Some homeowners who are still paying their adjustable-rate mortgages on time -- but are struggling to do so and are worried about keeping up when the payments adjust even higher -- are finding that their mortgage company won't help them until they actually fall behind.
In short, the time-honored advice to take action before you get in trouble, and contact your lender to work out a solution, doesn't appear to hold true in these days of soaring foreclosures and tighter credit. Lenders aren't required to bail out homeowners when their mortgage rates and payments adjust upward, even though they've been under enormous pressure from lawmakers and consumer groups to do so.
In December, President Bush called on lenders to relax their rules and negotiate lower interest rates to help homeowners avoid foreclosures. Critics said Bush's plan was both limited in scope and voluntary, and said many homeowners stuck in a bad situation wouldn't get the help they needed. It appears the critics were right.
"We're seeing a lot of homeowners who are doing exactly what the banks are asking them to do and being told there's no help for them," said Pava Leyrer, a mortgage broker in Grandville and former president of the Michigan Mortgage Brokers Association. "They're being told that because they haven't missed a payment yet, the bank can't do anything."
The predicament has consumers in a Catch-22: They're being told that even with spotless credit, they can't get help. Instead, they must miss payments, and even then assistance from the lender isn't a certainty.
Lenders maintain they're doing what they can for struggling homeowners -- such as delaying an interest rate adjustment or lowering the interest rate cap on a homeowner's ARM. They also look at each person's situation to determine if they can refinance an ARM to a fixed-rate loan.
But they admit that today's tight credit market is making it more difficult to help.
"The rules for writing mortgages have changed," said Robert Rahal, president of Shore Mortgage in Birmingham, which sells only federally backed home loans. "In many cases, lenders are having to cut back on who they offer new loans for, and the refinance sector is feeling the pinch as well."
Two jobs just to keep up
Dan Przewlocki of Memphis is one homeowner caught in that pinch.
Przewlocki purchased his four-bedroom, three-bath colonial on 15 rural acres in Saint Clair County for $310,000 three years ago with an adjustable-rate mortgage through Washington Mutual, the Seattle-based bank and mortgage lender.
Przewlocki, a plant maintenance worker and National Guard reservist, purchased the home using a product called an Option ARM. That type of loan, geared toward those with fluctuating paychecks, establishes a low monthly payment -- that usually covers only interest -- and gives a consumer the option to pay more during months when income is higher.
"I figured it would be a good plan for me," Przewlocki said. "I wanted to pay more while I was working my regular job and less when I'm on active duty, since my pay is less."
For the first year, his ultra-low teaser rate of 2 percent meant payments were affordable, and Przewlocki said he was easily able to pay down the principal on his loan. He was expecting his first adjustment -- which boosted his interest rate to 6.5 percent -- but said a more recent increase to 7.625 percent has made his home nearly unaffordable.
"Things are extremely tight," Przewlocki said. "I'm working a second temp job just to pay the interest down."
Przewlocki said he knew in October that keeping up with the mortgage would be a problem. So he contacted Washington Mutual in hopes of either refinancing to a fixed-rate loan or modifying the terms of his current ARM.
And when he received a letter from the lender in November touting mortgage refinancing as a way to deal with higher adjusting payments on his loan, Przewlocki figured the company would be willing to help.
Just seven days later, Przewlocki received a letter saying he couldn't refinance his loan. When he called to ask why, he was told that because he hadn't yet missed a payment, there wasn't anything the company could do.
"Essentially, I'll have to ruin my credit before they'll modify my loan," Przewlocki said. "I was told blatantly on the phone, 'Skip a payment and maybe we can do something.' But I've got perfect credit. I shouldn't have to do that."
Multiple Washington Mutual spokesmen and women declined to comment on Przewlocki's case, citing company policy that bars them from making statements about specific consumer accounts.
But company executives said they're doing all they can to help troubled homeowners. Initiatives have included setting up a hotline for those concerned about making their mortgage payments, halting the sale of risky subprime mortgages that are more likely to default and committing $2 billion toward helping subprime borrowers refinance into more stable loans.
"Our firm belief is that early intervention combined with expanded options is instrumental to helping our customers find ways they can overcome financial obstacles to keep their home," said David Schneider, president of Washington Mutual's home loans division, in an early December statement to investors.
"We view foreclosure as a last resort and encourage our customers to contact us as soon as they anticipate difficulty in making payments on their mortgage so that we can discuss their various options."
Credit counselors step in
Still, because of the credit crunch and tougher mortgage rules, lenders are finding it increasingly difficult to help homeowners, especially those who are upside down on their homes, which means they owe more on their loans than their home is worth. That's especially prevalent in markets such as Michigan where home prices have declined sharply.
The new tighter lending standards, prompted by the subprime mortgage meltdown, require homeowners to either have some equity in their home or come up with a down payment before they can refinance from an ARM to a fixed-rate loan.
Natasha Swoish, manager of bankruptcy counseling and education services at GreenPath Inc., a Farmington Hills-based credit counseling service, said consumer trouble with lenders has caused a growing number of borrowers to seek help through outside agencies like hers.
"Homeowners are having to look at a number of different options," Swoish said. "In many cases, there are ways to work with lenders but they are working with many more people needing help these days."
Swoish advises homeowners to call a consumer credit counseling agency or other financial adviser that may be able to mediate between a borrower and lender.
Crisis squeezes lenders too
Business considerations also limit lenders' ability to provide philanthropic loan modifications, said Rahal, the Shore Mortgage president.
Modifying the terms of a loan to include a too-low interest rate could cause the bank to actually lose money on the mortgage, he said, and that wouldn't make the bank's investors very happy.
"In many cases, these loans are producing at most a razor-thin margin for the lender," Rahal said. "For lenders that are already on the edge, every drop in an interest rate for a loan can be a step closer to death."
In addition, many home mortgages are bundled and sold to investors, who expect a certain amount of return for the risk of carrying the loans. Banks working with such investors try to avoid lowering interest rates that could make the mortgages more difficult to sell.
Still, lenders are trying to work with the flood of customers trying to refinance, said Mike Kruczek, chief lending officer at Dearborn Federal Credit Union. "We're seeing a lot of people approaching us worried over their home loans," Kruczek said. "In most cases, there's a solution."
Countrywide Financial, a large national lender that has been at the center of the subprime market meltdown, said it has made significant strides in helping troubled mortgage payers. In November, it said it modified the terms of 12,565 home loans and worked out other foreclosure avoidance measures with another 2,000 homeowners.
Upside down, at a dead end
Getting help can become even more convoluted when a homeowner's lender goes under or is sold, as is the case for Donnell and Heather Freeman of Southfield.
The Freemans are barely making their $2,600-a-month mortgage payment. They purchased their four-bedroom, three-bath colonial with a two-car garage two years ago for $190,000 with a mortgage from American Home Mortgage, which has since entered bankruptcy.
Heather Freeman, who works as a customer service representative for DTE Energy, said she and her husband have been scrounging for overtime at work to make their house payment, which has more than doubled in less than two years under the terms of their ARM.
They tried contacting American Home Mortgage in December to modify the terms of their loan, but because the company is transitioning to new ownership, the Freemans were told they would have to look for help elsewhere.
Because the value of their home is only about $165,000, according to a recent assessment, they would need to pay thousands of dollars up front, money they don't have, for a more favorable mortgage.
"There's help being offered everywhere, it seems, but not for me in my situation," Heather Freeman said. "I have top tier credit, and I want to stay in my house. I shouldn't have to throw one away for the other."
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