FORECLOSURE LOOMS AHEAD . . .
WHAT SHOULD YOU DO?
(NOTE: While the following is good
information and offers alternatives to foreclosure, the “Home Affordable
Program, formerly known as the stimulus package, has been passed and offers
some resolution for some borrowers. To determine if you might qualify, see a
summary of the legislation in the Resource section of this web page under “Mortgage
News”)
Even when the overall economic picture is optimistic there can be a lot of
economic bad news for many homeowners. Loss of a job, 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 financing during the last several years and the more recent
increase in those ARM monthly payments have many homeowners worried about their
ability to make the increasing mortgage payments.
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 the recent increase in payment delinquencies followed by increased
foreclosures, lenders today are faced with either taking back the property or
cooperating. More are leaning toward finding 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.
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 most unlikely.
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
"forebearance". 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.
State and Federal legislators, when contacted, indicate that they are
“studying” the situation”. 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 here may be no
good options, merely less bad ones.
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.
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 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 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
king 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. (see tipsheet "Credit Counseling Services - Good or
Bad?")
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 is
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. If ultimately allowed,
bankruptcy judges would be empowered to force lenders to “work out”
a solution to keep a homeowner in their home. We do not yet know how this will
work but it is wise to remember that all decisions have unintended consequences
to them . . . for instance, if the lender makes a modification offer acceptable
to the court, will the homeowner have the right to refuse it, without unknown
consequences?
Likewise, 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, make
sure that your personal situation will not have any tax consequences. Under all
circumstances you are advised to acquire tax counsel regarding affect a short
pay. Finally, remember that when
financial problems start to occur, don't wait, examine alternatives immediately
and talk to your lender.
CREDIT COMMENTS: Your credit
score, which will determine your credit worthiness for future credit, will be
negatively impacted with a 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 Fannie Mae recently suggested increasing this period to
five 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 the foreclosure, 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 technical
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