FORECLOSURE LOOMS AHEAD . . .
WHAT SHOULD YOU DO?
(NOTE: While the following is good
information and offers alternatives to foreclosure, the “Making Home
Affordable” Program, has been enacted and offers some
resolution for some borrowers. To determine if you might qualify, see a summary
of the legislation in this tip sheet section under the title “Avoiding
Foreclosure”.
Even as the overall economic picture is said to be improving there can be a
lot of economic bad news for many homeowners. Continuous unemployment, a
reduction in wages, a sudden health issue or any number of unexpected things
can dramatically impact income and negatively affect one's current living
situation. The use of adjustable rate in the past and the increase in those ARM monthly payments continue to impact many
homeowners and creates concerns about their ability to make the increasing
mortgage payments. A large number of foreclosures occurred in 2010 and another
million plus homes are expected to be foreclosed upon in 2011.
When financial difficulties develop, most persons wait too long to seek
alternatives. While it is important to make mortgage payments on time,
circumstances like those mentioned above, can impact our ability to do so.
Alert your lender immediately. Failure to do so can result in a foreclosure
action, the process by which a lender repossesses the home and then sells it to
recapture their loss. Faced with this sort of financial difficulty, the
homeowner often thinks that just "walking away" and giving the house
to the lender is the most appropriate action. Make sure you have examined all
of your options before taking such a drastic step. Lenders indicate that they
tend to be more lenient with borrowers who they view as acting in good faith to
work out a problem.
With foreclosures continuing to increase, lenders today are faced with
either taking back the property or cooperating. Lenders are increasingly urged
to find solutions that help the borrower retain their home. A foreclosure
procedure can be expensive and time consuming and can sometimes involve
litigation. Despite claims that lenders are anxious to reclaim properties,
lenders are not in the real estate business and prefer to merely have mortgage
payments made regularly and on time. They are not typically interested in
owning real estate.
See “Making
Home Affordable” options at the tip sheet “Avoiding Foreclosure”
If you need assistance, your first call should be to the company to whom you
make your monthly mortgage payment. This “servicer” is paid to
collect your payments, retain records of your account and stay in touch on
behalf of the investor who owns your note. Don’t let embarrassment or
fear keep you from seeking a solution, even if it turns out to be temporary.
The longer you wait, the less likely it is that you will find a solution.
The lender’s first option will be to see if you can refinance your
current loan. Your ability to do so will depend upon the equity, if any, in
your property as well as your ability to qualify. If you originally acquired
100% financing, possibly with a first and second mortgage, refinancing may be
difficult, especially with home values having stabilized. The first trust deed
holder will likely be paid in full upon a foreclosure and may have little
incentive to cooperate with you. It is the second trust deed holder that is likely
to lose in the event of a foreclosure but acquiring relief from only one lender
is also unlikely to be sufficient to provide much payment relief. Bottom line,
when you have two loans and your equity position is virtually zero, refinancing
is less likely.
Here, then, are some additional possible strategies. Maybe the lender will
accept partial payments (if agreed to in advance) for a while. Some lenders may
even allow no payments for a short time, until a new job can be found, etc.
This process of a lender postponing payments is called "forbearance".
Lenders will sometimes offer to accept "interest only" payments.
Remember, the large majority of your mortgage payment is likely to be interest
. . . so, such an offer may not provide much relief.
Another option might include a “reset” or
“modification” of your mortgage with a new interest rate and
payments designed to your ability to repay. This will likely require you to
qualify as if you were re-applying for a loan. If you acquired what is
euphemistically called a “lier’s
loan” revealing your true income may create some anxiety. In all cases,
the lenders will not easily “give up” the unearned interest that
could result from a new payment arrangement. You may be required to tack such
unpaid interest to your remaining balance, thereby increasing the amount you
owe. Examine this option carefully as you may only be buying time before
you must liquidate and/or go through foreclosure anyway.
While relief is unlikely, contacting your legislators to ask their advice
may prove helpful? When all else fails, review the consequences of selling
before you lose your home to foreclosure. While a difficult decision, you may
be able to sell to preserve some equity and/or avoid a worse credit score hit.
In some cases there may be no good options, merely less bad ones.
If a sale and preservation of some equity is not possible, you may have to
decide whether to go to foreclosure, participate in a short sale or issue a
deed-in-lieu of foreclosure. There are positive and negative aspects of each of
these options and you will want to understand them thoroughly before making a
decision. Here are just a few comments about each option:
Foreclosure:
Many lenders are overwhelmed with a backlog of troubled loans to consider.
