Real Estate & Mortgage Insights

Take Advantage of Homeowner Programs to Avoid Foreclosure

September was a month full of chaos in the mortgage and housing markets. Looming failure of Wall Street titans like Lehman Brothers and AIG, buyouts of troubled banks like Washington Mutual and Wachovia, and talks of federal government intervention made interest rates unpredictable for potential homebuyers. With ARM loan interest rates continuing to adjust upward, and energy and food costs remaining high, borrowers by the hundreds of thousands forced to enter foreclosure. In fact, according to the Mortgage Bankers Association, 40 percent of all subprime ARM loans in the U.S. were in some stage of foreclosure or default in September, with 12 percent of all prime ARM loans falling into the same category.

Widespread foreclosures create numerous problems for both individual neighborhoods and for the country as a whole. Obviously, on a national level, soured loans have cost companies millions of dollars and in some cases, their very existence. On a local scale, abandoned foreclosed properties that fall into disrepair are magnets for vagrants and criminal activity. Nearby homes also fall in value as foreclosed homes make the neighborhood less desirable to live in.

Millions more of American homeowners are expected to fall into foreclosure during the next few years. In some cases, there may be no way to save their home. Yet in many other cases, homeowners can avoid foreclosure by talking with their lenders and possibly taking advantage of new federal programs.

Talk to Your Lender

The first step to avoiding default and foreclosure is to approach your lender and tell him of your situation. If your ability to keep up with your payments is lagging, talk to your mortgage lender before you actually have to make a late payment. Foreclosure means a huge loss of money for lenders, plus a lot of hassle to resell the property. Many would rather renegotiate the terms with you and possibly even write-down your mortgage balance a bit, instead of losing out completely on their investment when you default.

HOPE for Homeowners

In addition to early programs for struggling homeowners, the federal government started a new initiative in early on October 1, called HOPE for Homeowners, which could save as many as 400,000 American mortgage borrowers.

The program authorizes the Federal Housing Authority to back more adjustable rate mortgage (ARM) loans in danger of failure. It works like this: a worried homeowner contacts a HOPE representative. The representative works with the lender and voluntarily gets them to agree to write down the loan balance to 90 percent of the current value of the home. Then, they refinance the original mortgage into an FHA-guaranteed 30-year fixed rate mortgage with predictable monthly payments. As the value of the home appreciates in the future, the homeowner agrees to share some of that equity with the government.

In order to qualify for this program, borrowers must be able to fully document their income, occupy the property involved (no investment properties will qualify) and their housing costs after the refinance must total no more than 31 percent of their income (38 percent if they participate and in a 3-month trial period with timely payments.)

Borrowers interested in participating in the FHA program can contact their lenders, speak with a HUD counselor, or call 1-888-995-HOPE.