Money Coach to Listeners: How to Avoid Foreclosure
MICHEL MARTIN, host:
It's time for the Money Coach, where we check in with our personal finance guru, Alvin Hall. Now, you've heard us talk a lot on this program about the subprime mortgage crisis. The percentage of U.S. mortgages entering foreclosure in the first three months of the year was the highest in more than 50 years, according to Mortgage Bankers Association. So we think it's high time to talk about foreclosure and what people need to know about this difficult process.
Alvin Hall joins us from our New York bureau. And in our studio, we also have Carla Douglin. She's a foreclosure expert and author of "The Foreclosure Workbook: The Complete Guide to Understanding Foreclosure and Saving Your Home."
Welcome to both of you. Thanks for joining us.
Ms. CARLA DOUGLIN (Author, "The Foreclosure Workbook: The Complete Guide to Understanding Foreclosure and Saving Your Home"): Thank you.
ALVIN HALL: Glad to be here.
MARTIN: So, Alvin, I'll start with you. When does foreclosure start? How far behind do you have to be before you really need to start thinking about this?
HALL: When you miss two mortgage payments, you are officially in default. Then foreclosure depends upon the institution. Some of them will force you immediately to go into foreclosure, but generally, you can negotiate that. You can say will you let me make lower payments for six months? Will you fix my interest rate for a period of time, to allow yourself to negotiate. But then, once you get six months behind, they're almost always going to seek to foreclose.
MARTIN: Carla, how did you get involve with this issue? You're not a mortgage banker. You don't work in that field. So how did you get involved with and become an expert on foreclosure?
Ms. DOUGLIN: I started as a real estate investor in 2004, and then started working with homeowners, specifically, who were going into foreclosure, doing some training, and then wrote "The Foreclosure Workbook."
MARTIN Can I just ask a stupid, simple question? What does foreclosure mean? That's not the date that you get kicked out of your house or anything like that.
Ms. DOUGLIN: No, it's not.
MARTIN: What is that?
Ms. DOUGLIN: What it is is that that's the date that you go to auction. Your property goes to auction, and either it is bought by an outside party or it is repossessed - and it sounds like a car - by your lender, and you don't own it anymore. After that, you are contacted by whoever the new purchaser is, whoever the new buyer is, and they work out a procedure where they say, okay, you have 30 days, 40 days or whatever to leave your home.
MARTIN: What are some of the common reasons people find themselves in this situation? Now, we find out, of course, because of this whole subprime mortgage issue, that there are people who are facing balloon payments, that - they weren't expected them - their mortgage payment actually increase beyond their ability to pay.
Ms. DOUGLIN: That is correct.
MARTIN: But is that - has that been the case historically, or are there other factors that tend to lead to the situation?
Ms. DOUGLIN: There are lots of other factors. You have medical issues, family issues, not being able to handle their finances correctly. And so there is no common mortgage problem. There is no common problem that people are having that get them into foreclosure. We're seeing a lot now with the adjustable rate mortgages resetting. But the foreclosure issue has been one since the beginning.
MARTIN: So what's the first thing a person should do when he or she finds that he or she cannot pay that mortgage payment?
Ms. DOUGLIN: The very first thing that you should do, do not panic. What we found is that people get so embarrassed about their financial situations that they do not reach out for help. And it's really important that they not panic and figure out what their issue is. What is it that's keeping them behind? Lay out their finances and understand what income is coming in, what expenses they have, before they talk to their lender. Because one of the issues that people are having is they're agreeing to mortgage workouts and financial rectification payments with their mortgage, but they're not able to hold those payments, which really bumps them into foreclosure.
MARTIN: So what's the second thing you should do?
Ms. DOUGLIN: The second thing that they should do is gather all the information that they can about their foreclosure before they call their lender, because what you find is that homeowners don't answer the telephone and they don't open their mail. And they don't know what the due dates are of their foreclosure. They don't exactly know what the number is for their arrears, like how much they have to pay in order to get themselves out of the foreclosure situation.
