Information released by the HOPE NOW coalition, a voluntary effort by major lenders to reduce mortgage foreclosures, shows that for the first time since its inception in July 07 prime mortgage foreclosures exceeded those for subprime loans.
According to housingwire.com, the reason for this trend is that servicers prefer to rely on repayment plans when dealing with prime borrowers who fall behind, rather than modifying the terms of the loans as they do with most subprime borrowers. HOPE NOW reports that 57,822 troubled prime borrowers got a repayment plan in July, which is 72.3 percent of all workouts effected that month. While only 48 percent of subprime borrowers were stuck with similar repayment plans–servicers were more likely to offer loan modifications instead.
Housingwire.com’s opinion is that this is because lenders still believe they have a shot at recouping prime borrowers’ arrearages, so they push repayment plans. In addition, repayment plans allow the lenders to classify seriously delinquent loans as “current,” which makes their numbers look better. But many feel the practice just sweeps the problem under the rug. Even prime borrowers end up in foreclosure when the repayment plan isn’t feasible.
Kevin Kanouff, the president of Clayton Holdings Inc. theorized that servicers are using repayment plans as “one way to reduce default rolls.” Repayment plans represent “a temporary fix for the servicers if they do not fit the borrowers’ capabilities to repay. Eventually the real numbers will come out on bad plans.” Cheryl Lang, the president of Integrated Mortgage Solutions, clains repayment plans “are used to minimize or mask the 90-day-plus category of delinquencies.”
So, what can we learn from this? First, if you have a problem with your mortgage you are likely to be offered a better solution if you are a sub-prime borrower. Don’t allow your lender to shove an unrealistic plan down your throat. Second, you are more likely to be successful at keeping your home out of foreclosure and saving your credit rating if you get a loan modification rather than a repayment plan. A loan modification involves changing the terms of your mortgage to something manageable. A repayment plan just means moving the past due amounts to a different loan, classifying the (still unpayable) mortgage as ”current,” and expecting you to pay both your mortgage and the repayment plan. How logical–let’s see, the borrower is behind on the loan because he can’t make the payment, so we’ll help him out by giving him 2 payments to make!
If your lender suggests a plan that you know won’t work, don’t let their stupidity become your stupidity. Housing / mortgage counselors abound, and qualified attorneys can also help with mortgage negotiations. If your goal is to keep your home, working with your lender to create a realistic plan is your best chance at a win-win.
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Well, that makes me feel better as a lower credit score borrower. See, it isn’t just us.
Wow, that’s really interesting. It seems all the latest mortgage news has been focusing on the subprime borrowers and it’s great to see that it isn’t directly related to one side of the street. This blog is great, keep up the good work!
So the lender is assuming that because these prime borrowers have good credit they can afford their mortgages? If there is a loss of employment do they take that into consideration?
When lenders evaluate you to see if you are a candidate for a modification or repayment plan they look at several things. First, your equity–if you have a lot of equity the lender is more likely to foreclose because it stands the best chance of recouping its losses by forcing the sale of the property.If you have little or no equity the lender won’t foreclose if it can be avoided. Foreclosure is expensive and unless you have no income or the worst credit ever the lender is likely to give you a chance to keep your home.
Repayment plans. These make sense when you are behind on your mortgage because of a short term problem (like a temporary medical setback or a job loss) and can now pay your mortgage but can’t catch up on the missed payments. The lender (or mortgage insurer) may bring your account current and arrange for you to add the missed payments to the balance of the loan, pay them in small amounts over time, or pay it when you sell the property. When a mortgage insurance company does this it’s called a claim advance. Because prime mortgages are more likely to have mortgage insurance this option is more likely to be available to prime borrowers.
Loan modifications. This involves reducing your interest rate, changing the terms of your loan, cramming down (reducing) the balance, or a combination. For example, if you had a $300,000 Payment Option ARM and made the minimum $759 payment every time, your balance might increase by $75,000 and your payment could adjust to $2,625! But if you show your bank that you could pay about $2,000 a month, they might change your loan like this:
A fixed rate at 6.25%, with a 40 year term, and a balance reduced from $375,000 to $360,000. This equals a payment of $2,044.