In Face of Foreclosure, Follow California Mortgage Payment Advice
Though the California housing market remains stronger than others around the nation, the Bay Area has not been immune to rising foreclosure activity.
Between January 2006 and January 2007, every Bay Area county except Marin saw a rise in foreclosures, according to RealtyTrac. Solano County had the highest foreclosure rate in the state in January.
Alameda and Contra Costa counties also had rates that were above the state and national averages. Witht that in mind, let’s review courses of action borrowers can take if they fall behind on mortgage payments:
- Talk to your lender and seek a good nonprofit credit counselor or bankruptcy attorney.
Your best course of action will depend on whether your financial difficulties are likely to be temporary or long term, and whether you have any equity in your house. Equity is how much you would have left after you sold your house and paid all closing costs and mortgage balances.
If your financial difficulties are likely to be long term and you do possess home equity, consider selling the residence and preserving your stake, says Jack Guttentag, a former finance professor at the Wharton School of the University of Pennsylvania. If you have equity and think your financial difficulties will be short term, consider taking out a home equity loan and using it to pay your mortgage until you are back on your feet.
“You have to do this before you become delinquent. If you are 30 days late, you might be able to get a loan. If you are 60 days late, you are not going to get it,” Guttentag says.
- Try talking your lender into a forbearance or loan modification agreement.
In forbearance, the lender might postpone or reduce your payment for a certain period, such as three to 12 months. After this time, the unpaid amount, called the arrearage, could be added to your monthly payment and paid off within a few years. Or the arrearage could be added to your principal and repaid when you sell or mortgage refinance your home.
In a modification, the lender changes terms of the loan to reduce your monthly payment. The lender might reduce the interest rate, lengthen the number of years remaining on the home loan or switch your payments to interest-only.
“Loan modifications don’t happen that often,” Guttentag says. “Paradoxically, lenders are more apt to be understanding and interested in a workout when the borrower has no equity than when he does.”
- Persuade the lender to accept a short sale or deed in lieu of foreclosure.
In a traditional short sale, the owner sells the home and remits the net proceeds to the lender as payment in full, even if it is less than the loan balance.
In a deed in lieu of foreclosure, the borrower voluntarily turns the deed over to the lender as payment in full and the lender cancels the debt. Some California mortgage lenders will do this because it’s easier and cheaper than foreclosing.
Other lenders prefer the legal protection foreclosure provides. If a lender accepts a deed in lieu, then sells the house and there was a lien on the property, the new owner can sue the lender, says Rick Harper, director of housing with the Consumer Credit Counseling Service of San Francisco.
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