Curing the Late-Payment Blues

Ame

ricans are having a tougher time than ever making their mortgage payments, according to a survey just released by the Mortgage Bankers Association. Its data show that a record 1.23% of mortgages, or some 640,000 loans, are in foreclosure — with the lender moving to take the home from the borrower. That's not only a significant jump over the 1% of loans in foreclosure last year at this time, but it's the highest rate in 30 years of record keeping.

What's behind the leap? There's the slumping economy, of course. When unemployment rises, late payments aren't far behind. But Mortgage Bankers Association economist Doug Duncan cites two other factors: the wider availability of credit to people who have in the past had trouble paying their bills, and a proliferation of such innovative mortgage products as interest-only loans, which — because they drive monthly payments artificially low — have encouraged people to buy bigger homes than they can afford.

The good news is that chances of avoiding foreclosure are greater than they've ever been. Fannie Mae is now negotiating to let borrowers keep their homes in 53% of problem-loan cases, a sizable jump over the 35% it was "working out" five years ago. Other lenders are following suit for good reason: a foreclosure costs them $2,500 on average. Says Duncan: "Nobody wins in a foreclosure."

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What should you do if you're feeling pressed?

CALL YOUR LENDER IMMEDIATELY. Explain why you're having difficulty making payments, how long that difficulty will last and what will have to be done to resolve it. Be prepared to provide financial details, including monthly income and expenses. The goal is to get the lender on your side, says mortgage lender James Nutter Jr. of Kansas City, Mo. "So do not wait for the lender to call you. If you call them, they will look upon that as you trying to not shirk your responsibility."

REFINANCE. If you have yet to miss a payment, refinancing can ease your burden. You can lower your interest rate, extend the term of your loan (thereby stretching out your payments) or convert some of the equity in your home to a cash cushion you could use to get by.

ASK FOR A PARTIAL PAYMENT. If you have an fha mortgage, your lender may be willing to let you make a partial payment — say, $700 instead of the full $1,000 you owe — without changing the terms of your mortgage. You typically can't do that with a conventional loan. But if you call and say you've missed a payment, your lender may tell you that you can make that payment up by spreading it over the next few months.

LOOK AT A LOAN MODIFICATION. If you can't continue to pay at your current rate but you can pay something, your lender will generally try to work with you to come up with a payment that you can afford. This works a bit like a refi without going through that process. You'll pay back what you owe, but you may do it over a longer period of time or at a lower interest rate.

If after considering all these alternatives, staying in your house doesn't look possible, try one of two other fixes. Neither will protect your house, but both can protect your credit rating. The first is called a "preforeclosure sale." It will allow you to sell your property (while living there) and move on in an organized fashion. The second is called a "deed in lieu of foreclosure." That's when you give your house to the lender and the lender disposes of it.

However difficult it may be, notes Keith Gumbinger of mortgage-information publisher HSH Associates, it's key to your financial future that you face this problem head on. He says, "The worst thing you can do is run and hide."

Jean is a columnist for Money magazine. E-mail her at moneytalk@moneymail.com