YOUR MORTGAGE : Borrowers Get Chance to Avoid Foreclosure

Homeowners who missed mortgage payments because of temporary financial squeezes should be less likely to lose their homes to foreclosure, thanks to new policies quietly put into place by the nation’s two biggest lenders.

Both Fannie Mae and Freddie Mac--who together own millions of American home mortgages--are now aggressively seeking to identify and work with delinquent borrowers who are on the fast track to foreclosure. For those whose financial situations are short-term or curable, both companies are now far more likely to approve “modifications” of loan terms.

The modifications may involve changes in the mortgage terms that allow defaulting borrowers to pay back their arrears little by little, instead of a lump sum. Or the entire amount in default--say three or four months’ worth of payments--might be paid off by extending the term of the mortgage itself by another three or four months.

The debt has to be repaid, ultimately. But in the meantime, the borrower gets a crucial reprieve from the ticking time bomb of foreclosure proceedings. Typically, lenders take a tough stand on delinquencies: Make good on the money you haven’t paid us or we’re going to have to sell your house via foreclosure. Under the new policies, every borrower gets at least a second look to see if something can be worked out to avoid disaster.

In many cases, both companies note, there may be no remedy, no real prospect for a borrower getting back to financial health. In those situations, the new policies encourage sale of the property without formal foreclosure proceedings or handing over deed to the property without a sale. The latter is known as a “deed-in-lieu” of foreclosure.

Both Fannie Mae and Freddie Mac are backing up their new policies with hard cash. They have informed their “servicers”--the mortgage companies who actually collect monthly payments, and handle escrows and other administrative aspects of each loan--that they will receive cash incentives for every case where defaulting homeowners can be kept out of foreclosure. The incentives to the servicers generally range from several hundred dollars to over $1,000, depending upon the situation. Assisted homeowners are also expected to help defray the expenses of the loan modification arrangements.

This is a key step, mortgage industry experts say, because any form of loan forbearance or “workout” can be expensive to the lending institutions involved. But far worse, they say, is the cost of foreclosure itself, which can range into tens of thousands of dollars when the property brings in less money after paying legal and brokerage costs than the amount of the outstanding debt.

Freddie Mac’s nationwide program took final effect Aug. 1. Fannie Mae’s program was announced to servicers last spring. Freddie Mac is also experimenting with a pilot program that unites it with the National Consumer Law Center and nonprofit housing counseling agencies to work with moderate-income homeowners facing financial trouble. The pilot program, currently limited to homeowners in Massachusetts, emphasizes early detection of problems, hands-on counseling on household budget issues, as well as evaluation of loan modifications appropriate for individuals seeking assistance.

As an example of how the concept works in practice, Gary Klein, project attorney for the National Consumer Law Center, cited a Boston family who rented out one unit in their duplex, and lived in the other themselves. The family counted on income from the rental unit to meet mortgage payments on the property as a whole. Freddie Mac owned the loan.

When their tenants suddenly moved out, the family found itself in a cash bind. After missing three months of mortgage payments--and suddenly owing a lump-sum $6,000--the homeowners were advised by the loan servicer to contact the consumer law center. After reviewing the situation, according to Klein, staff counselors prepared a workout proposal to Freddie Mac that allowed the entire loan to be recalculated. The $6,000 in arrears plus other costs were added to the outstanding principal balance and the entire loan was re-amortized. That is, the mortgage was recast for a new 30-year term, allowing the family to pay off the arrears in small monthly doses, as part of the regular mortgage.

Restructuring the entire debt like this--not just simply paying back the arrears over a year or two--”is very important in helping a family get out of a financial crisis like this,” said Klein.

The ultimate winners of heads-up proactive loan modifications? Everybody: Fannie, Freddie, loan servicers, borrowers, and even local neighborhoods and property owners, who avoid the financial pain that a foreclosure sale can spread so widely.

Distributed by the Washington Post Writers Group.