What to do if you’re facing foreclosure

This week’s column is another departure from my normal Q&A format.

I’d like to try to help some homeowners who may be facing foreclosure because of a mortgage loan program that they can’t afford.

You’ve probably seen the news about skyrocketing foreclosure rates across the country.

So far, Washington’s foreclosure rate is far below the national average, but the number of foreclosures is expected to increase during the next six to 12 months.

The reason for this sudden increase in foreclosures is that many homeowners were lured into bad loan programs by unscrupulous mortgage loan officers. In some cases, loan officers used “stated income” loan programs to put borrowers into loans that they could not qualify for if they told the truth about how much they really earned. For example, a man recently called my mortgage firm and asked us to help him refinance his loan. He makes only $3,600 per month but the loan officer at his previous mortgage firm used a stated income loan and wrote down that the man earned $8,000 per month. Now he is stuck with a loan payment that eats up his entire monthly salary.

You might say that the man should have known that he didn’t really make $8,000 and therefore he should not have signed the loan papers. I agree with you. But the loan officer who put him into that loan committed mortgage fraud, and even though the buyer went along with it, the loan officer is the professional who should have known better.

Unfortunately, there is nothing we can do to help a homeowner in that situation because he is in a home that he simply can’t afford, even under the best loan program available.

His best course of action is to sell the house before his credit is damaged any further.

In other cases, borrowers got high-interest-rate loans because they had poor credit and many of those loans are set to adjust to even higher interest rates over the next few months. Typically, those kinds of loans had interest rates that were fixed for the first two years and the borrowers may be shocked to see how high their rates jump up at the end of the two-year introductory rate period. Many subprime borrowers can’t even afford their payments under their introductory rate.

Even many borrowers with good credit got sucked into those 1 percent interest ARM loan programs and now they realize that their interest rate has jumped dramatically and their loan balance is getting bigger every month instead of smaller if they continue to make the minimum payment — but they can’t afford to make a payment big enough to cover the interest expense.

If you find yourself in any of these situations, or something similar, don’t wait until you are behind in your mortgage payments to seek help.

The state Department of Financial Institutions has set up a help line for consumers at 877-746-4334, and it has helpful information on its Web site: www.dfiwa. gov/consumers/education/ foreclosure/prevent_ foreclosure.htm.

The key is to contact your lender early. Many lenders are willing to work with you if you contact them before you go into foreclosure. They would rather take a small loss by adjusting your loan terms instead of taking a big loss by going through the expense of a foreclosure. For example, Countrywide Mortgage has set aside $16 billion to assist borrowers who need help with their mortgage payments.

If your loan has been sold to a different lender since you closed, contact the firm that is now servicing your loan. That is the firm to whom you make your mortgage payment every month.

If you need help, contact the counseling agencies recommended on the Department of Financial Institutions Web site. They can help you manage your debt and work with the lenders on your behalf.

Also, if you were a victim of a loan officer who mislead you or deliberately overstated your income on a loan application, report that loan officer to the Department of Financial Institutions. The agency is going after loan officers who committed mortgage fraud and/or engaged in predatory lending. While reporting them won’t help get you out of a foreclosure situation, at least you can prevent somebody else from falling into the same trap.

Again, I cannot emphasize this enough: If you are struggling to make your mortgage payments and you think you may not be able to avoid a delinquent payment (30 or more days late), please contact your lender immediately. Explain your situation and ask what they can do to help you out. That is much better than trying to avoid the situation until your house is eventually sold at auction on the courthouse steps in a trustee sale.

Also, be sure to ask the lender how their payment assistance plan will affect your credit rating. Many people are surprised to find that their credit report continues to show mortgage late payments several months after they have worked out an adjusted payment plan with their lender. Don’t automatically assume that your credit will be protected by a payment assistance plan.

Mail questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.