What Banks are Doing to Help Troubled Borrowers

The glut of foreclosures is behind us in most states, but there will always be some percentage of homeowners who struggle with their payments for any number of reasons. And many Americans are still underwater on their mortgages, owing more than their home is worth.  Foreclosures are disruptive and costly, and have put banks firmly in an industry – real estate – that they never intended to enter quite so deeply. If holding out for higher value isn’t an option, the homeowner can get help in several different packages.

Loans designed to help borrowers with poor credit

Some borrowers caught up in the early stages of the housing bust have since regained financial health. Their credit scores, however, remain low and will for some time, as long as unpaid creditors, bankruptcies and foreclosures remain on their credit histories. For some, that means seven years (from bankruptcy discharge or foreclosure), ten years (some unpaid creditors and liens), or longer before their credit score climbs to the level lenders require. So even though they may be currently employed and have enough money saved for a down payment, they cannot obtain a mortgage. Advocates for these individuals are pushing for a “dignity” mortgage – a higher interest loan to borrowers with low credit scores or higher debt-to-income ratios.  Critics argue that banks would be unwise to offer any new variety of subprime mortgage at all, especially in light of the recent housing bust.

Quicker short sales, and more of them

Banks are far more likely to forgive a second mortgage and approve a short sale than to modify a primary mortgage. Critics point out that this “loophole” allows banks to show on paper that they’ve fulfilled their obligation to help troubled borrowers, but the homeowners are forced out nonetheless.

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Even so, short sales, which used to be a rarity, are now quite common, accounting for over 10 percent of all real estate transactions in late 2012; they offer a welcome exit from an unaffordable loan for many borrowers.

Short sales generate more revenue, on average, than foreclosures. And a short sale does not damage the borrower’s credit score as much as a foreclosure does. So everyone benefits, to some extent.

Delayed foreclosures, loan modifications

For jumbo loan lenders, a foreclosure can result in huge losses. Some find it in their best interests to work with borrowers who need adjustments to their repayment plan or loan. Some lenders even offer cash incentives to a homeowner who will agree to a short sale. One couple was offered $30,000 cash to agree to short sell their $1 million home; they were 18 months behind on the mortgage. Although such offers can be made to owners of homes at all price levels, the losses are much greater on jumbo loans that foreclose, and therefore the offers can be far more generous and forthcoming to those borrowers.

Lenders offer job training

The most admirable help comes from Fifth Third Bancorp of Cincinnati, which provided professional job coaching services to nearly one thousand homeowners who fell behind in their payments. The lender paid a third-party training company to provide help on everything from resume writing to networking to interviewing. So far, none of the program’s participants have lost their home to foreclosure. Furthermore, about 40 percent of participants found employment within six months of starting the program. All participants report better spirits, higher confidence levels, and appreciation for the help.

Give a man a fish and he eats for the day. Teach a man to fish and he feeds himself for the rest of his life.

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