Foreclosure Hurts Both Homeowner & Lender

The number of foreclosures continues to rise, causing severe problems for lenders. In January 2008 about 4.15% of all mortgages were at least 30 days past due. Financial stress and political pressure has led some lenders to be more accommodating. According to a March 2008 report by the Hope Now Alliance, lenders have helped work out over a million mortgage loans in the six months ending January 31, 2008. Loan modifications increased 16% in January compared to December 2007.

Most of the workouts favored by lenders involved repayment plans. 73% of lenders set up plans that allow homeowners to either catch up on missed payments or have those payments added to the principal of the loan.

The balance of the workouts were loan modifications. The lender either extended the length of the loan, forgave a portion of the principal or lowered the interest rate.

Advantages of a Foreclosure Workout

There are significant advantages to a workout for both the lender and the borrower. Although lenders in the past have typically been hard-nosed about working with a borrower, they are beginning to realize that they need to work with them to avoid collecting a huge inventory of foreclosed homes. These are known as "REO's."

Foreclosures are expensive and time-consuming. Once a property forecloses the bank must sell it. If the bank buys the house at auction in poor condition, it may need major repairs before bringing it back on the market.

The lender cannot ignore a property that it takes back by foreclosure. It must maintain and insure the house. Homeowner's dues, property taxes, and utilities must be paid.

It takes months from the Notice of Default to acquire the property and it may take much longer to sell.

Generally, the lender wants to make the best of a bad situation. Their goal is to recover the principal and accrued interest and expense, even if it takes longer than originally agreed.

The lender wants to structure the workout so the loan does not go into default again. Also, the lender wants to avoid your going into bankruptcy.