The Treasury Department and an alliance of banks announced a new plan today to allow some homeowners to suspend foreclosure actions for 30 days.
The aim is to give seriously delinquent borrowers -- meaning those who are more than 90 days behind on payments -- more time to work out repayment plans, loan modifications or refinancing deals with lenders.
The plan, called Project Lifeline, is an offshoot of the previously established Hope Now alliance of major mortgage lenders and servicers. The group has been criticized for focusing its efforts mainly on subprime adjustable-rate mortgages.
Hope Now has released revised figures stating that 545,000 subprime mortgage borrowers were helped in the second half of 2007, along with 324,000 prime mortgage borrowers. The assistance consisted of 652,000 repayment plans and 217,000 loan modifications. Hope Now stated that 68% of delinquent subprime borrowers received some form of assistance.
Participants in Hope Now and Project Lifeline will include Countrywide Financial, Washington Mutual, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
Hope Now points out that only one-third of foreclosures initiated actually resulted in the borrower losing a home.
With that in mind, here are factors to keep in mind if you or someone you know is worried about losing a home:
Call the loan servicer
If a mortgage borrower has any hint of trouble affording payments, the best course of action is to call the loan servicer and discuss the situation. The borrower should ask to speak to someone specializing in mortgage loan workouts or loss mitigation. Borrowers can also call the Hope Now hotline at 888-995-4673.
To keep borrowers in their homes, lenders are more willing to change mortgage payment terms than ever before. Adjustable rate mortgages, for example, usually have a very attractive fixed rate for a period of time, say three years, after which the payment is likely to increase sharply.
It is quite common for someone who is late making loan payments to be intimidated by the collections process. But now more than ever, the situation is likely to improve if the loan servicer is contacted.
It's in everyone's interest to keep borrowers from losing their homes.
The lender doesn't want to own real estate
In this market, the last thing a mortgage lender wants to do is seize somebody's home. That would make the lender responsible to pay the property taxes and handle maintenance while it tries to sell the home.
Even with the recent Federal Reserve rate cuts, many borrowers with adjustable-rate mortgages are facing "payment shock" when their rate adjusts for the first time. One way a lender can help a borrower unable to afford the rate reset is to extend the fixed-rate period for another year or two.
This could give the borrower enough time to refinance the loan.
Know What It Means to Be 'Upside Down'
It is quite possible that the home is now worth less than the outstanding mortgage loan balance.
In some areas of the country, real estate prices have dropped sharply. If the loan was made with a low down payment, there could be a substantial shortfall if the loan is refinanced or the home is sold, or if foreclosure is completed.
The lender may also be willing to "forgive" a significant portion of the loan balance to help a borrower refinance now.
Good news About Taxes
Normally, if a portion of a loan balance is forgiven, it is reported as taxable income on a 1099C. This holds true even if the borrower loses the home.
The good news is that the Mortgage Forgiveness Debt Relief Act of 2007, signed by President Bush in December, provides relief.
Subject to certain limits, you will pay no taxes on forgiven debt balances when you refinance your primary residence. The act is temporary, only covering mortgage balances forgiven during 2007, 2008 and 2009.
A Frustrating Scenario -- and Perhaps More Good News
There have been various stories of borrowers who were not late on their mortgage payments but realized they would be unable to make upcoming payments because of the loss of a job or a pending rate reset.
Some of these borrowers were told they couldn't be helped, because they had yet to be delinquent on their loans. This set up an absurd scenario where the borrower might actually be told to stop making payments so they would be eligible for a repayment plan, loan modification or refinancing.
This week Countrywide Financial announced new standards for loan workout rules for subprime loans, which included offering help to subprime borrowers who'd not yet made a late payment.
This is a great start. Other large servicers might follow.