Lenders giving no slack to deadbeats, but are helping others

Lenders, loan servicers and mortgage investors are going to unprecedented lengths to help deserving borrowers avoid falling behind on their payments and possibly losing their homes. Believe it or not, nobody wins when a house has to be repossessed -- not the borrower, not the community where the borrower lives, not even the lender.

But when it comes to those who can pay but won't, or investors who gambled on ever-rising housing values but came up snake eyes, the gloves are coming off. They will be going after you, and they'll be going after you hard.

It's difficult to find anyone to talk about getting tougher on borrowers, let alone speak on the record. In the current environment, where governments and the media at all levels are focused on the plight of unsuspecting borrowers who were pushed unknowingly into subprime loans or led into exotic mortgages that are proving to be poisonous, they don't want any publicity, even if the topic is deadbeats.

Who are "they?" Some are mortgage insurers who cover part of the losses that lenders and investors experience when a house goes into foreclosure. Some are the owners of the mortgages themselves who take it on the chin when loans go into default. And some are investors who purchased delinquent loans at 50 cents or 60 cents on the dollar and are trying to bring borrowers current.

They want it known that they are not going after the true hardship cases -- people who are in deep financial trouble because of lost jobs or major debilitating illnesses. They also are not chasing down those who cry foul, maintaining they were misled into taking out high-cost or dangerous mortgages.

But they are coming down hard on the "walkaways," borrowers who have the resources to pay their loans but choose not to, usually because their houses are no longer worth as much as what's owed on them.

Using the latest skip-tracing and asset-search techniques to locate these failed borrowers and their hidden riches, they are hunting high and low for those who can pay, either now or later.

"These people always thought they could just walk away," one loss-mitigation specialist told me not too long ago. "But if they have the financial wherewithal, we're going after them. They need to understand there are other consequences behind losing their properties."

One big gun in the arsenal of weapons is a legal remedy known as a deficiency judgment. Permissible in 31 states, deficiency judgments allow mortgage holders to collect the difference between what they're owed and the cash they received when the property is sold at foreclosure.

So if you owed $400,000 on your loan and the lender/servicer/investor was only able to sell your house for $300,000, you could still be on the hook for $100,000.

If there is any good news in this, it's that the "scratch and dent" investors who buy nonperforming loans have much more wiggle room to work with delinquent borrowers than the loans' original owners because they don't have as much skin in the game.

These guys are sometimes known as "bottom feeders," a moniker that conjures up images of repo men grabbing non-payers by their ankles, turning them upside down and shaking every last dime out of them. And to be sure, they are bill collectors who won't pussyfoot around with unresponsive borrowers.

At the same time, though, they can be somewhat more benevolent. If the scratch-and-dent investor paid just $100,000 for a loan with an outstanding balance of, say, $200,000, they have $100,000 to play with. So they might settle with the borrower for, say, $50,000 or $60,000 instead of the full $100,000.

Their real goal, however, is to bring the borrower current, and they can be just as flexible -- if not more so -- than the original lender. And those guys are bending over backwards right now to keep people in their homes.

So when the phone rings and your lender's on the other end, answer the call. When an envelope arrives in the mail, don't toss it in the wastebasket. Open it and read it. And when some suit knocks on your door, he might not be a bill collector, but someone who is trying to help you.

Getting their attention

The No. 1 problem lenders have with delinquent borrowers is the inability to get their attention. The most important thing you can do is call your lender. Even if you just think you are going to be late, get on the horn.

"Talking to a lender early is a lot less painful than talking to a lender later," says Jim Dowell, executive vice president of MortgageFlex Systems, a Jacksonville company that helps lenders keep track of their real estate owned, or REO.

But don't talk with the collections department; talk instead with the loss-mitigation department, aka "customer relations" or "customer help group." The "loss mit" folks are the ones empowered to help you. The collection guys can only browbeat you into foreclosure -- or pass you along to the right folks if they really believe your story and are trained to do so.

"Just like any other bill collector, they have a right to collect their money, and mortgage companies are nothing if not collection agencies," says Michael Brotherton, a consumer- and debtor-rights advocate in Dayton, Ohio.

"But at the first sign of a problem, you should contact the lender's loss-mitigation department. Unfortunately, most people don't know the difference between collections and loss mitigation, and sometimes it's hard to get past one to get to the other."

If you are successful, you'll find that the lenders have several arrows available in their loss-mit quivers. They can modify the terms of your loan by, say, reducing the rate to make payments more manageable, or by extending the loan several years.

They also can reduce or even suspend your payments for a while until you get back on your feet. Or they can let you catch up on what you owe by adding an additional amount to your regular payment.

If you don't qualify for any of these options, maybe the lender will give you more time to sell your place and pay off what you'll owe. Or perhaps the lender may be willing to accept less than what you owe. Another alternative might be just to hand over the deed to the place in lieu of foreclosure. And another would be to allow someone else to take over what otherwise might not be an assumable loan.

But you won't be offered any of these options unless you talk with your lender. That's why the business is becoming one of what Ingrid Beckles, vice president of servicing and asset management at Freddie Mac, calls "first responders." Instead of waiting for borrowers to call, lenders are, among other things:

• Contacting borrows up to six months or more before their adjustable-rate loans are going to reset, alerting them to the pending change and trying to find out if they are going to need help with what might be much higher monthly payments.
• Sending people armed with loss-mitigation information to the homes of tardy borrowers between 6 p.m. and 8 p.m., when they are most likely to be home.
• Using return envelopes printed with bar codes that can be tracked as soon as they reach the post office so they know when the check really is "in the mail."
• Using handwritten envelopes instead of letterheads, figuring that borrowers are more likely to open mail if they can't tell it's from the lender.
• Filling out the paperwork in advance rather than sending reams of blank forms that are more easily tossed in the circular file.
• Contracting with local counseling agencies to act as intermediaries and contact delinquent borrowers who are more apt to talk with a local credit counselor in person than a faceless person hundreds or thousands of miles away.

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