An explosion over the past few years in adjustable rate mortgages (ARMS) and interest-only mortgages has recently led to a growing number of foreclosures and borrowers at risk. This phenomenon often corresponds to an upward adjustment in the interest rate or the payment amount that the borrower is not equipped to handle. Some borrowers are lucky enough to refinance, but if the home is no longer worth the purchase price, those homeowners often tumble into foreclosure.

Lenders and regulators have reacted: Lending standards are tightening, which may make it difficult for many potential home buyers to find financing and for borrowers at risk to find refinancing. Loans with no or minimal down payments and small monthly payments up front — many of which were granted with minimal to no documentation of income or assets in the past few years — are becoming rare. Home buyers with damaged or thin credit histories may have to postpone their plans until they can save money for a down payment and build better credit.

Facing foreclosure 

If approached by a consumer in trouble with his or her mortgage loan, urge them to immediately contact their lender’s loss mitigation department or seek a qualified credit counselor or attorney to assist. Many lenders will refinance or try to work out some other solution if the consumer’s financial situation is salvageable.

Warn consumers about offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a quitclaim deed and up-front fees. The FBI warns that these companies profit from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim loses the property and the up-front fees.

Refinancing rules changing 

Loan officers taking applications will now demand income and asset verifications and proof, not always the case over the past few years. Without evidence of real income, some borrowers will be unable to refinance. If they can’t resell, they may lose the fight and succumb to foreclosure.

National Association of REALTORS^® President Pat Vredevoogd Combs has strongly urged the Department of Housing and Urban Development to change Federal Housing Administration (FHA) rules and waive the existing requirement that a homeowner’s mortgage be “current” in order to refinance into an FHA loan product. This would permit a significant subset of borrowers behind in their payments and facing the prospect of foreclosure to safely refinance into an FHA mortgage.

How can REALTORS® protect new buyers from bad mortgages? 

REALTORS^® can try to protect their clients and customers from risky loans and assist those in jeopardy with their current loans by guiding them to the proper counselors for financial and legal assistance and by providing information — like the “Consumer Tips for Finding a Good Mortgage” on page 10.

Buyers who are educated about the basics of consumer credit, mortgage loans and homeownership are less likely to be tricked by unscrupulous lenders. Make sure they know there are alternative lenders and mortgages if they shop around.

• Help buyers find out how to obtain their credit score and a copy of their credit report. For information about obtaining credit reports and credit scores, see the Mortgage Loan Assistance REALTOR^® Resource page or the Fair Isaac site at www.myfico.com.
• Insist that buyers be pre-qualified before they hunt for homes so that they know what they can afford and do not overextend themselves.
• Encourage first-time home buyers and home buyers with no credit history or a marginal credit standing to attend credit counseling or home buyer counseling classes. Lists of counseling services appear in the Consumer Resources section of the WRA Mortgage Loan Assistance REALTOR^® Resource page at www.wra.org/mortgages.
• Use the Mortgage Loan Consumer Handout and the Predatory Lending Consumer Handout that appear in the Consumer Resources section of the WRA Mortgage Loan Assistance REALTOR^® Resource page at www.wra.org/mortgages. REALTORS^® can copy these pages back-to-back on one sheet of paper and distribute them to the buyers they work with.