With little public fanfare, a segment of the home mortgage industry has begun a major campaign to keep economically troubled homeowners in their houses and lenders nationwide off their backs. Homeowners who understand the significance of this new effort within the industry can turn it to their advantage.
Led by mortgage insurance companies like Milwaukee-based Mortgage Guaranty Insurance Corp. (MGIC) and Philadelphia's Commonwealth Mortgage Assurance Co., the campaign focuses on persuading lenders to treat borrower delinquencies in the current recession differently than they have in other years.
Rather than the traditional "pay or lose your house on the courthouse steps" approach, the new campaign emphasizes making peace: Loan modifications, creative repayment plans, 30-day "indulgences," cash advances by insurers and other "workout" concepts.
It also represents an effort by the mortgage insurance industry to keep consumers away from the fastest-growing form of homeowner debt relief: bankruptcy filings. Of the record 1-million new bankruptcy petitions expected to be filed in 1992, according to the American Bankruptcy Institute, more than 92 percent will involve personal bankruptcies, including hundreds of thousands of homeowners.
Mortgage insurers are particularly troubled by the sharp jump in bankruptcy petitions because they have to pay off staggering claims to lenders when a borrower's home goes to foreclosure. Mortgage insurance, paid for by homeowners themselves, is widely required by lenders who make mortgages with initial down payments of less than 20 percent.
When a borrower defaults and the loan is foreclosed, the lender can submit claims to the insurer for a portion of the unpaid interest and principal payments, legal costs, brokerage fees, repairs and other expenses. The losses associated with bankruptcy-related foreclosures are far higher than ordinary foreclosures, according to industry spokesmen. That's because court-administered bankruptcy proceedings can freeze assets like homes for months or even years. Meanwhile, the unpaid mortgage interest and other expenses continue to grow.
To avoid such heavy claims, mortgage insurers recently began giving regional and local mortgage lenders crash courses on how to keep borrowers out of bankruptcy. MGIC calls its nationwide effort aimed at 3,000 lenders the "Preserving Homeownership" program. The insurer is urging its lenders to pull out all stops to work with borrowers facing layoffs or other economic distress.
"We're saying, keep people in their homes and everybody ends up better," said John R. Hoff, MGIC vice president for claims. In many cases, Hoff said, that means banks and mortgage servicing firms have to radically change their relationships with their borrowers. They've got to communicate that they seriously want to hear when there's a problem and that borrowers with a tale of woe will get a sympathetic and resourceful response, not a bureaucratic "send your monthly check or else."
MGIC's program emphasizes several stages of borrower relief, depending on the nature and severity of the borrower's problems:
"Temporary indulgences." These allow homeowners who missed a payment and don't currently have the income to cover it, to remain "30 days down" for as long as necessary. Because large numbers of defaults begin with just one missed payment _ followed by rigid, uncompromising demands by the lender for the full arrears _ the "indulgence" option tries to nip such disputes in the bud.
Forbearance and repayment plans. These are "more lengthy temporary indulgences," Hoff said. These can postpone two to four missed payments for extended periods. If the borrower has enough income to make partial repayments at some stage, a written schedule is agreed upon and relieves the homeowner of the immediate threat of foreclosure.
Short-term delinquency payments by MGIC to the lender. In some cases, MGIC itself will step in with cash and make the missed payments to the lender. The objective is the same as forbearance: To keep the borrower's and the lender's fingers off their respective nuclear war buttons _ bankruptcy petitions or foreclosure.
Loan modifications. These typically involve recasting the terms of the note to suit a borrower's current and future income situation. They can allow a borrower to drop from an 11 percent rate, for instance, to an 8 percent rate. Or to stretch out a five-year payback term to 20 years.
Hoff emphasized in an interview that the program "isn't for everybody." Borrowers facing insuperable difficulties may be urged to simply hand over the keys _ provide a "deed-in-lieu-of-foreclosure" _ to spare both sides unnecessary legal expense. It's also not for what Hoff terms "walk-aways" _ borrowers who ask for relief but have no real intention of holding up their part of the bargain.
Efforts by other mortgage insurers emphasize training for lending institution staff on how to encourage borrowers to "write your own proposal." Cam Melchiorre, claims vice president for Commonwealth Mortgage Assurance, said, "We want to tell borrowers to make us a reasonable proposal. Tell us what your trouble is and how you got into it. Then give us a reasonable solution _ how much you can pay and how long it'll take to cure the problem."
Melchiorre says there's no guarantee that your lender will agree to your proposal. But with bankruptcy filings setting records and mortgage delinquency rates on the rise, "You could find a more sympathetic ear (at your lender's) than you ever guessed."
1992, Washington Post Writers Group