Some borrowers get more aid than others

"Is it true that mortgage servicers will not help borrowers in trouble until they stop making their payments? I am a home retention counselor and I keep hearing from people referred to me that they have received no response from their servicer because they have not yet missed a payment. I would hate to advise people that they have to stop paying if they expect to get any help if it is not true."

There is certainly much truth to it because I have heard the same story from numerous people I have counseled, whose stories I have no reason to doubt. The most common story is that they were told by the servicer to come back when they were two payments behind.

There are understandable reasons why borrowers who are delinquent on their payments receive more prompt consideration than those who are current. To the degree that servicers are faced with more requests for help than they can handle at one time, they have to set priorities. The number of borrowers in trouble has ballooned over the last year, outstripping the efforts of servicers to expand their capacity to deal with them.

A plausible way to set priorities is in terms of the degree of urgency of the problem. A borrower 60 days behind in his payment is closer to foreclosure, and if he is going to be saved, he needs faster action than a borrower who is current. So borrowers who are current get placed at the bottom of the list of borrowers requiring special treatment -- if they are even placed on the list at all.

This tendency is reinforced by the fear of free-riders. All borrowers would like to get a better deal on their mortgages, whether they have trouble making their current payments or not. If loans are being modified to help borrowers, some borrowers who are not in financial distress will try to take advantage of the situation by pretending that they are. But potential free-riders may not be willing to become delinquent because that would hurt their credit. By only considering modifications for borrowers who are already delinquent, the servicer reduces the number of potential free-riders.

In addition, the practice of dealing only with borrowers who are delinquent keeps loans in good standing for longer periods. Consider the borrower who loses her job but has savings sufficient to cover the payments for some months. Investors would prefer that the borrower make the payment out of savings for as long as possible, since she might find another job during this period, avoiding the need for any modification of the mortgage.

If I were a borrower with reduced income but with good prospects of recovery, I would make the payment out of savings, avoiding the hit to my credit. If I considered the prospects of recovery to be poor, however, I would stop paying and husband my savings. This will move me up on the servicer's priority list for special treatment. While it also moves up the hit to my credit, that would happen anyway as soon as my savings were exhausted.

If I did not have a problem making the current payment but will have a problem dealing with an anticipated payment increase, I would handle it differently. First, I would determine exactly how large the payment increase will be. If the increase stems from an interest-only loan reaching the end of the interest-only period, the new payment can be found using any monthly payment calculator (including my calculator 7a) inputting a term equal to the remaining life of the loan. If the increase stems from a rate adjustment on an adjustable-rate mortgage (ARM), the new payment won't be known exactly until a month or two before the adjustment, but an estimate based on the current value of the rate index will provide a good estimate. I explain how to do this in ARM Borrowers With Their Heads in the Sand on my Web site.

Step two is to develop a detailed budget that documents the point that the expected payment is not affordable. Use the form provided by Genworth at https://hoa.mortgageinsurance.genworth.com to show your income, expenses and assets.

Submit your document to the servicer well in advance of the anticipated payment increase. There is no guarantee that it will lead to a contract modification before the payment increase materializes. However, it gives you a good shot to move up in the servicer's queue by providing the concrete detailed information that servicers require. It also keeps you out of the hands of the modification hustlers who want to be paid upfront for doing what you can do yourself.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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