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Clark Howard's Tips

February 12, 2008

There's been so much buzz about 6 of the largest banks offering foreclosure relief to millions of homeowners. The relief will be temporary, but it could lead to changes in loan terms and payments. Participating lenders include Bank of America, Citigroup, Countrywide, JP Morgan Chase, Washington Mutual and Wells Fargo.

The bottom line is that they are not prepared to deal with millions of people going into foreclosure. They simply don't have the staff to manage REO (real estate owned) properties in their portfolio. Each foreclosure costs upwards of $70K in clerical expenses. So this move was really designed to prop up the big banks, more than it was intended to help out homeowners.

Clark's advice is to contact your lender if you're behind on your loan and you've been avoiding them. Remember that yesterday's "no" may be a "yes" today or tomorrow. Just keep in mind that this is not charity -- the lenders just don't want the expense of foreclosed homes!

What these lenders have agreed to do is call a time-out and look at the financial situation of borrowers facing foreclosure. They may reduce your interest, your balance or both to keep you in your home. Those who are current in their mortgages will not get similar rate reductions. If that's you, file this one under the "life's not fair" category because there's nothing you can really do about it.

To get some historical perspective on this new development, you need to look to commercial real estate lending. Commercial borrowers who get into trouble can lose their properties, but more often than not lenders will do modified loan agreements to avoid having to take on the properties. The closest parallel in residential real estate is probably the short sale. However, the fallout from Japan's '80s real estate bubble proves there's danger in putting off the day of reckoning too long.

Consumer advice courtesy of