FORECLOSURE LOOMS AHEAD …WHAT SHOULD YOU DO?
When financial difficulties develop, most persons wait too long to seek alternatives. While it is important to make mortgage payments on time, circumstances 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.
When notified of a borrower’s inability to pay their mortgage, lenders are faced with either initiating a process (foreclosure) for taking back the property or cooperating with the defaulting borrower in hopes of finding an alternate solution. Lenders are increasingly urged to find 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 have multiple loans, including a second trust deed or an equity line loan, the refinance option can become more complicated.
The Home Affordable Refinance Program (HARP) was initiated in 2013 and extended several times but is now set to expire on December 31, 2018. If one is to take advantage of this program, it will need to be done almost immediately. It is unlikely that HARP will be extended again because Fannie Mae is rolling out a new program available January 1, 2019. The agency’s website states the requirements as follows.
- Minimum LTV of 95%, and does not qualify for other Fannie Mae refinance programs
- Loans opened after October 1, 2017 are eligible
- At least 15 months have passed since opening of the loan
In other words, if you got a loan after September 2017, you are eligible for a high-LTV Fannie Mae refinance starting in January 2019.
There are other alternative loan programs being created that could step in to replace the hole left by the HARP loan expiration. The new “conventional 97 refinance” loan allows homeowners to reduce their rate with only 3% equity in the home. A standard conventional refinance loan can now be done with only 5% equity and the loan does not need to be a current Fannie Mae owned loan to be eligible. All of these options will require qualifying for the new loan.
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, health restored, etc. This process of a lender postponing payments is called “forbearance”. 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. 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.
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 there may be no good options, merely less bad ones.
If a sale and preservation of some equity is not possible, you may have to decide whether to go to foreclosure, participate in a short sale or issue a deed-in-lieu of foreclosure. There are positive and negative aspects of each of these options and you will want to understand them thoroughly before making a decision. Here are just a few comments about each option:
Foreclosure: Foreclosure can take many months to culminate. You may be able to remain in the home during this time affording an opportunity to save money for when you are eventually evicted. You may feel compelled to offer to make partial payments during this time of occupancy. It is a futile gesture as you will still be evicted. Your credit will be negatively impacted and it will several years before you will be eligible to purchase a home. Other credit may be restored sooner, especially if you have remained current on much of your other credit obligations.
Short Sale: This is the process whereby the borrower remains in possession of the home and cooperates with the lender in a sale. While the lender may encourage this option with the indication that your credit will be less damaged via the short sale than a foreclosure, there is little evidence to support that assertion. It appears that your credit rating will be equally impacted as the report is most likely to show in both cases “debt settled for less than owed”. If you opt to participate in a short sale, you might ask the lender for a stipend of $3000 to $5000 at the close of escrow as a participatory fee. It will assist you in your transition from ownership to renter.
Deed-in-lieu: Some lenders are now suggesting this as an option to either a foreclosure or short sale. Contrary to the concept that one can simply “walk away” from the property and give it back to the lender, the lender must agree to the deed-in-lieu process. There are some protections that accompany the deed-in-lieu arrangement and you may benefit from exploring this option with good counsel.
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. Determine if the lender will consider a forbearance (the temporary suspension of payments) until you are re-employed?
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 (those acquired in the 2004 -2007 period) 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 that 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 a 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 equity 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 kind of help. Unfortunately, many lenders now view this sort of credit notice as a major blemish since most creditors now report such settlements as having been “settled for less than owed”. So, while this assistance can be helpful, it requires careful consideration as to its overall affect on your credit history, etc.
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.
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) had been eliminated through 2017, make sure any short sale occurring after December 31, 2107 that your personal situation will not have any tax consequences. Under all circumstances you are advised to acquire tax counsel regarding the affect of a short sale.
CREDIT COMMENTS: Your credit score, which will determine your credit worthiness for future credit, will be negatively impacted with any of the options . . short sale, deed-in-lieu or 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 varies depending upon the type of loan default and the amount of any down payment funds in the re-purchase transaction. The minimum waiting period is 2 years with four years being more typical and the longest period being 7 years. Anyone seeking to purchase following a default of any kind should contact their mortgage lender.
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 technically a 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!