Act Now, Before Home Mortgage Problems Worsen

Troubles in mortgage land may get worse before they get better, especially for subprime borrowers, whose spotty credit put them into costly home loans.

“It’s an amorphous blob of trouble,” Keith Gumbinger of HSH Associates, a mortgage research firm, said. “And there’s more pain to come.”

Many borrowers stretched themselves far too thin with costly bad credit home loans in 2004, 2005, and 2006, when they were able to qualify for mortgages that may have started off with high interest rates, but lower monthly payments.

Most subprime, or bad credit mortgage, borrowers aren’t deadbeats, but everyday folk who get hit with one job loss or illness too many.

Now those rates and payments are adjusting upward, with increases in the mortgage rates to which they are pegged.

Homeowners have trouble making their new, higher payments, and - if they live in a place where the prices have flattened or gone down - they may not even be able to sell their home and pay off their home loan.

In the first quarter of this year, roughly one in 41 subprime home loans was in foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association.

Those are the worst mortgage default statistics since the Great Depression. And it’s likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality.

Many carry penalties if you pay off a mortgage early and could reset by as much as 5 percentage points when they do adjust. And the underlying rates are going up, too.

The average 30-year fixed-rate mortgage is 6.85 percent, close to its 2007 highs. And that’s for a high-quality mortgage; a subprime borrower could pay 9 percent or more for the same loan.

What to do? Don’t hide, because mortgage troubles will find you and the longer you ignore them, the worse they will invariably get.

Start by getting smart about your home loans, and by being brutally honest with yourself. Find out when it’s scheduled to adjust, and by how much.

Ask yourself …

• Is there a prepayment penalty?
• Will you have serious problems keeping up, or just some discomfort?
• Have you been making all your debt payments on time?

Then take action …

• Refinance. If you’ve been able to raise your credit score since getting a subprime mortgage, apply for mortgage refinancing pronto.
• Call your lender. There’s no downside to letting your lender know you are having trouble. They do have some incentives to work out a plan that keeps you in the house and paying off the loan. Even if they don’t, they can’t take any action against you just because you call them. If you’re making your payments, the mortgage lender will leave you alone. If you’ve already fallen behind, the call will help, not hurt.
• Don’t chase predatory lenders. A lot of scam artists are targeting troubled borrowers now, with promises to fix your credit, pay off your bills, or save your house. Many “do nothing at all or perform services consumers can do for themselves at little or no cost,” the FDIC says.
• Look ahead. If you’re okay now, but won’t be next year when your mortgage resets, don’t wait. Start shopping for a better loan now. If necessary, take drastic action: Hold garage sales, take in roommates, moonlight, borrow money from your snobby brother-in-law. Just do something.

SOURCE: Boston Globe