Personal Finance: Mortgage mess? Mop it up

By Linda Stern

WASHINGTON (Reuters) - Troubles in mortgageland may get worse before they get better, especially for the so-called "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. (And note that most subprime borrowers aren't lowlife deadbeats, but everyday folk who get hit with one job loss or family 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. Instead, if it's becoming a struggle to stay current with your mortgage, try these initiatives.

-- Start by getting smart about the terms of your mortgage, 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 the payments or just some discomfort? Have you been making all your debt payments on time since you got the mortgage? Once you have a better fix on where you stand, you'll have a better idea of what you're able to do to fix it.

-- If you have been able to raise your credit score since getting your subprime mortgage, refinance with a better quality mortgage.

-- Call your lender. There's no downside to letting your lender know you are having trouble with your payments. They do have some incentives to work out a plan that keeps you in the house and the loan. Even if they don't, they can't take any action against you 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.

-- Seek outside help from reputable organizations. These groups, recommended by the Federal Deposit Insurance Corp., will offer financial counseling and may be able to help you restructure your loans: The U.S. Department of Housing and Urban Development (www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm) and the Homeownership Preservation Foundation (www.995hope.org). You can also try The Mortgage Bankers Association, which offers educational material about mortgages and the contact information for most major lenders (www.homeloanlearningcenter.com) and Freddie Mac (www.FreddieMac.com/creditsmart).

-- Don't chase predatory lenders who may be chasing you. A lot of scam artists are targeting troubled subprime borrowers now, with mailings that may promise to fix your credit, pay off your bills or save your house. Many of these companies "actually do nothing at all or perform services consumers can do for themselves at little or no cost," says the FDIC. Fuhgedaboutit. And don't give your Social Security number or other personal info to a company that calls you for business, without you having called them.

-- Look ahead. If you're okay now, but won't be next year when your mortgage resets, don't wait. Start shopping for a better loan now. And, if necessary, take drastic action to avoid losing that home, which is one of the worst financial blows that can befall a person. Hold garage sales, take in roommates, moonlight, borrow money from your snobby brother-in-law, do whatever it takes. Use that extra money to stall until your mortgage is smaller than the equity in your house and you can sell, or until you're back on your feet again.