AVOIDING FORECLOSURE!
The growing number of foreclosures remain
a major concern as we wrestle with the continuing financial crises. Solutions
to homeowners woes are not easy. Among the suggested
solutions are the following:
ASK THE LENDER FOR THE NOTE
The most recent suggestion for home owners facing
foreclosure is to ask your lender or the original note from the original
purchase loan.
Here is the rationale behind this strategy:
Home owners, facing possible foreclosure, are advised to
contact their lender to “negotiate” a loan modification. Complaints
have occurred in which homeowners acquire no cooperation from the lender. We
have also heard that because of the way that mortgages were packaged and sold
globally, that lenders have experienced difficulty in retrieving the paper work
related to the loans that they are “servicing”. Perhaps there is a
connection between the lender’s unwillingness to modify a loan and the
fact that they really are not in possession of the note and thus do not have
the authority to negotiate a modification. On the other hand, as a servicer, they are authorized to initiate a foreclosure
action.
When one finances a home purchase, the
“agreement” between the lender and the borrower is identified in
the NOTE. The lender produces the note as evidence that they have the authority
to negotiate with the borrower as well as exercise the foreclosure option.
The rationale behind seeking a copy of the note is that the
owner wishes to “negotiate” a modification with the lending entity
in possession of the note and with whom the owner is obligated. If the servicer is not capable of negotiating a note modification,
the owner is encouraged to “demand” being able to relate to the
note holder directly.
Thus, if the foreclosing entity cannot produce the note,
there may be a reasonable question as to their authority to foreclose without
having at least addressed the issue of a note modification.
Will this strategy work? We don’t know. But, it may be
worth a try!
HOME AFFORDABLE GUIDELINES
( formerly called the stimulus package) . . . WHO DOES IT HELP?
The
Making Home Affordable portion of the stimulus bill has been defined and the
following is a summary of the guidelines. There are several aspects to the
program including a refinance option and a modification option. (the comments in parenthesis and
italicized are the author’s)
Home Affordable Refinance
This
program is available to homeowners who have a solid payment history on an
existing Fannie Mae or Freddie Mac loan. The anticipation is that those
borrowers who have been prohibited from refinancing because their current
loan-to-value ratio exceeds 80% will now be eligible to refinance at
today’s lower rates.
The
expectation is that because the lenders and servicer already have the borrower’s
information on file, less documentation will be required in the new refinance
transaction.
This
reduction in documentation along with the expectation that an appraisal will be
able to be waived is expected to make a refinance quicker and less costly for
lenders and borrowers.
The
plan relies upon the voluntary cooperation of the lenders and seems to allow
each lender the latitude to determine the credit worthiness of the borrower and
other aspects of each refinance request. Nor do we have a clear idea of the
evaluation process, including how low the interest rate might be adjusted
and/or how long the term might be extended to make a refinance viable. (This
lack of consistent guidelines, adopted by all lenders, is a concern for
consumers. It may be reasonable to assume that many borrowers will be deemed
ineligible and thus we can expect that short sale transactions will continue.)
Home Affordable Modification
This
portion of the program has received the most attention and seems to have the
more developed guidelines. Designed to reach “at risk” borrowers
and modify loans into more affordable payment schedules.
Eligibility
& Verification:
· Loans
originated on or before January 1, 2009
· First
liens on owner occupied properties only
· Conforming
loan limits although the higher limits up to $729,750 in designated communities
are allowed
· Full
documentation of income and assets required accompanied by a
affidavit of financial hardship is required
· Verification
of owner occupancy status is required
· Borrowers
who have not missed payments but who are deemed at imminent risk of default are
to be targeted.
· The
monthly payments, including PITI and any PMI, will be reduced to no more than
31% of the borrower’s gross monthly income. The lender will be reimbursed
by the government for the cost of the reductions in monthly payments from 38%
DTI to 31% DTI.
· The modification sequence requires first the reduction of
interest rate with a floor of 2% and then extending the term to a maximum of 40
years. Then, if necessary, a principal forbearance could be initiated.
· Loans
can be modified only once (this was in response to the criticism that
previous modifications were insufficient to provide real relief and were for
only a short period of time)
One
major concern already identified with the process has to do with the
requirement that servicers
conduct a “net present value” calculation. Translated, this means
that the servicer will
compare the cost of a loan modification with a foreclosure and will implement
whichever option provides the lesser cost or loss to the lender. (The net
present value is non-transparent, meaning that the numbers used to make the
calculations are presently available only to the servicers.)
