Help for burdened homeowners January 19, 2010

As we begin 2010, there are many property owners concerned about what this year will bring. Stressed by payments they can’t afford, falling behind in their mortgages or possibly dipping into their 401Ks to stay current, many are worried about losing their home. The good news is that owners have some new options, that make it possible for them to keep their home or, if that isn’t practical, to give it up with less stress, expense and credit damage than would otherwise be the case. If you are feeling the crush of burdensome mortgage payments or know someone who is, be assured that you are not alone; there are many honest, hardworking people in the same situation. And there is help available. I hope this information will help you get the relief you need.

Help is available – and it’s free
Alternatives to foreclosure include forbearance, refinancing, loan modification, short sale, and a deed-in-lieu-of foreclosure, all of which are discussed below. If you are interested in exploring any of these, you need to take action. Don’t sit there worrying about it, or try to hang on by emptying out your bank account (or retirement), or prematurely opt for a short sale, or decide “just to walk away.” Contact your lender as soon as you receive a Notice of Default (sent out about 30 days after a missed payment) as well as the resources identified below to evaluate your options. Talk to a tax and legal expert. In this way can you preserve your opportunity to work something out.

A word of caution: there are companies out there charging thousands of dollars to negotiate with lenders. While not illegal, it seems shameful to me for them to charge for services to people already under financial pressure, when the services are already available absolutely free. Don’t pay a company to negotiate with your lender or to provide other services. Go to www.hopenow.com for contact information for a HUD-approved counselor to help you choose which of the below options is best for your situation. Or call 1-800-SAFENET for free counseling. Also, many lenders have a toll-free number and web page that helps property owners assess whether they might qualify for different workout programs.

Making Home Affordable (MHA) is a government program created to help Americans lower their monthly mortgage payments and keep their property, or, if that isn’t practical, to give an incentive to loan servicers and borrowers who successfully avoid foreclosure. MHA’s website, www.MakingHomeAffordable.gov, lists participating loan servicers; provides self-assessment tools and calculators to help you determine if you may be eligible for refinancing, loan modification or other foreclosure alternatives; answers FAQs; connects you with free local counseling services; and provides a handy checklist of documents you need to have in hand when talking to your lender.

The important thing to remember about MHA is that, in order to receive help through the program, you need to attempt the alternatives to foreclosure in a certain order: refinance, loan modification, short sale, then deed-in-lieu of foreclosure. MHA’s website gives detailed information about three programs that help you take these steps: (1) Home Affordable Refinance Program (HARP), (2) Home Affordable Modification program (HAMP), both of which cover more than 85% of all mortgages, and (3) Home Affordable Foreclosure Alternatives Program (HAFA). HAFA won’t take effect until April 5, 2010; however, many lenders are already participating. HAFA offers a $1,000 incentive to loan servicers, $1,000 to help pay off junior lien holders, and $1,500 to homeowners to help with relocation, if the parties are able to work out an alternative to foreclosure, including a short sale or a deed-in-lieu-of foreclosure. These incentives are available now, having been put in place by HAFA’s predecessor, Foreclosure Alternatives Program.

Possible options for homeowners
Generally, here are what your options might be:

Forbearance. Your lender may let you skip or reduce payments if you have a plan to catch up, such as you are expecting to start a job soon, or receive a tax refund or bonus, etc. The plan is for you to get current through reinstatement (one catch-up payment) or a repayment plan (increasing monthly payment until caught up).

Refinancing the loan. Refinancing can reduce the interest rate, reduce the principal balance, or reset the term of the loan for a 30-year fixed from the new current date. If the loan is a Fannie Mae or Freddie Mac loan, you may be eligible for refinancing under HARP; to find out, go to MHA’s website or to www.hopenow.com.

Loan modification. It is encouraging to know that loan modifications are now outpacing foreclosures. Your lender may modify your loan by adding missed payments to the loan amount or reducing the monthly payment by either re-amortizing the loan over a longer period or reducing the interest rate. If the loan modification is done through HAMP, your monthly payment would be reduced on a 3-month trial basis. Then, if you make your payments on time, the interest is kept at a low fixed rate for 5 years, then capped at a low rate for the life of the loan. When applying for a loan modification, stay in regular contact with the lender to make sure paperwork doesn’t get lost. Even so, it can take 45-60 days to get a response.

Short sale. A short sale is when a property is sold for less than the amount owed on it. Many borrowers who are “upside down” in their house (that is, they owe more on it than what it is worth) mistakenly believe they can simply decide to do a short sale: sell the home, give the sales proceeds to the lender, then walk away with no further obligation. This is not the case. Lenders must approve of the short sale. Basically, the lender will confirm three issues: (1) that the seller has a demonstrated hardship situation, that s/he simply can’t continue making payments, (2) that the buyer is qualified to buy the property, and (3) that the offer amount is a fair one.

Borrowers should find short sales done under HAFA easier. Not only does HAFA work with standard deadlines and process, but HAFA short sellers will also get pre-approved sales terms from the lender before listing the property, a huge improvement. In a non-HAFA short sale, the lender may expect you to help make up the shortfall, requiring you to sell assets (including retirement accounts) and bring cash to the closing or else to sign a new promissory note, then start making monthly payments. You will be released from further obligation only if the lender agrees in writing to accept the short sale proceeds as full satisfaction of the debt. (You may ask: but what about in a non- or limited-recourse state, such as Oregon? Isn’t the lender prevented from coming after me for any shortfall? No. Recourse has to do with deficiency judgments, which only apply to foreclosures, not short sales. You must negotiate for full satisfaction of the note in a non-HAFA short sale scenario and get it in writing.) In a HAFA short sale, you cannot be held liable for any shortfall in your first mortgage debt. This isn’t the case with junior lien holders, though. You should seek legal and tax advice if doing a short sale.

