgage holders seeking help expect that to change. "We're going to see a lot more folks come in the door from the subprime area because they will be seeking refuge," said Howard Dvorkin, founder of Consolidated Credit Counseling Services. "They don't have the cash. These folks thought they bought a house and it would keep going up, up, up, and they would be able to refinance in the future, but that's not been the case."
At Consumer Credit Counseling Service of Greater Dallas, counselors are seeing two groups of debt-ridden homeowners, said Gail Cunningham, vice president of business relations. "The first one is who says, 'My home is my largest investment, it's my greatest asset, it is my best hope of building wealth, and I will do what it takes to make my mortgage payment,' and they neglect other bills," she said.
The second type is the first-time homeowner who got into a subprime mortgage. "He lives off of credit. He charges his groceries, he charges his medicine, gas," Ms. Cunningham said. "He's of the mentality that he cannot risk his lines of credit being shut down because he knows he's relying on credit to put food on the table tonight, so he's sacrificing his mortgage payment." Thankfully, this type of debtor isn't the norm. "More people are more concerned about keeping their home," Ms. Cunningham said. "But this new subset – they don't have much of themselves or their wallet invested in their home. He's able to pay enough to keep his credit cards open. If he loses his house, he loses his house."
Congress, the housing industry and consumer advocates are forging an alliance to keep financially troubled homeowners from losing their homes. The groups recently unveiled a "Statement of Principles" that was hammered out at a Homeownership Preservation Summit convened by Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee.
The principles include:
•Having companies that process mortgage payments contact subprime borrowers before their interest rate resets to determine whether the borrower can afford the new higher payments. If the homeowner can't handle the higher payments, and if there's a risk of default, the mortgage company could revise the loan terms before the rate resets to make it more affordable for the homeowner. That may include lowering the interest rate, or stretching the term of the mortgage to make payments more affordable.
•Enabling eligible homeowners to refinance to prime loans plus creating new loan programs and expanding existing programs that will enable subprime mortgage holders to "refinance out of resetting subprime ARMs."
•Partnering with third-party counselors, such as credit counselors and nonprofit organizations, to help troubled borrowers. Banking regulators also have asked lenders to work with homeowners struggling to pay their mortgages. "The crisis affecting the subprime market is a comprehensive one, and involves many parties," Mr. Dodd said. "It cannot be solved overnight and cannot be solved by one party acting alone. Each party needs to do its part in helping to address this problem."
This is a good start, but I'm waiting to see whether those steps will actually be carried out.
