A year ago, most home foreclosures were concentrated in depressed manufacturing areas of the Midwest and the speculative real estate zones of Florida, Arizona and California. Most other regions were experiencing only modest increases because the unemployment rate — the most common trigger of mortgage default — was relatively low. Now, with the economy in full retreat and the jobless rate rising, borrowers and lenders in areas with previously marginal foreclosure rates are bracing for the worst.

By Bob Tedeschi, November 30, 2008, NYT

As a result, the banking industry has taken pre-emptive measures to help borrowers. The best example is an initiative, announced this month, to help those who took out loans backed by Fannie Mae and Freddie Mac, the government-owned companies that buy conventional mortgages from a wide swath of lenders. The companies’ loans make up about 58 percent of single-family mortgages nationwide.

Lenders are willing to change the loan terms if home ownership costs exceed 38 percent of gross monthly income — a measure known as the debt-to-income ratio. Lenders use this benchmark for determining the size of a loan.

But a property tax increase or a job loss can push borrowers beyond that threshold. To stave off financial jeopardy, lenders are asking that anyone with a debt-to-income ratio exceeding 38 percent contact the company that sends the borrower’s monthly mortgage bill. These loan servicers, as they are known, can drop the interest rate, reduce the loan’s principal by as much as $100,000 and extend the repayment to 40 years, if doing so ensures the borrower can pay the loan, according to Ed Delgado, a senior vice president of Wells Fargo Home Mortgage.

Borrowers must first document their income and then make their first three payments under the new repayment plan for the loan modification to fully vest. After five years, servicers will re-examine the borrower’s financial health and either adjust the terms further, keep them in place or revert to the original terms of the mortgage. If the home is sold, borrowers must negotiate with the servicer to determine whether they must repay the principal that the lender set aside.

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