What if you don’t know whether or not you are in a short sale situation with your property? One of the first things your agent should do when taking the listing is to calculate your net proceeds from the sale, based on an estimated sales price. In order to get a good figure, s/he will have produced a solid CMA (competitive market analysis) that yields a realistic fair market value. This will tell you whether there will be cash left over after the sale or if it’s possible you will be in a short sale situation.

The advantage of short sales is that they can get you out of your current unsustainable situation so you can be sustainable homeowners in two years if you want to. Homeowners who do a short sale must wait two years before applying for a Fannie Mae loan, compared to five years for a foreclosure. The credit of a homeowner who goes through a short sale is damaged but so as much as with a foreclosure.

“Friendly foreclosure” (deed in lieu of foreclosure). In a so-called friendly foreclosure, the homeowner signs over property to the lender and the debt is forgiven. This may hurt credit but is better than a foreclosure. Lenders are sometimes willing to do this because they will get the property back quicker and probably in better condition than they would in a drawn-out foreclosure proceeding. Homeowners and lenders who do a friendly foreclosure are eligible for the incentives provided by the Foreclosure Alternatives Program ($1,000 to servicers for short sales or deed-in-lieu-of-foreclosure, $1,500 for homeowners to help with relocation and up to $1,000 toward cost of paying junior lien holders to release liens).

Last November, Fannie Mae announced its new Deed-for-Lease Program (“D4L”) that allows eligible borrowers facing foreclosure, or their tenants, to stay in their homes. This minimizes displacement of families and deterioration of neighborhoods that often occurs when homes are left vacant. Under D4L, the borrower transfers ownership of the property to the lender through a deed-in-lieu of foreclosure and the borrower or tenant signs a lease for up to 12 months. (Fannie Mae is still free to market the property sell it to an investor subject to the lease, though.)

Foreclosure
If none of the alternatives work out – or if a property owner chooses not to take any of them – foreclosure will occur. Foreclosure will do the most amount of damage to a borrower’s credit; however, in a non-recourse state or limited-recourse state (like Oregon), the borrower is relieved of any further obligation to the lender.

There are property owners who may choose not to take advantage of any of these options and simply allow a foreclosure to take its course, to just “walk away” from a house. This is a personal decision. A borrower considering this should definitely get legal and tax advice to make sure s/he has a complete understanding of the implications for his or her personal situation. While the information and counseling resources I have listed in this article may provide valuable information, you should not expect a HUD-affiliated counselor to counsel you to let a property go to foreclosure. It is, after all, pretty much their mission to prevent this from happening.

When might someone make this choice? Take, for example, a homeowner who owns a home now worth $65,000 less than what is owed on it. He still has his job and can afford to make the payments but he doesn’t feel that makes financial sense. He would take the short sale option but, since he doesn’t have a hardship situation, the lender won’t go for it unless he makes up the difference. If the lender would reduce the principal by $65,000, he would stay (there are lenders who might agree to this – it is basically selling the property at fair market value without the time and expense of foreclosing, then selling it at that amount anyway). Otherwise, he feels his best choice is to go away financially intact, let the home be foreclosed, rent somewhere else, then wait five years until he’s eligible to buy another property.

The timeline for foreclosure goes like this: A borrower will receive a Notice of Default about 30 days after the missed payment. Foreclosure will be initiated Day #90 after the non-payment; however, the borrower still has three more months (actually three months less 5 days, until Day #175), to redeem the property by catching up with payments. The property will be foreclosed on Day #180. The homeowner then has 10 days to vacate. If the property is a rental, Oregon lessees may remain 60 days after foreclosure (or lease expiration, if earlier) and month-to-month tenants must receive 30 days’ notice, (unless the buyer plans to occupy property, in which case lease tenants must get 30 days’ notice). Requirements for rental properties vary in other states.

Working with a real estate agent
The only one of these options in which a real estate agent can participate with you is a short sale. To advise what option is best for you, for instance, or to try to negotiate a loan modification with a lender is beyond the scope of their practice and is therefore not legal or ethical. Even an agent who is knowledgeable about MHA and distressed homeowner options will steer you to other experts and resources to help you make informed decisions.

If you do go the short sale route, make sure to work with an agent who is knowledgeable about the process. Short sale transactions take longer and have more complications that conventional transactions, so having an able agent navigate through the process is all-important. Also, be prepared to get the necessary paperwork together. Think of it as applying for a loan, only with more paperwork. One-third of all short sales that go into escrow fail and the #1 reason is that sellers do not get the required paperwork together. Your agent will tell you what is needed, but the rest is up to you. Finally, be prepared to wait 45 days or longer for lender approval of an offer. Having an agent who consistently follows up with all parties and tracks the process will help, but s/he is still very limited as to how much s/he can control the process.

Looking forward
Yes, these may be challenging days. Maybe you are procrastinating, feeling overwhelmed by the size of the problem. But, as they say, how do you eat an elephant? One bite at a time. You can get through this, too, by taking the first step and then moving methodically in the direction of a solution. Check out your options, get professional advice, get your paperwork together, and the problem will begin to shrink.

“Though you cannot go back and make a brand new start, you can start now and make a brand new end.” (author unknown)

Disclaimer: As you can see, this is complicated material about which I have presented my general understanding. I am not a legal or tax expert. Please make sure to seek professional legal and tax advice.

Advertisement