Back in April, I wrote "Six Steps to Avoiding Foreclosure" as a practical guide for homeowners who are having trouble meeting their mortgage payments.
The most important nugget of advice I gave in that column -- and something that not enough homeowners do -- is to take the initiative to call your lender as soon as you realize you have a problem.
The same advice holds true if you have an adjustable rate mortgage that's going to reset to a higher interest rate -- which in turn will raise your monthly mortgage payment.
Get Ready Now
More than a trillion dollars in adjustable rate mortgages are scheduled to reset this year. As a result, experts predict that foreclosures could double in 2007, and reach an even higher level in 2008.
With all this negative news, you have to wonder if you'll be affected. What are you doing right now to protect yourself? Are you simply waiting for something to happen? I hope not, because you need to be proactive if you have an adjustable rate mortgage.
For instance, have you called your lender to determine what your new monthly payment will be and when it will take effect? Do you have a mortgage that's currently 4.75 percent and headed to 7.5 percent when it adjusts? Do you have a clue as to when that adjustment will occur?
Contact Your Lender
As standard procedure, your bank or lender will probably send you a letter shortly before the new payment amount goes into effect. The problem is that by then your higher rate and payment will be ready to kick in.
You can't afford to wait for that letter -- you need to proactively contact your lender 120 to 180 days in advance and discuss what your options are. Can you refinance? If not, what solutions can your lender offer to allow you to handle the rate increase?
Many of you will see your home mortgage payment increase by as much as 50 percent in the next 18 months. If you can't handle this increase -- and many of you can't -- you need a plan now.
No Advance Notice
In my travels, I'm often asked, "Why don't lenders reach out earlier to borrowers -- especially the ones who'll see huge increases once their loans reset?"
The New York Times just ran an article revealing that some lenders are now being more proactive in reaching out to their borrowers than ever before.
That's great news, but the article also points out that not all servicers in the industry have the freedom to change the terms of a loan. What that means is they can't call you in advance to discuss your rate adjustment. In those cases, the borrower (that's you) needs to reach out to the lender.
Many Hands in the Pie
Many homeowners assume that their mortgage is a straightforward legal agreement held directly between themselves and their lender. In reality, it's more complex than that.
A mortgage contains terms that are influenced by a number of constituents -- the lender who made the loan, the servicer who manages the loan, the regulators who oversee it, and the investors who buy it. All these components of the mortgage market work together in order to extend a mortgage loan to you, the consumer.
Here's how the cycle works: You get a mortgage loan from a lender, and most lenders hold the loan for a short period before selling it. The sale of your mortgage gives the lender the money it needs to give a loan to someone else who wants to buy a home.
The mortgage market in the United States has worked this way for decades -- very successfully, I might add. It's why millions of people all over the country can borrow money to buy a home.
From Mortgage to Investment
Traditionally, mortgages have been one of the safest and most stable investments going, since so few homeowners default and a relatively low percentage of people pay off their loans in any given year.
For this reason, capital market investors -- usually Wall Street institutional investors or securities underwriters like Bear Sterns or UBS -- buy a large number of loans and then group them to back security bonds.
Big corporations invest in these bonds through their pensions, mutual fund investors buy the bonds for their bonds funds (which you and I then invest in through our 401(k) plans), and insurance firms buy the bonds to cover future insurance claims.
Rock the Boat
Why won't your lender call you "early" to prepare you for a rate hike? If you're showing no outward signs of being delinquent on your mortgage, the lender -- who's servicing your loan on behalf of the investors who loaned you the money to buy a house -- has to be sensitive to their desire for a stable investment.
So, depending on the product you have, the lender might not initiate a conversation with you if your loan payments have been coming in on time.
For this reason, you must do the initiating. You have to pay attention to your mortgage, interest rate, and the date it will adjust, and it's up to you to call early instead of waiting to be contacted.
A Solution on the Horizon
Given the recent uptick in delinquencies, investors, lenders, regulators, and legislators are discussing proactive solutions for consumers who need help. That'll take some time, since they have to figure out a method of relief that doesn't disrupt a complex financial system that supports both a healthy exchange of investment capital and homeownership -- the key driver of the American economy.
The brutal truth is that you don't have enough time to wait for their solution. You have to take matters into your own hands. So if you have an adjustable rate mortgage, take out your loan documents today. Call your lender and have them calculate your adjusted monthly payment. Finally, ask about your refinancing options.
The same advice holds true for anyone having trouble making their mortgage payments -- call your lender immediately. It's a simple approach to a not-so-simple set of circumstances.
Ironically, June is National Homeownership Month, and my advice to all the Automatic Millionaire homeowners out there is to stay the course during challenging times. Be smart, responsible, and proactive. Your home is probably the best investment you'll make in your lifetime, so protect it by paying attention to your mortgage and how the financing works. The more you know, the more you can do.
No comments:
Post a Comment