The
plan retains its limitation on the amount of value loss that a borrower can
have experienced in order to be eligible for a modification. If one is more
than 5% “underwater” the property is not eligible. Many borrowers
whose loans are more than 5% more than their home’s current value will be
prohibited from participating in the modification program. (A reasonable
assumption might be that short sale transactions will continue to be a remedy
for many borrowers)
The
current interpretation of an “at risk” borrower is one who is current
on payments but can identify a sufficient hardship to warrant modification.
The borrower who is delinquent in payments seems ineligible under the
guidelines. (Unfortunately, many borrowers were previously instructed that
they were ineligible for assistance until they were delinquent. Now, those same
borrowers are told that because they stopped making payments, in an effort to
qualify for help, that they are no longer eligible. We can only imagine the
confusion and outright anger at this turn of events.)
There
appears to be no assistance available for the unemployed borrower. The
guidelines clearly require modifications for those who can
“qualify” under the 31% ratio rule and other set forth provisions
noted above. No provisions have been identified for the borrower who has done
everything right, has paid the mortgage faithfully and now is unemployed and
unable to continue payments. (Many believe that some form of forbearance
assistance should be made available.)
Finally,
the plan calls for this structured relief plan of lower monthly payments to be
a five year program after which there can be a step up to current interest
rates. Some critics have already voiced an opinion that this is consequently
only a temporary fix and are concerned that borrowers will be unable to afford
the adjusted interest rate bumps in the future. (If home values have not
rebounded significantly during that same 5 year period, home owners may have
found that they only postponed a problem rather than having found a solution.)
Judicial Modification at Bankruptcy
Provisions
are being developed to allow homeowners who have exhausted all other options to
seek a debt payment plan via bankruptcy. With evidence that the borrower has
tried unsuccessfully to obtain an affordable loan modification, a bankruptcy
judge would be enabled to reduce the outstanding principal balance to the
current fair market value to facilitate the borrower’s retention of
his/her owner occupied home. Known as a “cram down” provision,
lenders are understandably opposed to the ruling. Their resistance is based on
the supposition that the number of bankruptcies will increase dramatically.
Proponents, point out that bankruptcy is a last choice situation and will
encourage lenders to work with borrowers in seeking loan modifications.
Other provisions
The
legislation is lengthy and has other provisions included. There are elements to
strengthen FHA, Fannie Mae and Freddie Mac in their ability to intervene with
at risk borrowers. There are outlined provisions for borrowers with high total
debt ratios who can seek HUD certified consumer counseling and a debt
reconstruction program along with their loan modification. Incentives for
lenders and servicers are
spelled out in the legislation along with expectations regarding how PMI
companies will assist in the modification process. While a very ambitious
program, we have to wait to see how it will actually help troubled homeowners.
A good start
In
spite of the limitations to the programs noted above, we can be hopeful that
the refinance and modification programs set out above will help millions of
projected borrowers. Keeping home owners in their homes is a big step towards
establishing some stability to the housing segment of the economy.
SHORT SALE OPTION
Lenders
seem to be open to participating in a short sale, often arranging for the
homeowner to remain in the home during the sale process. A short sale can be
less costly than having the lender actually proceed with foreclosure. There has
been increasing frustration among borrowers who find that, in spite of their
willingness to participate with the lender, the process is lengthy and
convoluted. With the stimulus legislation, maybe we will see a reduction in
short sales as borrowers are able to arrange payment plans to allow them to
remain in their homes?
In
the meantime, a “short sale” transaction is one in which the home
owner sells their home, with the consent of the lender, for “less than is
owed”. Until recently, homeowners were punished for such transactions as
they were taxed on the amount of “debt forgiven”. In other words,
if the lender allowed the home owner to sell for $50,000 less than owed on the
mortgage, the borrower was taxes on the $50,000 as if it were income. One of
the better things that Congress has done is to eliminate this “phantom
tax”.
While
the new rule is not a panacea for dealing with the foreclosure situation
let’s celebrate this as a first step in resolving some of the growing
foreclosure problems. A less discussed consequence exists for borrowers who choose
to participate in a short sale. Lenders are likely to view the borrower in the
same way as an individual having declared bankruptcy. The credit report will
most likely identify the mortgage as having been “settled for less than
owed”. This, in turn, could affect a borrower’s ability to acquire
future financing but may still be a better alternative than going through
foreclosure?
Author’s
Note: the next phase to making
this legislation most effective for short sale home sellers is to amend the
credit scoring models in regard to how said sales affect the calculation of
future individual credit scores. It has been suggested that the scoring models
be changed to permit new home mortgage financing after two years has elapsed
from the past short sale? Of course, other conditions such as unblemished
credit since the short sale, etc. would have to occur. Unfortunately, no such options appear to
be under consideration at this time.
