Best options for borrowers facing payment problems

An uncomfortably large proportion of my mail these days is from borrowers with serious payment problems. In most cases, I can't help them for reasons discussed below. In a few common cases, I try.

In one common case, the borrower has two mortgages, which add to an amount well in excess of the value of the property, and can no longer afford both payments. If the same lender holds both mortgages, and if the borrower can afford a reduced payment, his objective should be to persuade the mortgage lender to modify the notes to lower the payments.

The burden of proof is on the borrower. He has to document that he will be forced to default on the existing mortgages but could afford the payment on a new mortgage that would cost the lender less than foreclosure.

If the second mortgage is held by a different lender, the challenge is greater.

The first-mortgage lender is unlikely to modify the note so long as the second-mortgage lender remains in a position to foreclose.

I suggest that borrowers in this situation approach the second-mortgage lender first, with the objective of inducing that lender to get out of the way. The borrower can offer the second-mortgage lender an unsecured promissory note for a portion of what is owed on the second mortgage. Since the second-mortgage loan has little or no value except as a nuisance, any reasonable offer is likely to be accepted.

The situation described above is only one of many in which troubled borrowers may find themselves. Rarely do they communicate all the information I would need to find the best possible outcome. Not all have second mortgages, but some have large amounts of nonmortgage debt to complicate the process; while many have negative equity in their properties, some have positive equity; in some cases a loss of income appears temporary, in other cases permanent; in some cases borrowers plan to dispose of the property, while in other cases they want to hang on if possible.

In principle, there is a "best possible outcome" for every individual situation, but only rarely do borrowers give me all the information I would need to find it, even if I had the time. Few borrowers know what their options might be, and fewer still understand the information they must provide before a best option can be identified. But some useful resources are available.

I have an article on my Web site called "Mortgage Payment Problems: What If You Can't Pay?" It covers a wide range of possible situations in which borrowers may find themselves, and suggests the remedies that appear most relevant to each situation. Recently, PMI Mortgage Insurance Co. and Genworth Mortgage Insurance Co. have developed Internet sites directed entirely to helping prevent needless foreclosures. They essentially cover the same ground as me, but they do it better by breaking the problems down into bite-sized pieces. Further, they include a number of videos that many people will find easier to follow than written expositions.

Warning: These sites are not easy to find through the main sites of the two companies. The direct URL for the PMI site is www.homesafepmi.com; that for Genworth is http://www.smartermi.com/ -- click on the menu item "Education and Training."

These sites are for those who are prepared to invest the time needed to figure out what their options are. The sites will not hand-tailor a solution for them, but they will provide useful guidance nonetheless.

At a second site, https://hoa.mortgageinsurance.genworth.com/, Genworth takes a step toward providing hand-tailored solutions. They provide forms that, when filled out by borrowers, provide the raw materials from which hand-tailored solutions are derived. However, there is no automated genius to generate solutions; instead the information is referred to a Genworth counselor who will do it manually. Unfortunately (but understandably), the counseling service is available only to borrowers whose lenders have mortgage insurance with Genworth.

That does not mean that this facility is useless for other borrowers in trouble. At some point, every borrower in trouble who expects help must pull together all the information about his or her financial situation that is relevant to a best possible outcome. If the intention is to go directly to the lender, providing this information at the outset will go a long way to placing him or her at the top of the applicant pile rather than at the bottom.

I have been searching for a program that will automate the last step -- that is, after the borrower enters all relevant information, it will produce a "best possible outcome" for that borrower. While such programs exist, they have been developed for license to major players and I have not yet been able to shake one free for direct use by borrowers. But stay tuned.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Copyright 2008 Jack Guttentag

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