Facing Foreclosure?  

Here Are Things You Can Do To Avoid a Financial Catastrophe! 

As anyone who reads the newspapers or watches the news can tell you, home foreclosures are a huge problem that is getting bigger every day. Because so many homeowners are behind in their mortgage payments, lenders are becoming less tolerant of missed payments.

Indeed, a homeowner may face foreclosure or losing his home to a sheriff sale after missing only two or three monthly mortgage payments. And, if he has more than one mortgage as many people do, any or all of the lenders can start proceedings when the loan or loans go into default.

When two or more payments are missed, the lender files a Notice of Default. This is a public notice filed and recorded at the county level. This is followed by a waiting period to allow the borrower to make good on what is owed: principle, interest, taxes and insurance plus any late fees, penalties and legal costs. If the borrower fails to act, the property is advertised as being for sale and is placed in a public auction or sheriff sale.

The foreclosure laws in each state are somewhat different, so there are no universal solutions. The process takes longer in some states than in others, usually from two to nine months. But once you have been served with a Notice of Default, it is time to act if you haven’t done so already.

Surprisingly, many homeowners fail to take any action at all when served with a Notice of Default. They stand helplessly by like a deer in the headlights while events overtake them, and the bank repossesses their most valuable asset.

When you are facing financial difficulties which will affect your ability to pay your mortgage obligations, the first thing you should do is contact your lender or loan servicer.  The contact information should be on your mortgage payment documents. Ask for the loss mitigation department.

It might also be advisable to contact an attorney who specializes in real estate or bankruptcy proceedings. You can get a recommendation for a lawyer from your local bar association.

When you speak to your lender, explain your financial difficulties to them. If the problems are a result of a death of a spouse, temporary job loss or serious medical problem, they may be very sympathetic. They have a variety of remedies available to them – and one might be right for you and your situation.

For example, they may grant you a Special Forebearance. This means they will reduce or suspend your payments for a fixed period of time. At the end of the stipulated time period, you would have to make a lump sum payment or enter into a long term repayment plan to pay back the reduced or suspended amount. This might be a good option if the cause of your financial difficulty is temporary.

Another thing they may be willing to do is a Mortgage Modification. This means the lender refinances your debt, extending the term of your mortgage and/or reducing the interest rate to reduce the payment to a more affordable level. This is a path currently being pursued by the FDIC on an experimental basis with the mortgage portfolio of IndyMac Federal Bank which the FDIC took over this past summer.

Your lender may also be able to work with you to obtain an interest-free loan from HUD to bring your mortgage current.

There are additional new programs supported by the Federal government for which you might qualify. FHAsecure is a new FHA program designed to help homeowners refinance into safe, 30-year fixed government financed mortgages. If your bank has refused to qualify you for a normal re-fi loan, ask them about this program. If they are not FHA approved, you can call FHA at 1-800-Call-FHA for a list of local lenders for FHAsecure loans. Call everyone on the list, and see if you can be approved.

If all that fails, there is yet another refinancing option: The HOPE Now Alliance. This is a new Federal program that will try to create a workout or modification of your loan with your lender. You can call them at 1-888-995-HOPE. This is certainly worth a try as the service is free.

HOPE for Homeowners started on October 1, 2008. It allows the bank that holds your mortgage to write down the principle amount of the loan to 90% of the current appraised value of your home. They then refinance you into a 30-year fixed loan if you qualify for the reduced payment.

This program was designed to alleviate the problems created by sub prime mortgage practices. The people affected by these were most often first-time home buyers who bought a home with little or no money down. They were enticed into borrowing more money than they could afford with an initial mortgage interest rate that was unrealistically low. The rate then reset much higher after a short period, usually 2 years. This caused the payments to go up, often to an unaffordable level.

Many of these borrowers also engaged in 80/10/10 and 80/15/5 programs in order to avoid paying monthly mortgage insurance premiums. These programs consisted of an 80% loan-to-value conventional mortgage plus 2 additional shorter term adjustable rate mortgages (10% and 10% or 15% and 5%) to cover the down payment. When the interest rates for all these mortgages reset, many homeowners found themselves unable to meet the new payment requirements.

