Lender Can Be an Ally in a Money Pinch

It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.

--Former President Harry S. Truman

Those famous words are just as true today as they were when Truman first uttered them during the depths of a recession in 1958.

Losing your job is depressing, indeed--especially since the recession has probably dampened your chances of quickly finding a new job that’s just as good or pays as much.

Your stress and financial woes can be magnified if you’re a homeowner who’s stuck trying to make high mortgage payments on a vastly reduced income.

But with careful planning, you can turn your home and your mortgage into valuable financial tools to tide you over until you get back to work again.

Also realize that there’s little chance that you’ll lose your home through foreclosure--as long as you contact your lender immediately to discuss your current woes.

“Most lenders will be understanding and will work out a deal with you if you lose your job and can’t make your monthly payments for a while,” said Thomas Ducey, an official with the Federal National Mortgage Assn.

“The important thing is that you should go to the lender as soon as you run into financial trouble,” Ducey said. “Do something about it before you start missing payments or get a foreclosure notice--not after.”

Most lenders employ specialists trained to help borrowers who have run into financial trouble. You can usually locate the proper person by calling the phone number that appears on your monthly mortgage statement.

The type of relief you get--or whether you get any at all--will be determined by a number of factors.

“We handle each borrower on a case-by-case basis,” said Sam Lyons, senior vice president of Great Western Bank.

“But obviously, we’re going to look at a borrower who has a good payment record and is really looking for a new job a lot more favorably than we’d view someone who has a history of missed payments and isn’t looking very hard for work.”

More than likely, the lender will agree to provide you with some type of relief. Most financial institutions don’t like to foreclose on their borrowers because it’s an expensive, time-consuming endeavor--not to mention bad “public relations.”

“We make money by making loans, not by owning real estate,” said Barbara Watkins, a senior vice president with Security Pacific Bank.

“Less than one-quarter of 1% of our loans go to foreclosure,” she said. “If there’s some way we can reasonably help a borrower and still protect our interest in the property, we’ll do our best to work out a deal.”

Help can come in a variety of forms.

If it’s just a matter of being short a few hundred dollars each month, the lender might agree to temporarily lower the interest rate on your loan or to stretch out your payments over a longer period to reduce your monthly bill.

Or, the lender might let you make “interest-only” payments until you get back on your feet again.

If your cash crunch is more severe--say you can afford to make only a fraction of your payment or none at all--the lender may be willing to temporarily suspend your monthly bills.

If you want to keep your house but your current lender won’t restructure your debt or provide some other type of forbearance, you might need to visit a mortgage broker or lending institution that specializes in making loans based on the equity you have in your property.

Such lenders don’t care much about your credit record or whether you’re working: What’s most important to them is the amount of equity you have in your house.

“The big banks and S&Ls; don’t have the same flexibility that companies like ours do,” said Gary Judis, president of Los Angeles-based Aames Home Loan.

Aames is one of the biggest mortgage brokers in California, and it specializes in home-equity loans.

“We can tailor a repayment schedule that fits your needs, instead of forcing you to choose from a short list of ‘prepackaged’ loans that a typical bank offers,” Judis said.

For example, say you expect to be out of work for about six months and you have little or no cash reserves. Aames could give you a home-equity loan that would require no monthly payments for six months or a year--a loan that most conventional lenders would never make.

Unfortunately, such flexibility is often expensive. Some companies that specialize in making home-equity loans charge unusually high interest rates.

Even worse, upfront “points” can be extraordinarily high. A point is 1% of the total loan amount.

Five points is fairly common among these types of lenders, compared to the one or two points you would likely pay if you could get a loan through a conventional lender.

Depending on how the loan is structured and the risk factor that’s involved, you might pay as many as 10, 15 or even 20 points.

“I’d say that you should give serious thought to simply selling your house if your only alternative is to take out such an expensive loan,” said Morrie W. Reiff, a financial planner and president of Planned Asset Management in Encino.

“Even if you have to sell your house now and pay a 6% (sales) commission, it might be more cost-effective than taking out a loan with a high interest rate and paying 10 or 20 points upfront.”

As an alternative to selling your house, you might try to set up a line of credit from a conventional lender.

Although most big financial institutions will attempt to verify your income and employment status, a few lenders admit that they don’t always do so--especially when if it involves a homeowner with lots of equity who is seeking a relatively small loan of, say, $5,000.

“I can’t encourage anyone to lie on their loan application--lying on a loan ‘app’ is against the law,” said an official with one big lending institution.

“But the fact is, if you’re only looking to get a $5,000 or maybe even a $10,000 line, we’re not going to give your application as much scrutiny as we would if you were asking for $50,000 or $100,000.

“We’d check your credit report and a few other things, but we might not call to verify that you’re still employed.”

Of course, you shouldn’t forget other possible sources of cash that could be used to make your monthly mortgage payments. Perhaps you may have some jewelry, other types of collectibles, a boat or extra car that you can sell to raise money or lower your debt burden.

Stocks, bonds and other types of securities can be sold. Life insurance policies and annuities can often be cashed in or borrowed against at attractive interest rates.

You might also be able to borrow against your retirement account or make a withdrawal from it, although such a move could entail important tax consequences that you’ll want to discuss first with your accountant or other tax expert.

“If you look at all your options, and there’s no way you can save your house, sell it before the lender has a chance to foreclose,” said Dwain Greer, executive vice president of Shearson Lehman Mortgage Corp. in Irvine.

“A foreclosure will stay on your credit record for at least seven years, and you probably won’t be able to get another home loan until it’s erased,” Greer said. “It’s the ‘kiss of death’ in the mortgage-lending business.”