Home Loans: Tips for avoiding the default fallout

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Since the beginning of 2007, the financial press has been dominated by reports of falling home prices and the threat of a financial market downturn resulting from the practices of predatory lenders in the sub-prime mortgage sector, which are higher interest rate loans made to borrowers with poor or nonexistent credit. The loans have created the opportunity for millions of families to obtain homes that they normally could not afford. Now, according to a study by mortgage-risk data provider First American CoreLogic, the $1.28 trillion in outstanding sub-prime loans is expected to generate $326 billion in foreclosures over the next three years. To date, sub-prime defaults have forced 30 lenders out of business, with more expected to fail in the near term. Whether you have a sub-prime mortgage or not, you may still be impacted by the fallout from sub-prime lending activity.
Here are four tips to keep you from being a mortgage victim.

Know your loan. According to a recent survey by Gfk Roper, a global research consulting firm, a stunning 34 percent of home owners have no idea what type of mortgage they have. Because of the complexity of lending products and the desire to quickly become a home owner, many borrowers simply take the loan that their broker says is best, without doing much research. “Borrowers have few benchmarks against which they can judge loan products. They don’t know how much they should be paying on loans,” says Anthony LaGuglia, a managing director of advisory firm J.J. Burns & Co.

Take time to review your loan documents and be clear about the type of mortgage you have and all its provisions. If you don’t have an adjustable rate mortgage (ARM) or sub-prime loan, don’t assume this exercise does not apply to you. It is important to understand every aspect of your mortgage regardless of the type of mortgage you have. If you do have an ARM or a loan with an initial “teaser” rate, be clear on the adjustment dates, the amount of payment adjustments and any other terms. Call your lender and have them explain your loan provisions to you. It is their duty to tell you—and your right to know!

Know your lender. The last thing you need in your life is to learn that your mortgage lender has gone out of business. While it will not cause you to lose your home, it may cause you additional hassles. Call your lender today and ask them about their financial exposure to the sub-prime market and about their financial health in general. Again, this is information you have the right to know.

Set up a financial safety net. Whatever type of loan you have, you can still run into payment problems if you lose your job, become ill or have an accident. Now is the perfect time to put in place the financial safety net that you neglected to put in place last year. Your financial safety net should comprise nonretirement investments or savings, coupled with credit capacity in the form of home equity lines, unsecured bank lines of credit and emergency credit cards. A solid financial safety net should provide total lifestyle cost coverage for at least 12 months. Investments and savings alone should exceed 18 months of mortgage payments. If you do not have this safety net in place, immediately eliminate all nonessential spending and undertake an aggressive savings program until you have reached 18 months of mortgage payments. Contact your mortgage lender, bank and credit card provider and request the recommended credit facilities to complete your financial safety net.

Talk to your lender. If your mortgage payments are starting to overwhelm you, let your lender know that you foresee trouble paying and ask for help. If you let the lender know early, they likely will work with you because they do not want the loan to go into default. They may be willing to reduce or suspend payments for several months, temporarily reduce your interest rate, or work with you on a creative repayment schedule. Don’t be afraid to ask for help, but be sure to ask for it before you really need it.   

David Hinson is the founder of Wealth Management Network, www.wmnllc.com, in New York City. He may be reached at 646-375-2388, or by e-mail at dhinson@wmnllc.com.