The problems associated with these risky loan programs was exasperated when the housing market turned down sharply. All of the sudden, the fully-financed $350,000 home is only worth $300,000. But the homeowner still owes $350,000.

That means the homeowner is stuck with the house – unable to sell it without bringing a LOT of money to the settlement table. Since these home buyers didn’t have sufficient financing to be involved in the house in the first place, the likelihood of them having the extra cash for settlement is not very high.

Even if you find yourself with a mortgage for more than your house is now worth, don’t panic and do something foolish like walking away. In time, the housing market will recover and your house will eventually regain the value that it has lost.

If you have come to realize that you are in a house you can’t afford, don’t wait for the foreclosure process to take its course. Contact your lender now and ask them what options are open to you.

Perhaps they would be willing to consider a Short Sale.

Here is how that works: You immediately list your home for sale with a real estate agent. Because this is a complicated process, often taking several months to complete, try to find an agent who has experience with short sales.

If and when you get an offer on your home, the agent will submit it to your lender for consideration. You will be asked to submit a hardship letter to the lender explaining why you are unable to live up to your contractual obligations. Additionally, the Realtor® will submit comparable information on houses which have recently been offered for sale or sold in your neighborhood.

The bank will order an appraisal to see what the house is actually worth. They will then negotiate the commissions and final selling price with the Realtors® and the buyer.

Because you will be selling your house for less than the amount you owe on the mortgage, you could still be liable for the remaining balance plus associated closing costs like real estate commissions, transfer tax, estimated costs for repairs, unpaid utilities and property taxes, etc.  

It is therefore imperative that you make sure the transaction results in full satisfaction of the debt.  And be aware that you may owe federal income tax on the amount the bank forgives. Be sure to check with your tax advisor to avoid any nasty surprises.

It can not be said often enough: If you think you are in danger of missing mortgage payments and losing your home, the time to act is NOW! Any delay increases the likelihood of you losing your home, and it increases the legal costs of preventing a foreclosure. Plus additional late penalties and fees keep accruing. The longer you wait to act, the more expensive it gets.

Your home is most probably your most important financial asset. Not only is it the place where you and your family live, it is your chance to build a substantial amount of equity by paying off your mortgage over a 30-year period. Therefore, if you do get into arrears, do not ignore the letters from your lender. Take action to prevent a financial catastrophe.

You’ll also want to stay in your home for now. If you abandon your property, you may not qualify for assistance. And when your walk away from your home, you are still on the hook for the mortgage.

Since property taxes and property insurance are typically escrowed and paid with the mortgage, these typically aren’t being paid when the homeowner misses payments on his mortgage. Even if you can’t make your full mortgage payments, you should at least make an effort to pay the taxes and insurance.

If you must walk away, do it as gracefully as you can. To avoid the hassle of a foreclosure proceeding, you may want to voluntarily deed the mortgaged property to the lender. This is called a Deed in Lieu of Foreclosure. You hand over the deed to the property in return for the cancellation of the debt. If the property is worth more than the balance due, the lender must pay the borrower the difference in cash. But be aware that the debt cancellation may be taxable as income, so you’ll want to check with your tax adviser before entering into this type of agreement.

Once you have exhausted all other alternatives, ask your lender if they would be willing to pay you to leave the home in an orderly fashion and in clean condition. This will provide you with some funds so that you will be able to pay the first month plus one month security necessary to rent another place to live.

In summary, there are only three ways to get rid of a mortgage:

1)      You can sell the house and use the proceeds to retire the mortgage.

2)      You can give the lender the Deed in Lieu of Foreclosure, handing over the property to avoid a messy proceeding.

3)      You can see the foreclosure process through to the end.

Filing bankruptcy to avoid foreclosure is typically only a delaying tactic that adds significantly to the cost and seldom prevents the foreclosure in the end. Bankruptcy protection will put a temporary halt to a sheriff sale, but a mortgage is not covered under bankruptcy protection laws. Bankruptcy proceedings are only for unsecured debt -- like credit cards and personal loans. If you were unable to pay your mortgage before a bankruptcy, it’s likely you won’t be able to pay it after either, and the foreclosure process will resume.