What’s a delinquent borrower to do?
Among the stories dealing with subprime lending, many focus on the unhappy over-levered borrower,
No problem, we can carry all this debt
who finds him or herself unable to make current payments on a home mortgage. When that happens, what’s a borrower to do?
Here, based on the 31+ years I’ve been in this business, is what I tend to advise:
In other words, any advice below is utterly unreliable; don’t try this at home.
The organizing principle is one simple precept: be part of the solution. This includes concepts like:
· Be the property’s best steward. Maintain or repair it as if you’re going to own it long term. That’s your goal, so act like you mean it.
· Trade sweat equity for enforcement relief. The more you do the things a lender would want done if you were out of the picture, the less motivation the lender has to take you out of the picture.
· Report frequently and accurately. Lenders love information — even bad news is better than no news. When news is absent, a lender’s fears run amok.
1. Announce the problem — in writing. Don’t wait for the lender to come calling — once you know you’re going to miss a payment or two, tell your lender this.
You’ll be pleased to know I can’t pay my loan
You might think that calling attention to yourself invites trouble, but once you understand how a lender thinks [Yes, dear readers; post on this subject coming! -- Ed.], you’ll realize that stating your problem strengthens your hand. Lenders want timely loan payments; they don’t want uncertainty. They value information, and they have many borowers and accounts, so the ones who provide them good information, they tend to like.
As for the announcement, do it in writing. Writing is contemporaneous; it is permanent; it does not misremember. It proves you were forthright. When you are facing a later judge — in court or otherwise — you have proof of your intentions and good faith.
The value of writing
I am a strong believer in transacting official business by the Written Word. To make sure my name was not used loosely, I issued the following minute:
“Let it be very clearly understood that all directions emanating from me are made in writing, or should be immediately afterwards confirmed in writing, and that I do not accept any responsibility for matters relating to national defense on which I am alleged to have given decisions, unless they are recorded in writing.”
– Winston Churchill, Their Finest Hour, page 15
You taking this down, boy?
[One technical detail: avoid using the phrase "I am in default," which is a legal conclusion about your financial condition. A loan is typically not in default until the lender declares it is in default, and sometimes not even then; until that point, it's merely delinquent, in arrears, or non-performing. A better phrase is, "I'm behind on my mortgage payments," which is a factual statement about your account.]
2. Come clean on your financial resources. When queried about your circumstances, come clean.
Give accurate reports. To the extent you possibly can, do not sugar-coat or let your optimism run too far away from reality. Most of this information can be found online anyhow, and you already know you can’t pay the loan. Further, coming clean distinguishes you. Most people who can’t pay hide assets, fib about their situation, or at the very least hem and haw. Few things create more credibility than owning up to the situation — and credibility is one of your most precious assets.
“I have been advised that my credibility will enhance if I direct you to this chopped cherry tree.”
If the lender thinks you’re a skunk, into the foreclosure queue you go. If she thinks you’re honorable, you get treated honorably.
If you tell the truth, you don’t have to remember anything.
– Mark Twain
3. Figure out what you can pay. Even if you can’t make full payments, you can make some partial payment. Figure out what it is. Tell the lender that.
Why negotiate against yourself? Because you’re delinquent already! The lender may have ideas about debt rescheduling, or refinancing, or other solutions, but what the lender doesn’t know is how much you can scrape up. So tell her. Anchor her perceptions, even as you’re building credibility.
I want to plant in your mind a view of what I can do.
In pledging future payments, be conservative — offer a bit less than you could conceivably manage if everything went well. There are several reasons for this caution:
· You’re probably still too optimistic. You desperately want a number you can hit.
· Bad things can still happen to you — can’t they?
· You can always go up from a previous number. If you do, it makes the lender happier. Going up from the bottom is much better than going down. (There’s a vast body of cognitive psychology to the effect that bad news should be delivered all at once, while good news should be doled out in pieces.)
4. Make regular partial payments. Even if you can’t pay 100%, pay something — every month. And make it the same amount. That regularity is soothing to the lender, and establishes a baseline that adds to your credibility. Once again you’ll be separating yourself from those who, having missed one payment, figure they might as well be shot for a sheep as a lamb, and quit paying entirely.
This fellow stopped paying entirely, and look what happened to him.
[Some of my professional colleagues believe in paying 100% some of the time, then skipping a full payment. I like that less. It calls attention to your payment irregularity, which to me is a Very Bad Thing.]
Your payments have been irregular?
Although this is a good principle, there are times when you should overrule it. For instance, if the property is falling down, and you need to divert debt service to renovate or repair it, do so. Announce it ahead of time (Principle 1), in writing, and then return to the original schedule. The idea is, protect the real estate’s collateral value, which is what a wise lender will want to have done in any event. The goodwill you gain from protecting the property normally pays off when you — finally — get past the computers and complaining letters and get to a real person inside the lender.
5. Keep detailed records of everything. Not only should you keep copies of all your correspondence to the lender, keep the lender’s back to you. Judges and others are very sympathetic if you come in waving a sheaf of communications where you show you were a responsible borrower, trying to get the lender’s attention, and the lender just kept sending you form notices.
Penalty interest?
