NEW YORK -- More than $1 trillion in U.S. home mortgages have interest rates that will adjust up sharply next year, which could squeeze some owners out of their most important investment.
But cash-strapped homeowners now have options, as more companies and nonprofit groups work with lenders to help put delinquent loans back on track.
For-profit companies charge a fee to lenders to identify and help alter problem loans, while nonprofit groups can pay grants or make low-interest loans to struggling borrowers. In either case, the higher costs of a foreclosure is averted.
"Lenders are willing to go quite a distance to try and keep those folks in the property," says Duke Olrich, chief executive of Newport Beach, California-based DRI Management Systems, which makes software for default management companies.
"Ten to 12 years ago, if you weren't paying, you were going to be in foreclosure. There were no alternatives," he adds. "Loss mitigation has become, in the default arena, the one saving grace."
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These systems will be tested when adjustable-rate and risky mortgages with low teaser rates start to reset next year. Borrowers used these loans to get into homes during the five-year housing boom that ended last year.
With home prices now going downward and homes harder to sell, late payments and foreclosures could worsen the slump, a further incentive for lenders to prevent foreclosure.
"Loan modifications have become popular," says Olrich. "It's pure economics. For lenders, "probably the average foreclosure will cost about $50,000. If they can mitigate that so the loss is $20,000, that's a tremendous savings."
Homeowners benefit by keeping their home and avoiding tarnished credit, while lenders curb the cost of maintaining and disposing of foreclosed houses.
Under the arrangements, lenders may accept less than full payment while an unemployed owner gets a job or a family boosts its income. Mortgage rates can be lowered or the loan terms extended.
Companies like DRI work with collection specialists, selling them programs that analyze a borrower's finances, intentions about keeping the home, and solutions.
"The majority of delinquencies and foreclosures do not occur because the borrower is a deadbeat," says Douglas Robinson, spokesman for NeighborWorks America, a nonprofit created by Congress to provide financial support and training for community-based revitalization. "They occur because some personal life situation happened: illness, job loss, divorce," he said.
But other forces are also at play.
"The increasing rate of delinquencies and foreclosures these days is being driven by homeowners who have mortgages that are just not right for them," Robinson said.
More than one million U.S. properties entered some stage of foreclosure in the first 10 months of 2006, a 27 percent jump from the prior October, according to RealtyTrac, which tracks foreclosures.
"I hate to be the guy with a black cloud running over his head. But I think 2007 is going to be a year to watch out for, probably leading clear into 2008," Olrich said.
DON'T DESPAIR
The key to start mending a broken loan is for homeowners to outreach to, rather than dodge, their lenders, Robinson said.
"Borrowers should realize that there are people and organizations that want to help them stay in the house, if they can," he added. "They should not despair over their situation because until they have exhausted their options there is a possibility, strong, that they can work it through."
Iris Williams, 49, is a single mother with a 5.5 percent 30-year loan who turned to Fifth Ward Community Redevelopment Corp. in Houston, Texas when her situation looked bleak.
"I went to them and said 'hey, I've been laid off for a year, I got two payments behind and they're talking foreclosure, can you help me?"' she says.
Fifth Ward, where ironically she had once taught homebuyer classes, provided the $1,200 at a minor interest charge when Williams lost her job after Hurricane Rita.
"They put a payment plan in place. I could make a smaller payment to them over a year and they gave me the money up front to catch up," she says.
Employed again, "now I'm only shy one payment and I'm making it in pieces, so I'm back on track."
SELLING MAY BE BEST OPTION
Still, the best answer for some owners may be to cut losses and sell the home.
"Sometimes what's necessary is this third party that has no skin in the game to sit down with the homeowner and say you really can't keep this house," Robinson says.
The owner may have been out of work for an extended period without new prospects. Payment plans may be beyond reach.
"What we want to do is save your credit, your future, by getting this house sold," and leaving the borrower without a foreclosure tainting his record, Robinson says.
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