Why lenders might forgive your debt
There was a time when lenders didn't want to work with you if you couldn't pay. Now they want to avoid foreclosure, lawsuits or repossession almost as much as you do.
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http://articles.moneycentral.msn.co...ting/why-lenders-might-forgive-your-debt.aspx
By Liz Pulliam Weston
People who overdosed on debt in recent years learned the paradox of easy credit: While lenders were willing to let you borrow copious amounts, they weren't particularly interested in helping you work out a solution if you fell behind on repayment.
Lenders often found it easier and cheaper to write off delinquent accounts as bad debt than work with you on a repayment plan. After all, they could get a tax break on the loss and then get on with the profitable business of extending credit to the next guy.
Lately, however, lender perspectives have changed. Soaring default rates, a weakening economy and the credit crunch have rewritten the rules.
Credit card lenders charged off 5.47% of the total amounts owed on cards as bad debt in the second quarter, according to the Federal Reserve. A year ago, the charge-off rate was 3.85%.
Consumer bankruptcy filings in October topped 100,000, a 40% increase from a year earlier and the highest level since the federal bankruptcy reform law took effect in October 2005, according to the American Bankruptcy Institute.
More than 2.2 million homeowners are more than 60 days late on their mortgage payments, according to the Hope Now alliance of lenders and credit counselors, and one in six homeowners owes more on a home than it's worth.
With home prices plummeting, every foreclosure now represents a loss of 44% of the original loan amount, up from 29% a year ago, according to data from LPS Applied Analytics.
That's why lenders are now looking for ways to keep people paying their bills, even if it means forgiving some of their debt. Now the paradox is that in order to qualify, you must be struggling, but not so much that a change in terms wouldn't help you.
How the new programs work
The most sweeping new program was announced Nov. 11. Freddie Mac and Fannie Mae, the government agencies that guarantee 31 million U.S. mortgages, will begin paying the mortgage service companies that maintain the loans $800 for every loan they modify. Borrowers would get help in several ways: Interest rates would be reduced so that borrowers would not pay more than 38% of their gross income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free. (You can find more details here.)
The same day, Citigroup announced it would halt foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. Ultimately, it plans to modify the repayment terms on up to $20 billion in loans.
More from MSN Money
Bank, feds offer new mortgage aid
Feel like a sucker? You're not alone
Your 5-minute guide to bankruptcy
7 tips for surviving a financial panic
Would a lower rate help? Compare loans
Late last month, JPMorgan Chase expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 homeowners. The modifications were to include reducing amounts owed or the loans' interest rates, and replacing so-called "pay option" loans that typically resulted in mortgages growing over time.
Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial as part of an $8.4 billion legal settlement reached with 11 states in early October.
Loan forgiveness is a key part of the Hope for Homeowners program. This is the foreclosure prevention program that Congress created as part of the $700 billion Economic and Housing Recovery Act of 2008. Lenders that want to participate typically must agree to reduce borrowers' principal to 90% of their homes' current value.
But wait, there's more
In late October, a coalition of lenders and consumer advocates asked banking regulators to approve a pilot program that would allow struggling borrowers to pay off, over time, less than they owe -- as much as 40% less. Under current rules, any repayment plan has to be for the full amount owed.
Though the Office of the Comptroller of the Currency rejected the first draft over how banks would book the resulting losses, backers of the plan say they're committed to finding a remedy for overtaxed borrowers that's short of bankruptcy -- which would likely mean the banks see no repayment at all.
In the first proposal, a joint project of the Financial Services Roundtable and the Consumer Federation of America, applicants would have been evaluated by certified credit counselors; those who couldn't pay off their debt under a regular debt management program would have been placed in one of four repayment plans that would reduce their principal by 10%, 20%, 30% or 40%. Only consumers closest to bankruptcy could have qualified for the biggest reduction.
Video on MSN Money
Hope for housing
Fannie Mae and Freddie Mac unveil plans to help homeowners avoid foreclosure.
Travis Plunkett of the Consumer Federation of America said his group would continue to lobby regulators "to do everything they can, within bounds of the safety and soundness of the financial system, to help consumers," but that ultimately consumer advocates may have to turn to lawmakers for help.
