It’s the toxic fallout from the “subprime meltdown”: More and more Americans are losing their homes to foreclosure.
Sadly, many could escape this fate if they’d just talk to their lenders. Instead, they hunker down and hope against hope that something will happen before the mortgage company takes the home.
Nationally, the number of homes in foreclosure soared by 36 percent between July and August, and foreclosures have more than doubled in the past 12 months, according to RealtyTrac, a company that tracks foreclosure filings. Some experts think 2 million homeowners will lose their properties in the next couple of years.
The situation is especially bad in some markets that had the fastest home-price gains in recent years. Between July and August, foreclosure filings jumped by 48 percent in California and 77 percent in Florida. Nevada has the highest foreclosure rate in the country — one of every 165 households, compared to one in 510 households nationwide.
For some homeowners, foreclosure may seem the easiest option. If interest-rate increases drive monthly payments too high and the property cannot be sold for enough to pay off the loan, many just walk away and let the lender have the property.
That strategy’s a mistake. It’s almost always better to avoid foreclosure.
Foreclosure can ruin your credit rating, making it nearly impossible to borrow money in the future, and it might even make it harder to get a job or rent a home. In fact, a foreclosure can even cause your federal income tax to jump.
Fortunately, there is help, and I’ll make some suggestions in a minute. But first, why are we in this mess?
It’s the hangover from the housing bubble.
Low interest rates during much of the decade allowed buyers to borrow more, letting them bid home prices up. Lenders eager for business started offering “subprime” and “Alt-A” loans to people with poor credit or low incomes. Most of these loans carried adjustable rates that are now going higher, often adding hundreds of dollars a month to the homeowner’s monthly payment.
Tougher lending requirements and pre-payment penalties make it hard for troubled borrowers to refinance with cheaper fixed-rate loans. And many of these borrowers now find that their properties have lost value and cannot be sold for enough to pay off a mortgage taken out two or three years ago.
Result: The homeowner falls behind in payments, and after a few months the lender takes over the property.
What do you do if you’re in this fix?
First, look for any way to trim expenses so you can make your payments. Cut out entertainment, meals out, cell phone service, cable TV — anything that’s not an absolute necessity. Take shorter showers and eat more meatless meals, reduce gas costs by planning errands more efficiently. And as the weather gets colder, turn the thermostat down and wear a sweater. Many households can save hundreds of dollars a month with tighter budgeting.
Next, look for ways to increase income. Can you or someone else in the family get another full- or part-time job? Will local ordinances allow you to take in a boarder?
Then look for things to sell to raise money — the second car, jewelry, sports equipment, furniture and other things in storage. Have a garage sale or use eBay or craigslist.com.
Although people are usually told not to tap accounts like 401(k)s and IRAs for ordinary expenses, it may be worth it to save your home even if you have to pay tax and early withdrawal penalties.
Many of these steps are painful. But it may be short-term pain until conditions turn around — better than the long-term pain from losing a home and ruining your credit rating and job prospects.
If you still can’t make your payments after taking these steps, contact your mortgage lender. There should be a phone number in your loan documents, statements or coupon book.
Keep in mind that the lender does not want your home. Foreclosure is an expensive, difficult process for the lender, and because home prices are falling there’s no guarantee the lender will sell the property for enough to get back all that it lent you.
Many lenders are required by their insurers to work with troubled borrowers. For borrowers with temporary financial problems, lenders may suspend payments for a given period, or accept less than a full amount. Later, you would resume regular payments plus a certain amount every month to gradually make up the shortfall.
Or the lender might agree to permanently change your loan terms by reducing the interest rate, replacing an adjustable rate with a fixed one, adding missed payments to the loan balance or reducing monthly payments by giving you more years to pay the loan off. If your loan is insured by an agency such as the Federal Housing Administration, you might even be eligible for a one-time interest-free loan to cover late payments.
If it turns out you simply cannot keep the home, several options are better than an involuntary foreclosure. One is to ask the lender for time to sell the property to raise money to pay off the debt. The lender may agree to settle the debt for less than the full amount rather than incur the expense and hassle of foreclosing. Sometimes the lender will allow the homeowner to find a buyer to take over, or “assume”, the loan, even if your mortgage was considered non-assumable when it was approved.
A final option is “a deed in-lieu of foreclosure” in which you give the property to the lender, who then forgives the debt. This would not be quite as bad for your credit rating as an involuntary foreclosure.
Be aware, though, that when the debt erased by foreclosure is greater than the current market value of the property, the difference is considered income that may be subject to federal income tax. You may be able to avoid that tax if your liabilities exceed your assets. For information, go to the IRS Web site.
Also, get help from an expert. There are many state and federal programs offering advice or financial assistance. There is special help, for example, for people who live in disaster areas. And a federal law, the Servicemembers Civil Relief Act, can be used to reduce the mortgage rate paid by military personnel on active duty.
You can find help at little or no cost from a housing counselor approved by the U.S. Department of Housing and Urban Development that are listed at the agency's Web site, or by calling (800) 569-4287.
Stick with this list, as there are lots of crooked outfits looking to clean you out with false promises to shield you from foreclosure or boost your credit rating. An approved counselor can review your situation, explain your options, point you toward agencies and organizations that offer other help, and negotiate with your lender on your behalf.
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