Mortgage problems? The longer you hide, the worse they'll get

Troubles in mortgageland may get worse before they get better, especially for subprime borrowers, whose spotty credit histories put them into more costly loans.

"It's an amorphous blob of trouble," says Keith Gumbinger of HSH Associates, a mortgage research firm. "And there's more pain to come."

Many subprime borrowers stretched themselves with costly adjustable-rate mortgages in 2004, 2005, and 2006, when they were able to qualify for loans that may have started off with high interest rates but low monthly payments. (Note that most subprime borrowers aren't deadbeats, but everyday folk who get hit with one job loss or illness too many.)

Now those rates and payments are adjusting upward, with increases in the interest rates to which they are pegged. Homeowners may have trouble making their new, higher payments, and -- if they live in a neighborhood where home prices have flattened or gone down -- they may not even be able to sell their home and pay off their mortgage.

In the first quarter of this year, roughly one of every 41 subprime loans was entering foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association. Those are the worst mortgage default statistics since the Great Depression. And it's likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality. Many carry prepayment penalties and could reset by as much as 5 percentage points when they do adjust.

And the underlying rates are going up, too. The average 30-year fixed-rate mortgage is 6.85 percent, close to its 2007 highs. And that's for a high-quality mortgage; a subprime borrower could pay 9 percent or more for the same loan.

What to do? Don't hide, because mortgage troubles will find you and the longer you ignore them, the worse they get.

Start by getting smart about your mortgage terms, and by being brutally honest with yourself. Find out when it's scheduled to adjust, and by how much. Is there a prepayment penalty? Will you have serious problems keeping up, or just some discomfort? Have you been making all your debt payments on time?

If you've been able to raise your credit score since getting a subprime mortgage, refinance to a better loan.

Call your lender. There's no downside to letting your lender know you are having trouble. They do have some incentives to work out a plan that keeps you in the house and paying off the loan. Even if they don't, they can't take any action against you just because you call them. If you're making your payments, they'll leave you alone. If you've already fallen behind, the call will help, not hurt.

Don't chase predatory lenders who may be chasing you. A lot of scam artists are targeting troubled borrowers now, with promises to fix your credit, pay off your bills, or save your house. Many "actually do nothing at all or perform services consumers can do for themselves at little or no cost," the FDIC says.

Look ahead. If you're OK now, but won't be next year when your mortgage resets, don't wait. Start shopping for a better loan now. If necessary, take drastic action: Hold garage sales, take in roommates, moonlight, borrow money from your snobby brother-in-law.

Linda Stern is a freelance writer. She can be reached at lindastern@aol.com.