Primer for Distressed Homeowners: Part 2 of 3

In our first post of this series we covered the foreclosure process and defined some basic real estate terms related to distressed sales.

In this article we cover questions and answers on preventing foreclosure, negotiating with a mortgage company, and what to do about an adjustable rate mortgage that will soon reset.

Q: Can I legally prevent a foreclosure?

First, there is very rarely any defense to a foreclosure, hence there is not a lot in the way of foreclosure or short sale education for attorneys. That said, a homeowner who is about to lose their home may benefit from a private bankruptcy consultation (also called “bankruptcy counseling”), where an attorney can evaluate the entire financial picture, including the home, and advise the homeowner of his or her options and legal rights.

I generally refer people who want foreclosure defense to these resources for mortgage(s) on owner-occupied primary residences

1. State Home Foreclosure Prevention Project (“SHFPP”) 888-995-HOPE – For help with North Carolina foreclosures on subprime loans made between 1/1/05 and 12/31/07

2. President Obama’s Making Home Affordable Program

a. Home Affordable Refinance – For those who are current on their mortgages but cannot refinance to a lower interest rate due to a decrease in the home’s value; mortgages must be owned or securitized by Freddie Mac or Fannie Mac

b. Home Affordable Modifications – For those whose who are behind on their mortgages or are in imminent danger of falling behind because their mortgage payment is more than 31% of their gross monthly income; mortgages need not be owned or securitized by Freddie Mac or Fannie Mac

Q: Is there a reason to consult with a bankruptcy attorney if I do not intend to file for bankruptcy but I can’t pay the mortgage?

Yes! A bankruptcy attorney has the training and experience to evaluate your situation holistically. Take, for example, a married couple filing for bankruptcy protection who had voluntarily moved out of their marital residence, knowing that they were behind in payments and would probably face a foreclosure at some point. If they had consulted with us before doing so they would have learned about the North Carolina homestead exemption, which is up to $ 37,000.00 per person (your name must be on the deed, this must be your primary residence (not an investment property), and you must actually live there in order to claim it).

If you move out, then you cannot claim the North Carolina homestead exemption. Imagine how someone in this situation would feel when learning that an important door had been closed behind them.

Now, if there is absolutely no equity in the home, then this is irrelevant. Exemptions cover equity. For example, if you owe $150,000.00 on a house that is actually worth $140,000.00, then there is no equity and thus nothing to exempt. But if you owe $100,000.00 on a $150,000.00 house, then there is $50,000.00 in equity there; the homestead exemption means that the bankruptcy debtor (that’s YOU) gets paid first, before creditors.

You are probably thinking, “who would be in foreclosure if they have significant equity in their house?” We see it more and more these days. For example, consider a family with over $100,000.00 in equity in their home; the breadwinners have been unemployed for a lengthy period of time, stopped making mortgage payments, put their house on the market, and weren’t able to sell. The foreclosure sale has been scheduled but not held.

Q: My interest rate will reset in 2010/2011 and I can’t refinance, sell or make the higher payment. Now what?

The Better Business Bureau has a valuable article on this subject and includes this checklist for developing a plan of action. If this does information does not help, call a qualified attorney  when you are in default:

1. Carefully review the terms of your mortgage. If you have a sub-prime, nontraditional or adjustable rate mortgage you should review all of your loan documentation today. Don’t wait to find out that your monthly payment will double because of a pending rate increase. When are the “reset” points? Will you be able to make the new monthly payment with a higher interest rate? Would you face a prepayment penalty or other restrictions should you qualify to refinance? How much equity do you have in your home?
2. Can you rework your budget? It may be possible to make adjustments to your budget that will free up more money for mortgage payments. Reducing your spending or taking on a second job may help. Perhaps you can sell the extra car, forego private school tuition, take in a roommate, or make other lifestyle changes to bring in more money.
3. If you don’t hear from your lender, contact them. Keep in mind that your lender would prefer to avoid foreclosure as much as you would. Over the past year, the industry has begun to offer more assistance to troubled homeowners. More lenders are taking the initiative to forestall financial difficulties for adjustable rate mortgage holders. They are sending letters alerting homeowners to a pending “reset” and outlining refinance options. If you ignore phone calls or letters or other communications from your mortgage lender, you are adding to your troubles.
4. If your lender hasn’t contacted you, and you have already missed a mortgage payment or anticipate not being able to make the next payment, you need to contact your lender. Be aware that lenders are more likely to move quickly into foreclosure proceedings when they have not heard from the homeowner regarding their situation. Take the initiative and contact your lender.
5. Speak to the right person. Most mortgage statements contain a phone number specifically for use by homeowners who need to discuss difficulty making their monthly payment. This may be listed as the Loss Mitigation or the Collection Department. Staff members within these departments can advise borrowers of the options or “workouts” available to someone in their situation. If you cannot find a reference to such a department on your mortgage statement, contact the main customer service number and ask to speak to someone in loss mitigation.
6. Discuss your situation honestly. Your mortgage lender will probably have a specialist ask some questions designed to help identify workout options that are available to you as the borrower. To accomplish this successfully, homeowners should have at hand their bills, statements, and anything else that will help give an accurate portrayal of their financial situation.
7. Don’t try to fudge on the true details of your situation. Don’t be vague and don’t make false promises. Honesty and openness is the key to making this work for all involved parties. It is important that you accurately explain your current situation. Don’t describe it as better (or worse!) than what it truly is. Being honest and open with your mortgage lender will help them to identify the most appropriate workout recommendations.
8. Consider your options. It is key to remember that there are always options available to assist you, no matter how serious your situation. Your lender will either pinpoint ways to help you keep your home (retention) or identify options that will involve the sale or loss of your property (liquidation).

One example of “retention” is forbearance. That is a temporary reprieve from the full monthly payment in order to help the homeowner resolve financial issues and resume normal payments. An example of a “liquidation” option is a short sale. This allows the homeowner to settle with the lender in situations where the home can only be sold for less than the balance owed on the mortgage.

There are also special programs available for homeowners who have VA or FHA insured mortgages. Lenders should be able to help the homeowner identify workout options available for these types of mortgages.

Q: Can I hire an attorney to just tell the bank they can have the property and avoid the public disgrace of a foreclosure?

A lot of the people who are so averse to foreclosure and pro-short sale or consensual surrender (i.e., when you’re my bankruptcy lawyer, please tell the bank that they can have the house and don’t need to go to the trouble and expense of a foreclosure) seem to personally know their lending officer. Perhaps they go to church with the BofA employee who helped them close their mortgage, for example, and they feel terrible about what has happened. The problem is, in order to close their file and convey title to the property, the lender must involve some legal process.

In Part 3 of 3: Questions and Answers on short sales and sifting through the confusing offers from those who want to help distressed homeowners.

« « Primer for Distressed Homeowners: Part 1 of 3

Primer for Distressed Homeowners: Part 3 of 3 » »