Facing foreclosure? Fight is better than flight

It’s the toxic fallout from the “subprime meltdown”: More and more Americans are losing their homes to foreclosure.

Sadly, many could escape this fate if they’d just talk to their lenders. Instead, they hunker down and hope against hope that something will happen before the mortgage company takes the home.

Nationally, the number of homes in foreclosure soared by 36 percent between July and August, and foreclosures have more than doubled in the past 12 months, according to RealtyTrac, a company that tracks foreclosure filings. Some experts think 2 million homeowners will lose their properties in the next couple of years.

The situation is especially bad in some markets that had the fastest home-price gains in recent years. Between July and August, foreclosure filings jumped by 48 percent in California and 77 percent in Florida. Nevada has the highest foreclosure rate in the country — one of every 165 households, compared to one in 510 households nationwide.

For some homeowners, foreclosure may seem the easiest option. If interest-rate increases drive monthly payments too high and the property cannot be sold for enough to pay off the loan, many just walk away and let the lender have the property.

That strategy’s a mistake. It’s almost always better to avoid foreclosure.

Foreclosure can ruin your credit rating, making it nearly impossible to borrow money in the future, and it might even make it harder to get a job or rent a home. In fact, a foreclosure can even cause your federal income tax to jump.

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Fortunately, there is help, and I’ll make some suggestions in a minute. But first, why are we in this mess?

It’s the hangover from the housing bubble.

Low interest rates during much of the decade allowed buyers to borrow more, letting them bid home prices up. Lenders eager for business started offering “subprime” and “Alt-A” loans to people with poor credit or low incomes. Most of these loans carried adjustable rates that are now going higher, often adding hundreds of dollars a month to the homeowner’s monthly payment.

Tougher lending requirements and pre-payment penalties make it hard for troubled borrowers to refinance with cheaper fixed-rate loans. And many of these borrowers now find that their properties have lost value and cannot be sold for enough to pay off a mortgage taken out two or three years ago.

Result: The homeowner falls behind in payments, and after a few months the lender takes over the property.

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