By Ben Whitfield
The good news is that homeownership among minority households is on the rise. As of 2002, 47.1% of all African American households owned their home. This represents growth of 12.14% over the previous 15 years. 47.2% of all Hispanic households owned their home as of 2002. People understand that owning their
home is a good thing.
A recent study by Consumer Federation of America concluded that home equity now accounts for 42% of the wealth in all American households. Closer analysis of this data reveals exactly how important this is for minority households.
Home Equity as a Share of Household Wealth
All households 42%
Low Income* 80%
Moderate Income* 60%
African American 52%
Hispanic 63%
Consumer Federation of America – December 16th, 2003
* Low-income households are the one-fifth with the lowest incomes. Moderate-income households are the next fifth with the lowest incomes.
The news gets even better. Based upon 2001 federal data, even then median household equity stood at well over $70,000. According to a report issued by The Federal Home Loan Mortgage Bank (a/k/a Freddie Mac), from 2000 to 2003, aggregate home equity in the United States increased by two trillion dollars. That’s trillion with a T!
Put simply, more people own homes. The homes are more valuable, and more wealth is being created via homeownership. These are good things. However, all too often many families loose their home when they fall behind with their mortgage payments. If homeownership is the American dream, then foreclosure is a family’s nightmare. Homeowners almost always use mortgage financing to purchase their home. Mortgages are generally paid off in 15 to 30 year periods. A lot can happen in 15 to 30 years. "My spouse and I have separated/divorced, and I can’t make ends meet." "I am sick and can’t work." "I’m injured and can’t work." "I lost my job." "My spouse is serving in Iraq." "I have relatives overseas who were affected by a natural disaster; I have to send them money." "I ran out of savings." "My business is failing." "I’m hospitalized and have no health insurance." These nine situations devastate families. Practically every household will become acquainted with one or more of "The Dreaded 9" before their mortgage is paid off.
Much has been done to help potential homebuyers purchase a house. Unfortunately
very little has been done to help homeowners save a house. Falling behind on mortgage payments is always the result of another crisis. Foreclosure is a crisis caused by a crisis. No one is intentionally delinquent with his or her mortgage payments. If money is "tight" you pay your credit cards late, or delay the utility bill. Maybe you hold off on your car payment and park in the garage so it cannot be repossessed. We do what we have to, but in most cases people do not let the mortgage default unless there is some problem in their life that is so significant they just cannot make the payment. Inevitably, any one of "The Dreaded 9" can constitute such a crisis. Already in a fragile state of mind, many people do not actively seek help when they are behind on their mortgage. We suffer in silence.
What should you do? First, don’t panic. I believe it was Voltaire who said, "No problem can withstand an assault of sustained thinking." There are certain steps that families can take to save their home. Once you fall several months behind, the bank will stop accepting your payments unless you have all of the arrears. Although the bank may not accept your payments you must put away money every month for your mortgage. Put something aside even if you do not have enough for an entire mortgage payment. Remember, just because your bank stops accepting your payments does not mean that your mortgage problems are over! I advise people to purchase a money order each month; the funds will be out of your account and there’s less of a temptation to spend the money. Sooner or later your bank will contact you, when they do, you will be in a much stronger position to negotiate if you have some cash. Furthermore, having put money aside will demonstrate to your bank that you have not forgotten about your obligation.
Contact your attorney as soon as you receive any written notice from your bank stating that you are delinquent. If you do not have an attorney, get one. If you cannot afford an attorney, find the money. This is a priority.
Have your attorney contact the bank. Bank officials understand that before you loose your home, your attorney will advise you to file bankruptcy. Although you may have no intention of filing for bankruptcy, the very threat of doing so in many situations works to your benefit. You are much more likely to receive an acceptable forbearance plan if the bank knows that the threat of bankruptcy is real.
Bankruptcy buys time. You are given up to 60 months (five years) to catch up on your arrears. At the same time you must continue to make your regular payments. For example, assume you are $30,000 behind on your mortgage, and your regular monthly payments are $1,000 per month. If your bankruptcy case were successfully confirmed, during the five-year period you would make two payments each month. The combined total of the two payments would be approximately $1,500. The regular monthly payment of $1,000 will continue to be made directly to the bank. A second payment of roughly $500 ($30,000 arrears DIVIDED BY 60 months) will be made to the bankruptcy trustee. Trustee and legal fees will also be part of this payment. They are relatively small though.
Banks do not want to wait five years for their money. Once an attorney is involved your banker understands that the possibility of a 60-month bankruptcy payout is very, very real. Given this reality banks are far more likely to negotiate an acceptable forbearance plan. Forbearance plans allow delinquent borrowers a period of time to catch up. Many homeowners prefer this option rather than filing for bankruptcy.
Another reason to work with an attorney is to protect you from the myriad of bad deals and scam artists that will approach you. Banks must go to court and officially file a written motion to begin foreclosure cases. Court records are available to the public. This announces to the entire world that you are behind on your mortgage and possibly in a desperate situation. You will receive many letters and proposals. I am aware of some cases where people have come in person to delinquent homeowners’ houses to "pitch" their deals. Before you sign anything, or make any deal, have your attorney speak with whoever is making any proposal. Have your attorney review every document.
Many homeowners seek to refinance their mortgage when they are delinquent. The purpose of such a refinance is to have another bank issue a new loan. Proceeds from the new loan are used to pay off the loan that is in default. Refinancing a mortgage that is in default is often called a "bailout refinance." There are several benefits to these loans.
Bailout refinances allow homeowners to get a fresh start. Homeowners often have very bad feelings towards their existing bank once foreclosure proceedings are commenced. A new mortgage allows the homeowner to start over. Secondly, in certain cases, bailouts allow the borrower to "cash-out" (Get cash from their closing), as well as pay off the delinquent loan.
Historically it has been difficult for homeowners to get a new loan when their existing mortgage is in default. However, two market forces have made it substantially easier for borrowers to qualify for bailout loans. The most significant factor has been the rise in the value of homes. In many areas, houses have appreciated 40% or more in the past five to seven years. Bailout loans can be made for up to 70% of the current value of the home. The value of the home (the collateral) is so much greater than the new loan amount that some banks are comfortable making these loans. Lenders feel that even if you fall behind and they have to foreclose, they will get their money back.
The second market force that makes bailout loans appealing is they generally have higher interest rates than other investments available to banks. Banks are highly regulated. They are limited in what they can invest in. In addition to mortgages and other lending business, banks typically invest in very conservative instruments such as CDs and United States Treasury obligations. Presently six-month and one-year CDs are yielding 1.985% and 2.23% respectively. Five-year and ten year treasuries are only paying 3.7% and 4.2% respectively. Conversely, bailout interest rates are currently seldom less than 9.00%. These are risky loans. High-risk loans carry higher interest rates. This is considerably more attractive to banks than what they can make with alternative investments. Banks take the risk because the rewards are so attractive.
Homeowners should look at bailout loans as a stepping-stone out of their current problems. Bailout loans allow homeowners to save their home, reestablish credit, take cash out and avoid bankruptcy. They also allow the homeowners to avoid the awkwardness and embarrassment of having to depend on family or friends. After a year, assuming a good payment record, homeowners can refinance the bailout with a low interest rate loan.
Ben Whitfield, CFM, born and raised in Harlem, NY is a professor with the State University of New York. He is also the Senior Manager with eHome Credit Corp, a national mortgage bank. He can be reached at 516-213-2784, 516-909-1874 or bwhitfield@ehomecredit.com