Similarly, build your own financial record of every payment you make, and when you make it. Keep the lender’s statements, even though you’ll start seeing late fees, delinquency charges, penalties, higher ‘post-default interest’ accruals, and nasty boilerplate. Most lender servicing agents automatically tack these on (they’re in your loan’s fine print). They will seem to mount up at a dizzying pace. But they’re just levers, ratchets to get your attention, and courts are unsympathetic to them. The court figures the lender deserves to get their normal loan back, not to send you to the poorhouse for missing a few payments.
Think of your unpaid balance as overdue library books. The fines are to get your attention, but really, the library only wants its books back.
No, you cannot leave until you pay your library fines
6. Find a real person inside the lender. Companies are abstract entities; job titles are uniforms we put on each morning and doff each evening. In between, a company is represented by individuals, and as you move up the lender’s food chain, you get to wiser actors among their dramatis personae. Your goal is to puncture the anonymity barriers and get to an ‘asset manager’ or ‘loan specialist,’ someone who is used to dealing with troubled or non-performing loans.
This takes telephoning. Do it. Keep at it. Keep track of the names on any letter you get, and keep asking for their supervisors until you get somebody who talks to you like a person and says, “now, what’s the problem with your loan?”
7. Propose rescheduling your debt, including lowering your mandatory payments. You’re delinquent, you can’t pay everything you owe, but you’re paying something. You’re seeking a piece of paper, signed by you and your lender, that specifies a breathing interval. (You’ve “paid for” the interval with your conduct and your commitment to make partial payments.) Such pieces of paper go by many names — repayment plan, debt rescheduling, or provisional workout —
I’m here to work out your problems by any other name
— but they all have the same effect: you agree to make reduced payments, and your lender agrees not to take action against you.
You might think that a bad trade for the lender, but in my experience most lenders would rather have an agreement with you than not. Why? Because it has a predictability to it. It’s one less problem to worry about.
Some lenders may resist — but again, if things get bad, you’ll be facing a judge or someone outside the lender’s organization. It’s ever so much stronger to be able to say, “I was trying to reschedule my loan and I couldn’t get that enormous faceless monolith even to acknowledge my existence.”
Here at Brazilian Bank, we retrieve all your information and let none of it out
8. Explore refinancing. Loan payments have two elements, interest and principal. Both of them can change — meaning lower — in a refinancing.
· Lower interest rates are sometimes available in the marketplace or from social lenders, including state agencies.
· Principal payments can be reduced by extending the term, or moving to interest-only. This stretches out the interval of your future you’re pledging but lowers the constant payment.
9. Offer to chip in new equity. A lender facing a bad loan assumes that (a) the property will be her only good collateral, and (b) before she can get to the collateral, she’ll have to spend a bunch of money getting the borrower out of the way. If a lender thinks there’s new equity capital that can come in — from family, friends, or government, in short, from anywhere — that’s an automatic differentiator in your favor.
You don’ poosh cheeps in pot, you’re wasting my time
[Don't fib about this. But you are allowed to say, "I will ask my parents/ friends/ state for funds." If you mean it, that is.]
Similarly, the offer to contribute new equity is often the quid pro quo that a sympathetic lending officer will want to show to secure credit approval for your debt rescheduling (Principle 7).
You want my sympathy, offer me a quid pro quo
10. Look for financial help. Fortunately for the
11. Sell the property. Eventually, and sometimes even when all the preceding things are going on, you may wish to list the property for sale. If you do this, only good things can happen:
· You may get an offer that covers your debt and allows you to recoup equity. That’s an option you didn’t have before you tried.
· If you are marketing the property and you can’t get anyone to take it off your hands, that too is great evidence you can use to persuade your lender to give you a workout respite. What better proof that the lender has no better alternative? Further, you’re doing everything you can, and you’re motivated.
For a borrower, foreclosure is the end. For a lender, it’s barely the beginning. Lenders hate holding property in their inventory (it’s called REO, for Real Estate Owned, and it’s no speedwagon).
A 1927 REO Speedwagon
As I will explain in How a Lender Thinks, it represents nothing but work, headache, uncertain recovery, and certain loss.
Foreclosure this way
12. Consider bankruptcy. Sometimes nothing works. Sometimes the right answer, financially ugly though it may be, is to let the property go. However, as I wrote 18 years ago in my second bout with workouts (my first was in 1976), there are some unusual times when bankruptcy is the best survival strategy (link in .pdf).
Bankruptcy is a legal event — in law, it’s the death of an economic entity that expresses your former self — and it’s not to be entered cavalierly.
I scoff at filing bankruptcy!
Still, when the asset is complex (think three-family house, where you occupy one and rent out the other two), bankruptcy may jolt the lender into realizing it is better to cut a deal with you than to try to replace you.
[Don't forget, all AHI advice is guaranteed reliable or your money back. Oh, wait … Ed.]
Conclusion: outrun the bear. The old woodsman’s joke is of the two hikers who come upon an angry bear that makes to charge. One reaches for his rifle; the other puts on his track shoes. “Why?” asks the first hunter. “You can’t outrun the bear.” Answers his companion, “I don’t have to outrun the bear. I just have to outrun you.”
One of us is in trouble
To a borrower, default is all-consuming, a unique and emotionally wrenching experience, but to a lender, it’s all in a day’s work, one of dozens or hundreds or thousands of case files.
Yes, I have your case right here
Every morning, the lending officer chooses whom to attack, whom to cajole, whom to ignore, and whom to accommodate. She picks, in large part, by whether the borrower is part of the solution, or part of the problem.
Be part of the solution. As Churchill said:
