Southern California Job Market : Banks Are Willing to Deal : Believe it or Not, Some Lenders Are Showing Understanding
Your spouse lost a job. You took a pay cut. You’re afraid you’ll lose the house. It’s a bleak situation, but not as bleak as it normally would be. That’s because many lenders are becoming more accommodating as they find large numbers of their borrowers in similarly dire straits.
Bankers say they’re increasingly willing to make deals with hard-pressed customers. These accommodations range from lower monthly payments (in exchange for higher payments in the future) to a partial loan forgiveness.
The deals are not available to everyone. Credit-worthy borrowers, for example, aren’t likely to get special treatment. In such situations, lenders will take a hard line: “You signed a contract. Live up to it, or we take your home and trash your credit.”
But in cases of true hardship--especially when foreclosure is likely--the bank will usually try to work something out.
“It’s ironic that distressed borrowers are rewarded when good borrowers are not,” notes Leonard Schapira, an Encino attorney who specializes in real estate workouts.
“Lenders are in the business of lending out money and getting it back. They are not in the business of owning single-family homes,” explains Sam Lyons, senior vice president of Great Western Bank. “They are willing to look at every option available so that they don’t get the property back.”
The options vary depending on the lender and the borrower, but they include:
* Refinancing the loan--Lenders aren’t interested in new business from floundering customers. But if a bank already holds your mortgage, it might just make a deal. For those temporarily squeezed for cash, refinancing may make sense.
Someone who’s paying 9% on a $100,000 fixed-rate loan may be able to secure an adjustable with an initial rate of just 5%. That would reduce their monthly payments from about $805 to roughly $537--a $268 monthly savings.
In the long run, the adjustable may cost more than the fixed-rate loan. But during the first few years, it’s usually cheaper. And if that’s when you need help, the lower payments can mean keeping a home instead of losing it.
Some lenders will require the borrower to purchase private mortgage insurance as part of the deal. That adds a bit to the monthly payment and protects the lender from default.
* Reducing monthly payments--Some lenders won’t refinance, but they will allow cash-strapped borrowers to pay less than the normal monthly payment for a while. A $1,000 payment may be reduced to $750 for a year, for example. The $3,000 difference would be added to the outstanding balance.
* Debt consolidation--Perhaps the problem isn’t just the mortgage. It’s a mortgage combined with credit card and car payments. If there is enough equity available in the property, the lender may suggest that the borrower roll all these debts together into a 30-year mortgage. That could stretch out the payments and lower the combined interest rate as well.
* Partial loan forgiveness--This is usually the last, most extreme and most complex option. It’s reserved almost exclusively for those who have no alternative but foreclosure, says Schapira.
Let’s say you just can’t make the mortgage payments any time soon, so you decide to sell. But home prices are down so sharply that the best you can get is less than the balance of the mortgage. The lender may accept the purchase price as full payment.
Both borrower and lender suffer in the process, but not as much as they might in foreclosure. At least the lender gets back the bulk of the principal. And it keeps a foreclosure off the borrower’s credit record.
Still, Schapira suggests that you hire a lawyer if things get this bad. Your credit rating can suffer if the deal isn’t properly structured. And that defeats the purpose of avoiding foreclosure, he said.