Foreclosure may take many months to culminate. You may be able to remain in the
home during this time affording an opportunity to save money for when you are
eventually evicted. You may feel compelled to offer to make partial payments
during this time of occupancy. It is a futile gesture as you will still be
evicted. Your credit will be negatively impacted and it will several years
before you will be eligible to purchase a home. Other credit may be restored
sooner, especially if you have remained current on much of your other credit
obligations.
Short
Sale: This
is the process whereby the borrower remains in possession of the home and
cooperates with the lender in a sale. While the lender may encourage this
option with the indication that your credit will be less damaged via the short
sale than a foreclosure, there is little evidence to support that assertion. It
appears that your credit rating will be equally impacted as the report is most
likely to show in both cases “debt settled for less than owed”. If
you opt to participate in a short sale, you might ask the lender for a stipend
of $3000 to $5000 at the close of escrow as a participatory fee. It will assist
you in your transition from ownership to renter.
Deed-in-lieu: Some lenders are now suggesting
this as an option to either a foreclosure or short sale. Contrary to the
concept that one can simply “walk away” from the property and give
it back to the lender, the lender must agree to the deed-in-lieu process. There
are some protections that accompany the deed-in-lieu arrangement and you may
benefit from exploring this option with good counsel.
While it is unlikely, if you suddenly find yourself unemployed, maybe the
loan can be refinanced at a lower rate, it doesn't hurt to ask. Maybe present
payments can be stretched over a longer period and thereby lower the monthly
payment? Ask if some kind of affordable payment plan can be worked out.
Determine if the lender will consider a forbearance
(the temporary suspension of payments) until you are re-employed?
Unfortunately, not all lenders are initially cooperative. The major
investors who have purchased the majority of the home loans are Freddie Mac,
Fannie Mae and FHA. These giants of the industry have all encouraged or require
servicers to help borrowers avoid foreclosure. So, while you may have to call
several times to reach a person with the "authority" to make the
decisions, don't despair, keep trying to make contact with "that
person" who can help you. If you know that your investor is one of these
entities they may be able to provide assistance should you encounter a less
than cooperative lender/servicer. In addition, if you have an FHA or VA loan,
those agencies can not only assist via intervention with your lender/servicer
but they can inform you regarding their specific forbearance plans. To find the
counseling center closest to you, search at HUD Counseling Centers.
Complicating any form of “workout” is the fact that the
sub-prime loans were sold to investors in what were called securitized
instruments. The servicing lender may not have the authority to develop a
workable payment plan without seeking approval. This can slow down the process
and even derail it permanently. But don’t give up easily but press your
lender for cooperation. There is that saying that the “squeaky wheel gets
the grease”.
The foreclosure process is governed by state law with a timetable for each
procedure. The web site http://www.all-foreclosure.com/timeline.htm
may be helpful as you familiarize yourself with the process. (see below for basic information) It can take six months to a
year in some instances, during which time the interest on the loan continues to
accrue and other costs mount. Once the lender repossesses the home there may be
cost incurred in getting it ready for sale plus the actual sale costs
themselves. When the lender finally sells the property at the foreclosure sale,
the borrower is entitled to any remaining equity after the lender has recouped
costs.
Thus. as mentioned above,
if there is sufficient equity, you may want to consider selling your home to
insure saving some cash and preserving your credit rating. Discuss this
possibility with your current lender and enlist their cooperation during your
market time. Perhaps the lender will accept partial payments or waive some
payments during the sale process. . .especially if you
are in an escrow with a potential buyer. Understand that missed payments, even
with the permission of the lender, are added to the loan balance and will
eventually have to be paid. If your payments have been on time up to this
point, ask your lender to refrain from reporting any adverse information that
would affect your credit rating. It is always recommended that you acquire
confirmation of any agreements in writing, if possible. At the very least,
retain a record of any conversations and/or agreements.
There are many enticing advertisements suggesting that one enlist the
services of a credit counseling service. While this might be helpful in
terminating the interest due on credit accounts and assist in establishing a
payment plan, it is unlikely to be useful in solving your mortgage situation,
particularly, if you are already delinquent in your mortgage payments. There
are a lot of scam artists in this field, so be cautious should you seek this
kind of help. Unfortunately, many lenders now view this sort of credit notice
as a blemish similar to having sought a bankruptcy. So, while this assistance
can be helpful, it requires careful consideration as to its overall affect on
your credit history, etc.
