How to deal with the sub-prime mortgage mess

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What to do if you have a sub-prime mortgage you can't handle? Default, walk away, sell at a loss? Here's everything you need to know from author and CNN personal finance editor Gerri Willis.

How to deal with the sub-prime mortgage mess

Every day brings news of possible foreclosures in the housing market. What causes mortgage meltdown and how does it affect homeowners who want to sell their homes or readjust their mortgages? Here’s some advice to help us understand the current mortgage crisis:

How bad is the housing crisis?

  • It’s pretty tough out there right now, especially if you have to sell your house. This housing mess will most likely last the rest of this year until the beginning of 2009.
  • Eventually, prices will stabilize and they won’t go up or down. However, it will still be tough to sell houses.


What is this subprime mortgage mess and how did we get into it?

  • At the height of the real estate boom a lot of people bought houses that they couldn’t afford and they didn’t get the best terms when they agreed to their mortgages. These are called ‘subprime’ mortgages.
  • Unfortunately, in some cases because they couldn’t make their mortgage payments their homes were taken away from them. This started a domino effect and the real estate crisis got worse.


If you are behind in your mortgage payments what can you do to avoid foreclosure?

  • The first thing you should do is to reach out to your lender. It is one of the most important things to do, and it’s one of the things people almost never do.
  • You have to ask your lender for help. You can ask that your loan be modified or changed so that you can afford your loan.
  • But it’s not always easy to get your lender to talk to you. If that’s happening to you, reach out to the Department of Housing and Urban Development (HUD) (www.hud.gov). They have counselors in cities all over the US who can help you find the best way to get a better mortgage.
  • If you are unable to get a better mortgage you should try to find a buyer. You can even do something called a short sale. A short sale is when a buyer purchases your home for less than you owe the bank and the bank has to sign off on it. Times are so troubled right now that a lot of lenders are willing to do this.


If you have an adjustable rate mortgage can you easily switch to a fixed rate mortgage?

  • Not necessarily. Some of these subprime loan holders have fees that kick in if you try to change your existing loan requirements.
  • If you are in a subprime loan you want to speak to your lender to try to get out of your loan.


What is the downside of just walking away from your home?

  • By doing that you are ruining your credit history for 5 to 7 years.
  • There is one other thing you might do instead of that and it’s called a ‘deed in lieu of foreclosure.’ Basically you mail your house keys to your lender. It’s called jingle mail. By doing this you are giving up your house and your equity, you are turning your house over to the bank.
  • Doing this clearly tells the bank that you can’t make your payments. Your credit score will get hurt if you do this but at least you’re not just running away from a problem.
Transcript

ROBYN: I’m Robyn Moreno for howdini.com. Every day brings more news of homeowners facing possible foreclosures. What causes mortgage meltdown, and how does it affect homeowners who either want to sell their home or readjust their mortgages? Joining me to help break down the current housing crisis is Gerri Willis, CNN’s personal Finance Editor and author of Home Rich: Increasing the Value of the Biggest Investment of Your Life. Welcome, Gerri.

GERRI:  Hi Robyn.

ROBYN: What is this sub-prime mortgage mess anyway, and how did we even get into it?

GERRI:  And the height of the boom, a lot of people got mortgages that they couldn’t afford, sub-prime mortgages. These were mortgages given to people who couldn’t afford the best terms. Unfortunately, they couldn’t afford their houses, and their houses were taken away from them. This started a domino affect, and we saw the real estate crisis deepen and get worse, and now we’ve got a situation where prices are falling.

ROBYN: If someone is behind on their mortgage payments, what can they do to avoid foreclosure?

GERRI: Well job number one is to pick up your telephone and call your lender. It’s the most important thing to do, and it’s one of those things that people never do. You have to ask for help, forbearance, you can get your loan modified or changed so that you might be able to afford that loan. If that doesn’t work, you want to find a buyer. And you get even do something called a short sale. That’s where the buyer of your home pays less than you owe, and the bank has to sign off on this. Times are so troubled right now, frankly, that a lot of lenders are willing to do this. So think about finding a buyer if you absolutely cannot afford this house on your own.

ROBYN: If someone had an adjustable rate mortgage, can they switch to a fixed rate mortgage?

GERRI:  Not necessarily. Some of these sub-prime loan holders, they have fees when they, when they try to change out of that loan, fees that result in thousands and thousands of dollars. So you want to make sure if you’re in one of these sub-prime loans that you’re speaking to your lender, that you’re getting help to try to get out of this loan.

ROBYN: So if I’m in, behind on my payments and I want to go ahead and call the lender, do you think they’re really going to be amenable to this?

GERRI:  It’s tough, you know, I have to tell you. We get complaints all the time from people who say, you know, look, my lender’s not picking up the telephone. You might call the Department of Housing and Urban Development. They have a website, hud.gov, they have counselors in cities and communities all over the country, and they can help you find out the best way to get a better mortgage.

ROBYN: Gerri, how bad is the housing crisis, really, and is it going to last?

GERRI: It’s pretty tough out there for people. If you have to sell right now, I mean my heart goes out to you. It’s a tough time. And it’ll probably last for, you know, several months, probably through the beginning of next year. Look, what’s going to happen is that prices will stabilize, they’re going to go into a period of time where they don’t go up, they don’t go down, and that’s going to last for a while. It’ll be tough to sell a house.

ROBYN: The worst-case scenario: what is the downside of just walking away?

GERRI: We’re seeing a lot of people do that right now, and unfortunately they’re ruining their credit history for five to seven years. That’s a real killer. There is one other thing you might try instead of that, and it’s called a deed in lieu of foreclosure. Basically what this means, is that you take your house keys, and you mail it take your lender, its called jingle mail. You’re giving up your house; you’re giving up your equity. You’re turning it over to the bank. If you decide that you want to do deed in lieu of foreclosure, at least you’re telling the bank, you’re being up-front: I can’t make these payments, I’m giving you the house, I’m giving you my equity. Here is the investment. And at the very least, you’re being up-front about your intentions. Of course your credit score will get hurt, but at least you’re not just running away from a problem.

ROBYN: It’s a really, really tough market right now. Thanks so much for helping us try to figure this situation out.

GERRI: My pleasure.

ROBYN: Thanks, Gerri. I’m Robyn Moreno for howdini.com

meet theexpert
  • Gerri Willis

    Gerri Willis Author and Fox Financial Correspondent Gerri Willis is the host of The Willis Report, a primetime program on Fox Business Network. She's the author of two business books, “The Smart Money Guide to Real Estate Investing” and “Home Rich.” more about this expert »

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