Past
Fannie Mae rules allowed a borrower to seek new financing after four years had
elapsed from the foreclosure and/or short sale. More recent discussions have
centered around increasing this time frame to five
years. While often suggested, it remains unclear whether a borrower who
participates in a short sale will be eligible again to purchase a home within
two years or will have to wait the new five year term recently suggested by
Fannie Mae.
A
borrower can contact their lender directly or contact a real estate licensee to
help to arrange a short sale. Lenders are very willing to work with Rreal Estate representatives so you may find it helpful to
have an advocate working for you when negotiating with your lender.
In
either situation, be prepared to confront several potential hurdles. The fact
that a short sale is being considered means that the amount owed exceeds a
possible sales price. In recent years we saw an increase in 100% loans wherein
two loans were obtained . . . a first mortgage for 80% of the sales price and a
20% mortgage for the remaining purchase amount. In most cases, two different
investors now “service” the two loans. While the first mortgage
holder will likely be cooperative with your short sale request, the second
mortgage holder will most likely be literally “wiped out” and lose
their investment in any short sale. Acquiring the voluntary participation of
the secondary lender in this kind of situation can not only be
time consuming but can result in not being able to proceed at all. Complaints about the length of time it
takes to consummate a short sale are more understandable when recognizing the
position of any secondary lender. (see “ask for
the Note” article at the top of the page that may explain the reluctance
and/or inability of some lenders to negotiate a loan modification).
SEEKING HELP VIA
GOVERNMENT OPTIONS
Recent
legislation in Congress, while not directly addressing the plight of Homeowners
facing mortgage problems, did renew questions about what help is available for
homeowners experiencing difficulty making their mortgage payments.
Congress placed most emphasis on the resources of FHA to provide the necessary
assistance to troubled home owners. The two most discussed FHA programs are and
FHA Secure. and Hope for Homeowners. These available
plans can be confusing and too often will not provide real help.
FHA SECURE PROGRAM
Under
this loan option, FHA will provide a loan to 90% LTV of the present
appraised value. If the borrower owes more than this new loan amount, the
current lender will have to agree to either a.) carrying
a second trust deed for the additional debt or b.) eliminate/forgive the debt
overage completely.
There
are other rules affecting a borrower’s eligibility for the FHA Secure
program. The program was established to mostly accommodate those borrowers
facing payment increases due to Adjustable, especially option ARM, loan resets.
Any borrower who is current on their mortgage is eligible for an FHA Secure
refinance. If, on the other hand, the borrower is delinquent, the default must
have been due to the payment shock of an interest rate reset or, in the case of
an Option ARM, re “recasting” of the mortgage to the fully
amortizing payment. Help might be available to those already in
foreclosure but each situation is unique and depends upon the value of the
home, how much is owed and whether the lender is willing to offer a second
mortgage or “write off” the remaining debt.
In
all cases, the borrower must “qualify” for the refinance loan under
present FHA guidelines. We know that many borrowers will not
qualify for the FHA Secure loan option. They are encouraged to contact their
present lender to pursue a workout plan that might involve forbearance, a
mortgage modification or some other replacement plan. In some cases,
foreclosure may not be able to be avoided. (see
information above regarding a Short Pay as another option)
THE HOPE FOR
HOMEOWNERS PLAN
The
Hope for Homeowners (H4H) program, authorized by the Economic & Housing
Recovery Act or 2008 was initiated as of October 1, 2008. The program is
intended to help borrowers at risk of default and/or foreclosure refinance into a more affordable loans. FHA’s refinance loan
will be limited to 90% LTV of the current appraised value of the home. If the
current amount owed exceeds the refinance limit, a current lender must:
a.) “forgive”
the overage amount, or
b.) accept
a second trust deed for the un-refinanced amount.
Eligibility
rules include:
· the existing mortgage had to be originated on or before
January 1, 2008
· the mortgage debt to income must be at least 31% as of March
1, 2008
· the borrower must demonstrate an inability to afford the
current loan payments
· certification that the borrower has not intentionally defaulted
on their existing loan or has not obtained the existing loan fraudulently,
and has not been convicted of fraud.
The
exclusion regarding “not having obtained the existing loan
fraudulently” is not an FHA requirement but is likely to be adopted by
many lenders doing the H4H loan and will require some interpretation regarding
the word fraudulent. We know that many of the loans facing default, for
instance, were obtained with loans in which incomes were exaggerated. While
some borrowers can maintain that they were somehow “persuaded”
and/or deceived in the acquisition of their loan, many borrowers were willing
participants in the loan process. Now that they must fully qualify or any new
loan, any previous deception is likely to become apparent. Whether such
discovery will be sufficient grounds for loan denial will be up to each
individual lender.
Word/john/avoiding foreclosure