"It may be Congress that has to step in, and I think there's a lot of interest there" in doing so, Plunkett said. "We've got a train wreck coming."
Student loans and car debt
Meanwhile, makers of student and auto loans haven't announced any new plans for forgiveness. In recent years, in fact, both groups made escaping their debt more difficult. But:
Certain borrowers can still get portions of their federal student loans forgiven through volunteer work, military service and teaching in low-income communities. And Congress passed a law in 2007 that wipes out federal student loan debt for people who work in certain jobs and who make 10 years of on-time payments. Plus:
Auto lenders are stepping up their education efforts to let troubled borrowers know they have alternatives if they fall behind on their car payments. According to credit bureau Experian, more than 500,000 borrowers are 30 days or more overdue on a car loan.
Yet fewer than half of consumers in a recent poll knew that auto financing companies often worked with troubled borrowers, said Eric Hoffman, spokesman for the Aware, an education group set up by auto dealers and lenders that commissioned the survey.
Auto lenders may be able to modify a loan to stretch payments over a longer period or allow borrowers to make up missing payments, Hoffman said.
"We tell people, 'Don't ignore the situation if you're having trouble,'" Hoffman said. "Get in contact with your lender and see if there's a way to work out a different payment plan."
The same advice holds true for student loans. You may be eligible for income-sensitive or graduated repayment plans or, if you're facing economic hardship, forbearance or deferment that would allow you to skip payments for up to three years.
More from MSN Money
Bank, feds offer new mortgage aid
Feel like a sucker? You're not alone
Your 5-minute guide to bankruptcy
7 tips for surviving a financial panic
Would a lower rate help? Compare loans
Here's what to do about other debt:
Credit cards. If you're already behind on your credit card payments, you shouldn't wait to see if you'll qualify for any loan forgiveness programs. Make two calls: one to a legitimate credit counselor and another to an experienced bankruptcy attorney. Between the two, you'll get the information you'll need to decide whether you should continue paying your debt or have it "forgiven" by the U.S. bankruptcy court.
Mortgages. Gather your paperwork -- your mortgage documents, last year's tax return and some recent pay stubs -- and call a HUD-approved housing counselor to evaluate your situation and your options. If you qualify for a loan modification program, the counselor can help you get through to your lender's loss mitigation department, which will evaluate your application.
A lender will want evidence that you're in trouble -- and assurances that any changes will keep the payments coming. Don't expect that it will immediately hack your loan balance to what the house is currently worth; it won't.
Your lender has only a few ways to help you: It can reduce your interest rate, defer payments, extend the length of the loan or forgive some part of your principal.
With your counselor's help, you should decide what solution you want before approaching the lender. If you have a temporary situation such as an illness that will be resolved soon, for example, ask for deferred payments. If your adjustable-rate mortgage is about to reset, use MSN Money's Mortgage Calculator to see if a reduced interest rate could keep you in your home.
You may have trouble getting your lender's attention. That's particularly true if you haven't already fallen behind on your payments, something you should try to avoid, because late payments can kill your credit scores.
Video on MSN Money
Hope for housing
Fannie Mae and Freddie Mac unveil plans to help homeowners avoid foreclosure.
In that situation, consider getting an attorney's help, said lawyer and mortgage broker Alan Jablonski, author of "Successfully Navigating the Mortgage Maze" and operator of the AJ Consumer Watch Web site.
Unlike some of those who advertise loan modification help, attorneys have a fiduciary duty to put their clients first (and clients have many remedies, including lawsuits and disciplinary complaints to the bar association, if the attorney fails to fulfill those duties).
That's a far cry from many of the fly-by-night outfits that demand big upfront fees and then fail to act, or disappear with the money.
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
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If you decide to hire an attorney, you'll have to find one on your own, Jablonski said; anyone legitimate has a full workload and isn't proactively contacting potential clients.
Your state's bar association may offer referrals. In any case, you'll need to confirm that the attorney is in good standing with the bar, and that he or she has experience with loan modification.
Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published Nov. 17, 2008
There was a time when lenders didn't want to work with you if you couldn't pay. Now they want to avoid foreclosure, lawsuits or repossession almost as much as you do.
advertisement
http://articles.moneycentral.msn.co...ting/why-lenders-might-forgive-your-debt.aspx
By Liz Pulliam Weston
People who overdosed on debt in recent years learned the paradox of easy credit: While lenders were willing to let you borrow copious amounts, they weren't particularly interested in helping you work out a solution if you fell behind on repayment.
Lenders often found it easier and cheaper to write off delinquent accounts as bad debt than work with you on a repayment plan. After all, they could get a tax break on the loss and then get on with the profitable business of extending credit to the next guy.
Lately, however, lender perspectives have changed. Soaring default rates, a weakening economy and the credit crunch have rewritten the rules.
Credit card lenders charged off 5.47% of the total amounts owed on cards as bad debt in the second quarter, according to the Federal Reserve. A year ago, the charge-off rate was 3.85%.
Consumer bankruptcy filings in October topped 100,000, a 40% increase from a year earlier and the highest level since the federal bankruptcy reform law took effect in October 2005, according to the American Bankruptcy Institute.
More than 2.2 million homeowners are more than 60 days late on their mortgage payments, according to the Hope Now alliance of lenders and credit counselors, and one in six homeowners owes more on a home than it's worth.
With home prices plummeting, every foreclosure now represents a loss of 44% of the original loan amount, up from 29% a year ago, according to data from LPS Applied Analytics.
That's why lenders are now looking for ways to keep people paying their bills, even if it means forgiving some of their debt. Now the paradox is that in order to qualify, you must be struggling, but not so much that a change in terms wouldn't help you.
How the new programs work
The most sweeping new program was announced Nov. 11. Freddie Mac and Fannie Mae, the government agencies that guarantee 31 million U.S. mortgages, will begin paying the mortgage service companies that maintain the loans $800 for every loan they modify. Borrowers would get help in several ways: Interest rates would be reduced so that borrowers would not pay more than 38% of their gross income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free. (You can find more details here.)
The same day, Citigroup announced it would halt foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments. Ultimately, it plans to modify the repayment terms on up to $20 billion in loans.
More from MSN Money
Bank, feds offer new mortgage aid
Feel like a sucker? You're not alone
Your 5-minute guide to bankruptcy
7 tips for surviving a financial panic
Would a lower rate help? Compare loans
Late last month, JPMorgan Chase expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 homeowners. The modifications were to include reducing amounts owed or the loans' interest rates, and replacing so-called "pay option" loans that typically resulted in mortgages growing over time.
Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial as part of an $8.4 billion legal settlement reached with 11 states in early October.
Loan forgiveness is a key part of the Hope for Homeowners program. This is the foreclosure prevention program that Congress created as part of the $700 billion Economic and Housing Recovery Act of 2008. Lenders that want to participate typically must agree to reduce borrowers' principal to 90% of their homes' current value.
But wait, there's more
In late October, a coalition of lenders and consumer advocates asked banking regulators to approve a pilot program that would allow struggling borrowers to pay off, over time, less than they owe -- as much as 40% less. Under current rules, any repayment plan has to be for the full amount owed.
Though the Office of the Comptroller of the Currency rejected the first draft over how banks would book the resulting losses, backers of the plan say they're committed to finding a remedy for overtaxed borrowers that's short of bankruptcy -- which would likely mean the banks see no repayment at all.
In the first proposal, a joint project of the Financial Services Roundtable and the Consumer Federation of America, applicants would have been evaluated by certified credit counselors; those who couldn't pay off their debt under a regular debt management program would have been placed in one of four repayment plans that would reduce their principal by 10%, 20%, 30% or 40%. Only consumers closest to bankruptcy could have qualified for the biggest reduction.
Video on MSN Money
Hope for housing
Fannie Mae and Freddie Mac unveil plans to help homeowners avoid foreclosure.
Travis Plunkett of the Consumer Federation of America said his group would continue to lobby regulators "to do everything they can, within bounds of the safety and soundness of the financial system, to help consumers," but that ultimately consumer advocates may have to turn to lawmakers for help.
