A Congressional proposal to give bankruptcy judges authority to modify mortgages has died. Senate Democrats withdrew the proposal April 3 in face of strong opposition from Republicans and the banking industry.
But troubled homeowners still have the option of asking their lenders to reduce their mortgage payments voluntarily, and many lenders will say “yes.”
The fact is, the bankruptcy provision, approved in the House and supported by the Obama administration, would have thrown a life preserver to homeowners who, in many cases, were in such deep trouble they were going to drown anyway.
Still, if you are in bankruptcy, or fear you’re headed there, it could pay to talk to your mortgage lender. Many are agreeing to modify loan terms, feeling they’ll lose less by accepting lower payments than by foreclosing and trying to sell a home in today’s depressed market. As a rule of thumb, lenders lose half of what they are owed when they push a home into foreclosure, and these days the damage is often even worse.
To get the most receptive ear, contact the lender before the situation gets so bad it looks like nothing can be done, or before you have fallen months behind in payments and seem out of control.
To start negotiations, contact the servicing company, which is the firm to which you send your monthly payments. You should be able to find contact information on your payment coupons or other loan documents. Be persistent, and ask to speak to people higher up if lower-level folks say “no.”
Many lenders, like Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM) and Citigroup (Stock Quote: C) have set up programs for helping troubled borrowers, and you can look for guidance on their web sites. But even those that don’t have a formal process may be willing to negotiate. It can’t hurt to ask.
First, assemble the evidence that you’re really in trouble – proof you’ve lost a job, for instance, or that interest-rate resets have pushed your payments higher than you can afford.
If your mortgage payments come to more than 38 percent of your gross monthly income, you may be deemed troubled enough for help. The Obama Administration’s Making Home Affordable program, for instance, aims to cut payments to no more than 31 percent of a borrower’s income. To see if you qualify, check out our previous stories on refinancing and loan modification options.
The best ways to shrink monthly payments are to permanently cut the interest rate or principal, the amount you owe. Alternatives, like temporary rate cuts or postponing payments until later, are less desirable because they can saddle you with even bigger payments after the grace period ends. But anything that will save your home is worth considering.
Then look at the Mortgage Loan calculator to see how changing your interest rate, loan term or mortgage amount would affect your payments.