You've Defaulted on Your Mortgage: Now What?

March 13, 2007 — -- Today the Mortgage Bankers Association will release a report of mortgage delinquency and foreclosure rates, and the national, regional and state levels.

Analysts say a crisis looms in the riskiest part of the mortgage market that caters to people with less than perfect credit.

Homeowners who took advantage of countless mortgage deals that began with low-interest rates or so-called "subprime" mortgages, which looked past bad credit, are now paying.

"If you could fog a mirror or had a pulse, you were able to get a mortgage," said Ivy Zelman, a housing analyst with Credit Suisse Group.

Now with house prices leveling, and even dropping, and mortgage rates spiking, it is a perfect storm for homeowners -- 900,000 of them are now in foreclosure.

"It was 'Don't worry about it. Worry about it tomorrow.' Well, tomorrow is here," Zelman said.

And it's not just the homeowners in trouble, it's the companies that gave those mortgages, too.

"There have been between 25 and 30 companies who've either gone out of business or plan to close up since the beginning of 2007," said Rick Sharga of Realty Trac.

With those companies crashing, and homeowners foreclosing, federal regulators now want mortgage criteria stiffened.

How Much Harder Will It Be to Get a Mortgage?

"Good Morning America" financial contributor Mellody Hobson weighed in on what the mortgage crisis meant to homeowners.

Most home buyers will still be able to get a mortgage, but a considerable segment of borrowers, people who were really buying homes that they couldn't afford, probably won't be able to get a mortgage now.

But that part of the market drying up isn't a bad thing, Hobson says. Most of these foreclosures are on riskier loans, like interest-only loans, to people with less than perfect credit, and they came of age when real estate prices were going sky high and interest rates were the lowest they've been.

Although it means some people won't be able to own their own home, it also means people won't be saddled with a high-risk loan that they can't pay.

Hobson says the silver lining to all this is there is an opportunity for potential buyers to firm up their savings. Instead of stretching themselves too thin, now they can wait to buy a home until they have that 20 percent traditional down payment.

What Should You Do If You Have Trouble Paying Your Mortgage?

Get on the phone and call your bank. It will often work with you to renegotiate the terms of your loan, because it doesn't want a black mark on its record either.

If you have an "extreme" mortgage, do your best to lock in now. Rates have risen in the last couple of years, but they are still low. A 30-year fixed mortgage is around 6.14 percent -- at its lowest point since December of last year. In 2000, a 30-year fixed rate was more than 8 percent. In 1990, it was more than 10 percent.

You'll still take a hit. Most people with adjusted-rate mortgages have a rate of around 3 percent, so that rate will nearly double. But that's better than seeing your monthly mortgage payment continue to go up.

If you cannot afford to lock in your rate, consider selling your home to avoid foreclosure. Not only will you be out of a home, but your credit history will be affected for the next seven years, making it almost impossible for you to get a loan for anything -- a new car, home or any major purchase.

What Does This Mean for the Economy?

On a positive note, housing prices will undoubtedly go down. Banks will be forced to resell the foreclosed homes at lower prices -- that's a good thing for those in the market for a new home.

But this will also negatively impact the economy for three reasons. First, home-equity loans have been the third leg of the stool for the economy and have fueled consumer spending.

With home-equity loans drying up, this means there will be less money to purchase goods.

Second, people's sense of wealth is often tied to their home, so the psychological aspect of this will also weigh negatively on the economy.

Finally, this will have a negative impact on banks and will make borrowing and credit more expensive.