Subprime: “Why are you in trouble?”
As the nation sorts through the subprime mess, seeking programmatic or bulk resolutions of the many borrowers who are or may be delinquent, it’s helpful to recognize that, as in Anna Karenina, every borrower’s problems are his own and every delinquency has its own story.
Every loan case file tells a story
In previous posts, I’ve explained how a lender thinks, and offered delinquent borrowers free advice about how to conduct themselves when waiting for the inevitable telephone call from the lender’s representative. Now it’s worth laying out what you should say when the phone rings.
When the servicer calls – or writes, or emails – all of her inquiries boil down to her search for the answer to two questions:
- Why are you in trouble?
- What’s the best way out?
Remember, two questions
Today’s post looks at the first question; tomorrow’s will tackle the second one.
“Why are you in trouble?”
Few loan servicers will ask this question directly, but it’s uppermost in their minds, and all their inconsequential or administrative chitchat is searching for a hypothesis of your delinquency – a coherent explanation. There are lots of possible reasons — bad things sometimes happen to good loans.
Some of them are the lender’s fault. Some are nobody’s fault. Some are your fault.
As a general rule, you will get a more sympathetic hearing from your lender if the principal cause is less than half your fault. (Delinquency usually involves a combination of reasons, but there’s always a dominant one.) Here are the six major reasons:
1. Your originator fibbed. Get out the sob stories; these claims – if true – are Legal Aid’s trump card, and whether true or not, they are many a borrower’s opening lament.
Lying is such a judgmental word
“I was duped.” “They never showed me that schedule.” “They told me not to worry about it.” “They said I could refinance.” All these defenses are offered up.
The thing is, they’re so easy to claim and so hard to prove that they usually fall on ears made deaf by overuse. The loan originator who’s accused of deceiving you is conveniently gone, and there’s no way to verify your story. Professionals learn to doubt melodrama: they presume you’re not the martyred saint you’re portraying.
It’s really not my fault
Stories that sound too good and can’t be disproved are suspect. Worse, 99 times out of 100, the written documentation is against you: “Isn’t that your signature?”
Use this argument only if you can prove it. Otherwise you’re risking your personal credibility on a story that the lender will already have heard dozens if not hundreds of times.
As Prince Hal put it, the night before
O Lord,
O, not to-day, think not upon the fault
[…]
Though all that I can do is nothing worth,
Since that my penitence comes after all,
Imploring pardon.
Unlike the pure sob story, the good-behavior tale usually garners some personal sympathy. It’s verifiable – there’s the payment history. You’re creditworthy for some amount – you’ve been paying it! There’s a basis for exploring relief – and, as we’ll see in the second question, your previous payment history makes working out a loan with you less risky than it might otherwise be, and that can tip the scales in your favor between workout and foreclosure.
3. You’ve had personal financial reverses. People crave homeownership like they crave security. Everywhere in the world, almost everyone wants to own his or her own home. So people stretch to own them. They count on raises, or overlook expenses, or cannot anticipate an illness, a job loss, a financial reversal. This sort of thing happens to everybody.
If something bad has happened, something that you cannot anticipate, fess up to it early. You get sympathy because people see their former selves in you, and if you come clean, and don’t make excuses, you get points for forthrightness.
Once you have that little bit of person-to-person goodwill, then you face an immediate followup question, to which you had better know the answer and deliver it promptly:
Are the setbacks temporary or permanent? Be careful how you answer this one, as it can cut either way.
If they’re temporary, you’re likely to get relief, but it will be in the form of an interim workout – a payment reduction or deferral, with the unpaid amount added to the loan and re-amortized. If you get that relief, you have to make the payments and you had better be able to make the stepped-up payment when your relief period expires. If not, you will have blown all your sympathy for precious little time and no genuine equity buildup.
If the setbacks are permanent, the lender may decide you’re a hopeless case and just start the foreclosure conveyor belt.
Just grinding you up
If not, however, you’re much better placed for a permanent workout, if you’ve been paying currently and the lender cannot anticipate covering its full loan on a foreclosure.
This is the best argument to lose in a marginal neighborhood where you’re a homeowner but the For Sale and Foreclosure Auction signs have been sprouting like toadstools.
Popping up after economic rain
4. You thought you could afford the payments, but you can’t. We’ve all spent more than we should. We’ve all under-budgeted and had to make the embarrassed phone call for abashed request for financial help. It happens – even though nothing specifically bad occurred, your financial eyes were bigger than your wallet. So there you are, having over-reached. The question is, How do you react when you’re over-extended?
“Character is what you are in the dark!”
This argument also works better if, up to now, you’ve followed the Abraham Lincoln approach to debt service: making full payment some of the time, and some payment all of the time. Again, the point is not what you can’t afford that counts, it’s what you can.
5. You fibbed about your income. This is the second-worst excuse, because you got yourself into this mess. Why should we now bail you out when you got us in trouble?
Now, if you fibbed about your income, you can’t bury it. It’s going to come out.
Hey, Sully, remember when I said I would kill you last?
I lied.
You’re better off, humiliating and self-incriminatory as it may be to admit, to tell the lender and fling yourself on the mercy of the court.
Apparently, that is. You do have half a chance.
The fact of the matter is that, for the lender, yelling at you may feel good but doesn’t solve the lender’s problem. The loan’s been made, the money’s out, you’re there, now what do we do? You have to overcome the palpable, self-confessed evidence that you were untrustworthy before – don’t kid yourself, this is a huge hurdle – but you’ve got a shot, if you turn over a new leaf, immediately start on good behavior, and stay there.
It was just a little fib …
Which is why having previously fibbed isn’t the worst thing you can do – the next one is.
6. You’ve stopped paying as much as you can. Behind really behind, chronically behind, is one of the worst feelings in the world. Depression sets in, and with it lassitude. You know they’re coming for you, but they don’t. Instead the letters arrive, telling you things you already know, and threatening dire consequences, with language deliberately calculated to intimidate you. Perhaps some times you don’t even open the mail because you can’t bear to see what it’s going to say.
Takes all the energy right out of you
This is human and understandable … but if you succumb to despair and stop paying your loan, you do two things: make your motivation suspect, and move yourself up someone’s In tray rather than down. Remember, you’re not the only person who’s behind on his or her mortgage, and so even though you will have only one loan servicer, your loan servicer has dozens, scores, hundreds of borrowers. You’re going to be graded on a curve of your fellow borrowers – that’s human nature, and it’s also good business for the lender. Those who are paying something are likely to get a better hearing than those who are paying nothing.
During this initial conversation, at some point – and the loan servicer decides when, the abject borrower does not – the loan servicer makes up his or her mind, whereupon the conversation will turn to the second big unstated question: “What’s the best way forward?”
[Continued in an independent but related post tomorrow.]
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