Various segments of the housing industry have floated “what-if” balloons regarding possible solutions for the national mortgage mess.

The latest has been the Bush administration’s roundtable discussion with lenders about the possibility of extending lower, introductory rates on mortgages to borrowers with poor credit histories who were either misled into taking on a risk they could not afford or genuinely did not understand the consequences of an upwardly adjusting loan in a down market.

The idea has merit, especially given the fact that people who are behind on payments are embarrassed to contact their lender about their financial picture. Other homeowners try to hang on to the bitter end because of social status — they definitely do not want their neighbors to know that they can no longer afford their house.

In addition, the numbers of potential defaults are not yet slowing down. An estimated 3 million loans are scheduled to adjust (upward) next year, which translates into higher payments and the possibility of thousands of foreclosures. While the plan to extend the teaser rates would clearly help borrowers who wish to stay in their homes, it does little to address two important factors:

  • What can lenders do with their already mounting inventories of foreclosures and other properties, known as “real estate-owned,” or REO, that they were forced to take back?

  • How do lenders ascertain who gets to qualify for the extended teaser rates? Many of the borrowers who face foreclosure are not naive first-timers who were led down the road with hard-money, subprime loans. According to several national lenders, a majority of the homeowners who are desperately seeking a solution now were the same people who were desperately seeking extra toys, or larger homes and slicker neighborhoods, over the past few years.

“You don’t reward gamblers who know what they are doing and simply lose,” said Ted Jones, chief economist for Stewart Title. “When you go to the roulette wheel and bet on 35 black and the ball lands on 24 red, you don’t get to take it over. The other players don’t get to take it over, so why should you?”

Lenders handle loan modifications, reinstatements, repayment plans and REO properties differently during challenging real estate times. For example, nearly 15 years ago, a national lender succeeded in disposing a majority of its REO portfolio by selling the properties with a buy-back guarantee. The properties were offered at market value — not the foreclosed price or the “short-sale price” negotiated with the previous owner — with a 10 percent down payment and market interest rates.

After five years, the borrower had the option of deeding the property back to the lender at the original purchase price, provided that the property taxes had been paid and the house was adequately maintained. The mortgage payments made in the interim could be viewed as “monthly rent,” although the homeowner received a mortgage interest deduction on federal income taxes.

Not one house was returned to the lender. All had appreciated significantly in value.

The buy-back concept was based on the theory that housing is cyclical (and local). Most economists and housing analysts say that a home typically is a safe long-term investment and that home appreciation typically will outpace the rate of inflation. In a nutshell, today’s homes will be worth a lot more five years down the road.

If you are behind on your loan — or soon will be — take a deep breath, bite the bullet and call your lender. It’s better to make the call before you miss any payments, but it’s also possible to get help once you are behind.

Alternative programs for mortgage payments are typically lumped into one category called “forbearance.” Forbearance is not free, nor does it mean forgiveness. It usually is a short-term agreement between borrower and lender permitting partial payments until normal payments can be resumed. Typically, forbearance agreements run three to six months.

Lenders who keep loans in their own portfolio and do not sell them in the secondary market can be more willing to rewrite one of more of the loan terms, also known as a “loan modification.” This action typically is requested when there is a permanent loss of income and the borrower is seeking a lower monthly payment. Lower monthly payments can be accomplished by lengthening the term of the loan (20 years to 30 years; 30 years to 40 years), or by lowering the interest rate.

These are challenging mortgage times. If you are going backward on your loan, do not be afraid to propose an alternative course for your primary residence. If the four rentals you bought with no money down, however, no longer cash flow because your ARM just hit its first adjustment, don’t expect a lot of help. The lender will probably look at you as if you wanted your money back for losing on a roulette wheel.

To get even more valuable advice from Tom, visit his Second Home Center.

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