Negotiating Better Terms for Mortgage

By RON LIEBER

You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.

Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.

But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.

On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.

And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.

JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.

There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.

Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.

Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.

If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.

Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.

Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.

A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.

If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.

In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.

At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.

Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.

Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.

So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.

Report your loan modification to rlieber@nytimes.com.

Copyright 2008 The New York Times Company. All rights reserved.