Meltdown 101: Mortgage help from banks, government

[November 12, 2008]  MOSCOW (AP) -- With more than 4 million homeowners behind on their mortgage payments, the government and major banks are scrambling to help at-risk borrowers avoid foreclosure.

What exactly have they done -- and can they do more?

For one thing, the government and the mortgage industry said Tuesday a new plan will allow lenders to alter delinquent loans more quickly. That follows Citigroup's announcement late Monday that it would expand its efforts to help its beleaguered borrowers. Other national banks have initiated similar programs.

But what else is on the table?

Here are some questions and answers about mortgage assistance:

Q: What is a foreclosure moratorium?

A: A foreclosure moratorium is when a lender holds off on starting a foreclosure or completing a foreclosure sale on a delinquent borrower, to give both parties time to rework the loan or set up a repayment plan.

Oftentimes, the lender sets conditions for a moratorium. They might require, for example, that the home be the borrower's primary residence and that the borrower have enough income to make affordable mortgage payments.

Q: What is a repayment plan?

A: When a lender works out a plan for a borrower to pay back missed payments, it's called a repayment plan, or forbearance. A lender can increase the monthly payment until the missed payments are paid off or add the missed payments to the total principal the borrower owes.

Q: Can a restructured mortgage include an interest rate reduction?

A: Yes -- to lower monthly payments, a lender might decrease the mortgage interest rate either permanently or temporarily.

Q: What is a principal reduction?

A: A principal reduction, or forgiveness, lowers the total principal amount the borrower owes on the mortgage. That, in turn, decreases the monthly payment.

Q: How can changing the length of the loan help a struggling borrower?

A: To lower payments without changing the interest rate, a lender can extend the time required to pay off the loan. For example, a lender might restructure a 30-year mortgage as a 40-year loan, shrinking the payments by stretching them over an extra 10 years.

Q: What is a short sale?

A: A short sale is when a lender allows a borrower to sell the home for less than what's owed on the mortgage, and accepts that amount as enough to satisfy the debt. For a borrower, a short sale is less detrimental on a credit report than a foreclosure, but it's still a hefty stain.

Q: What other methods could lenders be using to help at-risk borrowers?

A: Lenders and the government are using all the tools available to them to help struggling borrowers. However, many of the most far-reaching remedies weren't made available until it was too late for many homeowners. And the continued rapid decline in housing prices, the stalled credit markets and the weakening economy have only made matters worse for troubled borrowers.

Q: Why is it hard to rework a loan?

A: In the late 1980s, Wall Street started to slice up mortgages and repackage them into securities that were sold to investors. As a result, many different investors could end up owning pieces of the same mortgage.

Now many of these investors are reluctant to allow significant modifications of the loans they partly own -- like reducing the principal balance -- because they don't want to take a huge investment loss.

Deutsche Bank estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged into these sorts of investments.

Q: Who else can help borrowers?

A: Borrowers are encouraged to contact their lenders or mortgage servicers as soon as they think they may fall behind on a payment. The sooner contact is made, the easier it is to head off larger problems.

Homeowners can also contact a nonprofit housing or credit counseling service to help with lender negotiations. Reputable services can be found, state-by-state, on the Department of Housing and Urban Development's Web site, and the Homeownership Preservation Foundation has a 24/7 toll-free line: 888-995-HOPE (4673).

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On the Net:

Department of Housing and Urban Development:
http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm

[Associated Press; By J.W. ELPHINSTONE]

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