With the number of foreclosures rising, homeowners are looking anywhere they can for help. But while there are a number of avenues promising relief, each has its own pitfalls.
The sheer scale of the problem has created a labyrinth of rules that no consumer should navigate alone, says Jim Sahnger, marketing director for Loan LifeSavers, a loan modification company in Palm Beach Gardens, Fla.
But as homeowners approach this new and harrowing experience, they wonder whom they can trust, what they can rightly expect and what their best course of action is. These are difficult questions, but acting quickly and talking to a range of specialists are the way to start.
Can’t the Obama mortgage plan help?
Even by President Barack Obama’s own estimate, the government mortgage plan, known as Making Home Affordable, won’t help every homeowner. In fact, the plan is designed for about 9 million homeowners. According to Moody’s, a New York-based financial research and ratings company, there are an estimated 14 million homeowners in trouble, and that number is rising.
To refinance under the plan, homeowners must have a Fannie Mae- or Freddie Mac-secured loan, be current on the last 12 payments, have stable income and owe less than 105 percent of the value of their home.
To modify a mortgage under the plan, homeowners must demonstrate a significant hardship and a lack of liquid assets, and they must show that they can make the modified payments. Additionally, homeowners can only seek to modify loans made before Jan. 1, 2009.
A government-created eligibility checklist can be consulted at the Making Home Affordable Web site.
The first question you must ask
So what are the options for homeowners who are looking to hang on? That depends on what their circumstances and long-term goals are, says Walter Walker Jr., co-author of “Foreclosure: The American Nightmare — Strategies for Preventing, Surviving and Overcoming Foreclosure.”
“Regardless of where they go, homeowners need to take a hard look at whether or not they can afford to stay in the house even if they do succeed in getting a modification,” Walker says.
While Walker believes many homeowners are giving up too early, some people won’t find a way to stay in their homes. He says many ads promising painless mortgage modifications deliver only minuscule reductions and false hope.
“If you still have a job, but your rate has adjusted and falling home prices have left you slightly upside down, you’ll likely find a lender willing to work with you,” Walker says. “If you’ve lost your job and there’s really no hope of making future payments, it’s just not going to work.”
Yet, financial hardships can work for a homeowner. Sahnger says they are often the fodder for negotiation because lenders are recognizing that they must work with homeowners.
“If someone has experienced a hardship that has led to increasing expenses or decreasing income, which has led to an inability to make their mortgage payment, the door is open to exploring the options for modification,” Sahnger says.
According to Sahnger, a good modification reduces the monthly payment by about 25 percent to 30 percent, with $500 per month left over for disposable income. The Obama plan calls for modifications that leave homeowners with a total monthly mortgage debt of 31 percent or less of the borrower’s gross income.
Achieving that goal requires a lot of personal information, says Charles Hokanson, a lawyer in Long Beach, Calif., who likens the modification process to compiling financials for a full-document loan or a bankruptcy.
Who do you work with for a modification?
With any loan modification, one simple question emerges: How much does this cost?
The answer ranges from free to a few thousand dollars and depends on who you use.
Walker says homeowners should start with a counselor approved by the U.S. Department of Housing and Urban Development. Ideally that counselor will also have been certified by NeighborWorks America, a national nonprofit based in Washington, D.C., that specializes in coordinating community-based revitalization efforts.
Another resource Walker recommends is Hope Now, based in Washington, D.C., which is an alliance between HUD-approved counseling agents, mortgage companies, investors and other mortgage-market participants that provides homeowners with free foreclosure prevention assistance.
But the nonprofit route has its pros and cons.
HUD-approved counselors will cut through a lot of red tape and provide an impartial assessment of the situation by acting as a moderator between the bank and the homeowner, Walker says.
But Hokanson says they can’t solve every case. “They only work if a bank is willing to talk, which isn’t always the case, and they aren’t in a position to handle cases that fall outside of the typical modification,” he says.