So they have to gather that information and then call the lender and say, okay, I understand that my due date is November 15th, and I'm not going to be able to make that 15th payment. Can we push it back to the 21st? And mortgage lenders are more than willing to really make those kinds of changes for people if they just open up and talk to them.
MARTIN: Now, this is - that's an interesting point that Carla made, Alvin. And I think a lot of people believe that the bank would really prefer to foreclose on a home, because then they can sell it.
HALL: No, not in this environment, because the market prices are lower. So if even if they go to court, they have all of those costs - the foreclosure cost, the commission. It's just not worth it for them. I think many of them would rather work out something with you before they actually force you into foreclosure.
Ms. DOUGLIN: That is correct.
HALL: But Carla hit it dead on the head when she said you have to talk to them. If you just call up and suddenly out of the blue and say, oh, things are just going bad. I just can't handle this. It's as if you have no credibility. You have to keep them on your side.
MARTIN: But what if it's a situation like medical bills, for example? And you have a family member —-let's say, you're underinsured and you don't have insurance and you have a family member who needs medical treatment or something that - you lose your job. You don't have any money coming in. What are you supposed to do?
Ms. DOUGLIN: Still talk to your lender. I mean, they may be able to work out something where they kind of hold your payment for three months, six months. As long as you have that conversation with them and explain exactly what's going on, you have the documentation to back it up and say, okay, in about three months, things should be back to normal - six months, things should be back to normal. They will be willing to work with you.
MARTIN: Well, what if you don't know? If you've just lost a job, you have no idea when you're getting another one.
Ms. DOUGLIN: Then it's really important to look at your other options when it comes to your home. I mean, if their having financial issues, they cannot be emotional about their home. It is their property. If they can sell it, and if they can sell it quick to a realtor, they can sell it to an investor. If they can look at other ways to bring money into the home, these are all the options we go over in "The Foreclosure Workbook," and it's really, really important that people pursue those options.
MARTIN: So I think what I hear you saying is that you can't be afraid to lose that home in order to preserve your credit.
Ms. DOUGLIN: That is absolutely correct. Foreclosure is so much worse on your credit than a bankruptcy even, because it shows that you weren't willing to do anything to solve your situation.
MARTIN: I don't know that was true. Alvin, is that true? Is it really, a foreclosure is worse on your credit rating than bankruptcy?
HALL: Oh, yes. Oh, yes. Oh yes. Because at least in bankruptcy, your debts will be wiped out. This shows that you did not make the payments, did not negotiate a deal.
MARTIN: Let's say that you are hearing this conversation, you're already in foreclosure.
Ms. DOUGLIN: Mm-hmm.
MARTIN: Is there anything you can do to minimize the damage to yourself, long-term, or to protect yourself?
Ms. DOUGLIN: It would still go back to speaking to your lender. At the point where you are in the foreclosure process, they may have passed you on to a law firm. If they've passed you on to a law firm, you have to get all the information that you can about that law firm and then contact them to find out what your foreclosure date is and what options you have to rectify it. You can work out a payment system with the law firm as well. As long as you contact them way before your foreclosure date, then you're good.
MARTIN: If someone loses a home to foreclosure - that's sad, and shouldn't occur - is there any possibility that person will ever own a home again?
Ms. DOUGLIN: Oh, absolutely.
Ms. DOUGLIN: You can rebuild your credit. It may take a while. It may take two years, three years, four years. But they can always get another home.
MARTIN: Mm. Alvin, final thought?
HALL: Yes. And my grandmother used to say if you're standing on the track and the train is coming at you, there's no reason to stay on the track. And that's what people need to realize. When they first see that they're about to default on a mortgage or something like that, do something. Don't just stand there and wait for the train to hit you.
MARTIN: All right. Alvin Hall is a financial expert. He joined us from our bureau in New York. Carla Douglin is the author of "The Foreclosure Workbook: The Complete Guide to Understanding Foreclosure and Saving Your Home." You can find links to this book at our Web site, npr.org/tellmemore.
Carla and Alvin, thanks so much.
Ms. DOUGLIN: Thank you.
HALL: Glad to be here. Transcript provided by NPR, Copyright NPR.