"It may be Congress that has to step in, and I think there's a lot of interest there" in doing so, Plunkett said. "We've got a train wreck coming."
Student loans and car debt
Meanwhile, makers of student and auto loans haven't announced any new plans for forgiveness. In recent years, in fact, both groups made escaping their debt more difficult. But:
Certain borrowers can still get portions of their federal student loans forgiven through volunteer work, military service and teaching in low-income communities. And Congress passed a law in 2007 that wipes out federal student loan debt for people who work in certain jobs and who make 10 years of on-time payments. Plus:
Auto lenders are stepping up their education efforts to let troubled borrowers know they have alternatives if they fall behind on their car payments. According to credit bureau Experian, more than 500,000 borrowers are 30 days or more overdue on a car loan.
Yet fewer than half of consumers in a recent poll knew that auto financing companies often worked with troubled borrowers, said Eric Hoffman, spokesman for the Aware, an education group set up by auto dealers and lenders that commissioned the survey.
Auto lenders may be able to modify a loan to stretch payments over a longer period or allow borrowers to make up missing payments, Hoffman said.
"We tell people, 'Don't ignore the situation if you're having trouble,'" Hoffman said. "Get in contact with your lender and see if there's a way to work out a different payment plan."
The same advice holds true for student loans. You may be eligible for income-sensitive or graduated repayment plans or, if you're facing economic hardship, forbearance or deferment that would allow you to skip payments for up to three years.
More from MSN Money
Bank, feds offer new mortgage aid
Feel like a sucker? You're not alone
Your 5-minute guide to bankruptcy
7 tips for surviving a financial panic
Would a lower rate help? Compare loans
Here's what to do about other debt:
Credit cards. If you're already behind on your credit card payments, you shouldn't wait to see if you'll qualify for any loan forgiveness programs. Make two calls: one to a legitimate credit counselor and another to an experienced bankruptcy attorney. Between the two, you'll get the information you'll need to decide whether you should continue paying your debt or have it "forgiven" by the U.S. bankruptcy court.
Mortgages. Gather your paperwork -- your mortgage documents, last year's tax return and some recent pay stubs -- and call a HUD-approved housing counselor to evaluate your situation and your options. If you qualify for a loan modification program, the counselor can help you get through to your lender's loss mitigation department, which will evaluate your application.
A lender will want evidence that you're in trouble -- and assurances that any changes will keep the payments coming. Don't expect that it will immediately hack your loan balance to what the house is currently worth; it won't.
Your lender has only a few ways to help you: It can reduce your interest rate, defer payments, extend the length of the loan or forgive some part of your principal.
With your counselor's help, you should decide what solution you want before approaching the lender. If you have a temporary situation such as an illness that will be resolved soon, for example, ask for deferred payments. If your adjustable-rate mortgage is about to reset, use MSN Money's Mortgage Calculator to see if a reduced interest rate could keep you in your home.
You may have trouble getting your lender's attention. That's particularly true if you haven't already fallen behind on your payments, something you should try to avoid, because late payments can kill your credit scores.
Video on MSN Money
Hope for housing
Fannie Mae and Freddie Mac unveil plans to help homeowners avoid foreclosure.
In that situation, consider getting an attorney's help, said lawyer and mortgage broker Alan Jablonski, author of "Successfully Navigating the Mortgage Maze" and operator of the AJ Consumer Watch Web site.
Unlike some of those who advertise loan modification help, attorneys have a fiduciary duty to put their clients first (and clients have many remedies, including lawsuits and disciplinary complaints to the bar association, if the attorney fails to fulfill those duties).
That's a far cry from many of the fly-by-night outfits that demand big upfront fees and then fail to act, or disappear with the money.
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
Preferred format:HTMLPlain Text
Learn more about newsletters
If you decide to hire an attorney, you'll have to find one on your own, Jablonski said; anyone legitimate has a full workload and isn't proactively contacting potential clients.
Your state's bar association may offer referrals. In any case, you'll need to confirm that the attorney is in good standing with the bar, and that he or she has experience with loan modification.
Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published Nov. 17, 2008
