Avoiding the B word

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Canadian media as of late has been focusing a lot on the increasing amount of mortgage arrears and foreclosure proceedings across the country. Calgary foreclosures, for instance, are up 71% from last year, and related stats show that total bankruptcies have increased 12.3%.

But that's not to say the industry wasn't prepared for the bad news. In fact, two mortgage insurers have even introduced consumer-targeted programs to assist cash-strapped homeowners who are having difficulty making payments (for reasons related to the current economy, such as job losses and over extension, as well as the same reasons that have always been around, such as marital breakdown and fraud).

Days after updated mortgage arrears stats were reported, Genworth expanded its Homeowner
Assistance Program to include an online evaluator - a tool that can provide solutions once homeowners insert their financial data, such as how many more months they think they can afford to pay their mortgage. CMHC also introduced its Consumer Outreach Program, which is meant to inform cash-strapped homeowners through various mediums about the options available to them.

While both programs are designed to be a pre-emptive step geared at helping homeowners prepare for any conversations they may need to have with their lenders, the strong message that's being conveyed is that they are willing to work together with lenders and borrowers in order to keep people in their homes and stop the foreclosure stats from rising.

It's very plausible, then, that mortgage professionals will be the first stop for a lot of homeowners who are trying to find alternate ways to make ends meet. For those who can provide them with the necessary information - rather than turn them away - it's a great opportunity to build a loyal and trusting client base.

Avoiding bankruptcy
"We're at the beginning of a peak," said Paul Pauze, president of Bankruptcy Ontario, about the growing number of bankruptcies and mortgage foreclosures being reported. "People will scratch and claw before they feel they have to do something drastic like declare bankruptcy, so this is just the beginning."

Eric Putnam, a senior advisor with BDO New Beginnings, agrees, saying that there is a growing trend for homeowners to seek professional help when it comes to dealing with their tightening finances.

"The bankruptcy curve is definitely going up, but the proposals (the stage when borrowers propose an alternative payment plan to their lenders) are going up even faster and the credit counselors have never been busier," he said.

For people who either can't meet their payments or feel as if they won't be able to meet them soon, Pauze recommends an informal proposal to a creditor, which would avoid any use of the Bankruptcy Act and keep it off credit reports, he said. Results could range from lowering monthly payments to putting the amount in arrears back onto the principal of the loan to be paid.

"So many people are afraid to deal with the fact that they may be missing payments," he said. "They  wait until it's almost too late (about 90 days into delinquency) to even begin looking for a solution, but the sooner they do the better off they are."

Putnam, who offers a similar service, can recall a deal involving a homeowner who was unemployed and missing payments on his mortgage. After doing the math it was deemed that keeping the house would actually be cheaper than renting and, fortunately, the grandfather had money "socked away" for a future inheritance that the borrower wasn't aware of.

"We did a basket proposal with his lender, which isn't the same as declaring bankruptcy but does fall under the act and comes off the credit report after three years," said Putnam.

The lender received a lump sum with a plan to receive the rest, and the client was allowed to keep his house, which is the important thing, said Putnam.

"People are scared of the bankruptcy word," he added, "so we mediate with the lender and insurer to prevent it at all costs."

As lenders and insurers are clearly becoming more willing to work with borrowers rather than see them in foreclosure, services like the ones offered by Pauze and Putnam are becoming more in demand. Where this benefits the mortgage professional is when the client is able to keep his or her home and, in time, improve their credit score, possibly refinance, apply for a more affordable mortgage or even refer some family and friends.

"When the economy goes back up clients are going to go back to whoever helped them out in the first place and referred them to a professional, rather than just turning them away," said Pauze.

No matter which way you put it, bankruptcy is a word no one wants to hear (including lenders) and should always be a last resort, so it's in the mortgage professionals' best interest to help their clients avoid this long-term credit scarring whenever possible.

And while the immediate financial benefit may be minor or non-existing for referring a troubled client to a bankruptcy trustee or counselor (Bankruptcy Ontario pays a small referral fee, for example), it could be the start of a long-term relationship.