real estate

Seek loan extension before giving up home

Steve McLindenq_v2.gifDear Real Estate Adviser,
I am giving my house back to the bank. Can they go after my savings? What about other assets? I am near retirement age.
-- Kitty

a_v2.gifDear Kitty,
Depending on the state where you live, the bank could conceivably come after your savings through a deficiency judgment. However, these days there's a better-than-average chance the bank won't do that, especially if it is a first-lien holder. Winning such a judgment can be a lengthy and expensive process fraught with sizable legal fees and little upside, in part because so many homeowners have blown through their assets trying to stay in their homes. Plus, lenders have found it can create bad public relations, particularly if foreclosed parties start accusing them in court of questionable origination practices such as inflating appraisals or pushing "gimmick" mortgages that convinced borrowers to buy more than they could afford.

Many states prohibit a deficiency judgment following a "nonjudicial" foreclosure, or a foreclosure that hasn't gone through the courts. Other states, such as Texas and Georgia, are a little less lenient. Typically, IRA and 401(k) savings plans are untouchable assets. As for your savings, many people are moving their savings out of their banks before they even approach the same bank about a voluntary foreclosure -- an increasingly common but legally questionable practice.

But before you give your house back, ask the lender for a loan modification with lower payments and lower interest or an extension of payment time known as "forbearance." Banks don't want your house back in this environment. And don't overlook the option of a short sale, where the lender accepts less than what they are owed. It will cause a smaller blemish on your credit than a foreclosure. Of course, lenders don't have to consent to this. There's another option called "deed in lieu of foreclosure," where you would fully convey your interest in the home to the lender. Lenders will sometimes agree to this to avoid the cost of the foreclosure, especially since they'll end up with the house anyway.

At press time, Government-subsized short sales, deeds in lieu of foreclosure and loan modifications were all made part of the distressed-homeowners aid measures in the Obama administration's just-unveiled $75 billion foreclosure-prevention plan. Targeting at-risk homeowners who are upside-down on their mortgages and/or have other financial hardships, the plan would allow some borrowers to refinance into low fixed-rate mortgages in order to stay in their homes. For more details, go to www.FinancialStability.gov.

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