More importantly, avoid those con artists who claim they will solve your
problems and all you need do is give them title to your home. The promises
include that you will be able to re-purchase your home once you have cleared up
your financial picture. Don’t believe it. This is a sure way to
lose your home and any equity you possess. You would be better off selling your
home (as indicated above) then getting involved with these scam operators.
Finally, don't rush into bankruptcy. It is usually a short term fix for the
foreclosure problem (merely postponing the inevitable) but with a long term
impact for the borrower's credit. Remember, your mortgage loan is a
"secured" debt and filing bankruptcy will not necessarily "save
your home". While it may delay a foreclosure, if you have little or no
equity in your home, the lender typically will be successful in petitioning the
bankruptcy court to "release" the secured property to allow the
lender to recoup their loss. Having said this, the new stimulus bill was
expected to have a provision allowing bankruptcy judges to require lenders to
engage in efforts to modify a borrower’s loan. Known as a judicial
“cram down” this is a controversial notion. This provision, had it
been enacted, would have empowered bankruptcy judges to force lenders to
“work out” a solution to keep a homeowner in their home. While not
yet passed (delayed by Congress via the special interest lobbying of the
financial institutions) it continues to be discussed as a possible remedy. But
it is wise to remember that all decisions have unintended consequences to them.
For instance, if a lender, under such legislation, made a modification offer
acceptable to the court, would the homeowner have the right to refuse it,
without unknown consequences?
Investigate thoroughly the tax ramifications of entering into a "short
pay" arrangement, wherein the property is sold, with lender agreement, for
less than is owed. While the ‘Phantom tax” consequences (wherein
the borrower was taxed on the amount of the loan reduction, called
“forgiveness” of debt) have been eliminated through 2011, make sure
that your personal situation will not have any tax consequences. Under all
circumstances you are advised to acquire tax counsel regarding the affect of a
short pay. Finally, remember that when financial problems start to occur,
CREDIT COMMENTS: Your credit score,
which will determine your credit worthiness for future credit, will be
negatively impacted with any of the options . . short sale, deed-in-lieu or foreclosure. Additionally, it is
very likely that in an effort to keep up with mortgage payments, other credit
accounts became delinquent, further impacting your credit scores. It will take
some time to restore your credit and you might consider seeking advice from a
trusted mortgage broker/consultant. The other obvious question after
foreclosure is “how long do you have to wait before you are eligible for
another home mortgage”? The typical waiting period, for most lenders, is
a minimum of four years, although the waiting period under some circumstances
can be three years.
We are hopeful that several things might happen regarding credit scoring. It
seems logical that those borrowers who were victims of the sub-prime debacle,
who otherwise had good credit, would be allowed to seek mortgage financing
again when they are able to “fully qualify” for a loan. Don’t
expect another “easy to qualify for” loan. While unlikely, it seems
fair that those borrowers whose only blemish is
related to their home loan, could have their credit scores adjusted accordingly
and not suffer a devastating reduction to their scores. Unfortunately, when
things sound logical, they are seldom adopted as viable solutions.
Here area few phone numbers where you might find some assistance:
Hope Now 888-995-4673
the organization to which lenders have pledged themselves to work with
distressed borrowers.
HUD Counseling
Center in Redding:
800-750-2227 this contact may be helpful depending upon your
individual circumstances.
FORECLOSURE TIME FRAME:
The following time-line is applicable for non-judicial
California Foreclosures under a Deed of Trust. Foreclosures begin with the Trustor (borrower) not making the monthly payments to the
Beneficiary (Lender), the first missed payment is technically a default,
but in practical terms, most Beneficiaries do not begin the process until the
third payment is missed. If the Beneficiary cannot resolve the
defaulted payment amount with the Trustor through
Forbearance or other Loss Mitigation measures, the Beneficiary will instruct
the Trustee to begin Foreclosure proceedings.
Day 1
Record Notice of Default
Within 10 business days
Mail and publish Notice of Default
Within 1 month
Mail Notice of Default
After 3 months
Set sale date
25 days before sale date
Send notice of sale to I.R.S.(when
necessary)
Within 10 days from 1st publication
Send beneficiary request for property directions
14 days before sale date
Record Notice of Sale
7 days before sale date
If court action, 7day rule may apply
5 business days before sale date
Expiration of right to re-instate the loan
Sale
date
Property is sold to highest bidder at public auction
In reality, the number of
foreclosures have increased so dramatically, we are told that it is
taking months, sometimes up to six or more, to actually conclude a foreclosure
process. This translates into the possibility of one remaining in a home in
foreclosure for a fairly lengthy time. But, don’t depend upon it!
Web Page/foreclosure