Only attorneys, for example, can determine if any terms in the original loan violated the Truth in Lending Act, Hokanson says.
“As the mortgage bubble grew, a lot of people were taken advantage of and cheated. And for those people, relief is going to come from a lawyer, if it’s going to come at all,” he says.
Homeowners should look for lawyers with a background in foreclosures, real estate and bankruptcy.
How does a modification work?
Unlike refinancing, a loan modification changes the terms of the original note. While it has always been possible to modify the loan, Sahnger and Walker agree that the housing crisis has prompted banks to deal more with distressed homeowners.
“First, homeowners have to understand that the mortgage company doesn’t want (its) house back. Foreclosure … is the most expensive solution for them,” Walker says. “The second fact is that they will take back your house if they need to.”
Then what’s on the table? Just about everything, Sahnger says.
That can mean a reduction in the loan principal, but more often it’s an interest rate reduction. In other cases, the lender may simply offer lower monthly payments by extending the life of the loan, he says.
For those who can’t get a modification
Despite a growing number of options and increased flexibility by banks, the housing crisis likely will cost many people their homes. When that happens, homeowners have a tough choice to make, and many are choosing a delaying strategy.
Hokanson says one common tactic is to demand that the bank produce the original note. That can be difficult because many notes have frequently changed hands. But asking for the note is only a stopgap measure.
In New York, attorney Luigi Rosabianca says he’s heard of homeowners simply using court-ordered hearings such as New York’s mandatory pre-foreclosure conference between the bank and homeowner as a means of delaying.
“There’s such a backlog these days that homeowners can stay in their homes an additional nine months or so just by requesting a hearing,” he says.
Walker says a final alternative to losing the house is to seek a deed in lieu of foreclosure, which effectively returns the title to the bank and extinguishes the mortgage debt.
“A deed in lieu of foreclosure isn’t a great choice, but for some people that’s the only option left, and it’s a lot better than having the bank foreclose because the impact on your credit isn’t as bad,” he says.
But homeowners looking to walk away need to make certain that their state has anti-deficiency laws that protect borrowers from having to pay back mortgage debt after they’ve lost the house, Hokanson says. Anti-deficiency laws typically apply only to purchase-money loans, which is money lent by the bank to buy the house. That means that debt from a home equity loan or a second mortgage may stay with homeowners who pursue a deed in lieu of foreclosure.
Will bankruptcy help?
Homeowners who declare bankruptcy will stop the foreclosure process. But the automatic stay a court imposes on creditors will only last as long as the bankruptcy proceeding, and whether a homeowner is allowed to keep the house will depend on the specifics of their case, Hokanson says.
Once the bankruptcy begins, the homeowner will have to propose a plan to get back on track. But if they want to keep the home, they’ll need to get current on their mortgage payments and demonstrate the ability to stay current.
Hokanson says if a homeowner can’t show that he or she can live up to the bankruptcy plan, the judge will allow the foreclosure to go forward. However, the mortgage debt will likely be forgiven.
What about a short sale?
A short sale seems like a simple solution. If you can’t afford to make the payments, find a buyer who can. And in fact, short sales have long been a means of salvation for struggling homeowners.
Some homeowners can convince the bank to accept less than the value of the mortgage, provided they can sell the home quickly, says Travis Hamel Olsen, president of National Short Sale Center in Scottsdale, Ariz.
“The bank is trying to lose the least amount of money by agreeing to the short sale, and so they ‘incentivize’ the homeowner to conduct a short sale by minimizing the credit damage,” Olsen says.
Olsen says short sales typically take 60 days or less, but critics argue that the sheer size of the housing crisis limits the effectiveness of this tool, especially for homeowners living in areas hardest hit.
For those who do pursue a short sale, Olsen says it’s best to start right away, and it’s critical to keep up appearances to help attract a buyer. He also recommends working as closely as possible with the bank to make certain that a purchase offer is accepted in a timely manner.
To find out more, read “Mortgage modification scams.”