Fighting a Foreclosure
The feds haven't been much help so far. You're better off negotiating with your lender.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, February 2009
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Nearly 2.4 million homeowners have lost their homes to foreclosure since the housing market turned south in 2006, and that number is expected to climb to six million before the bust is over.
First to succumb were the investor flippers, who turned their keys in to their lenders to cut their losses. Next came the below-prime adjustable-rate-mortgage borrowers, whose interest rates jumped to unaffordable levels. Now the foreclosure bug is infecting the 12 million homeowners who are "underwater" because they owe more on their mortgage than their home is worth -- a group that includes prime borrowers who had top-notch credit. They all won't lose their homes, but if they suffer a job layoff or other financial hardship, "they're toast," says Mark Zandi, chief economist at Moody's Economy.com.
Simply stated, if you can't make your payments, can't sell and can't refinance, you're flirting with foreclosure. Every state has its own rules and timeline, but lenders generally start the foreclosure process three to six months after you miss a payment.
If you're determined to keep your home, you'll probably need to ask your lender to modify your loan terms. Or you could file for Chapter 13 bankruptcy with a plan to repay your debts, including your mortgage. If you can't make the numbers work, you can give up your home but avoid foreclosure through a short sale or by using an alternate strategy called deed in lieu of foreclosure. Those options may offer a psychological lift and help reassure future creditors about your motivation to repay. They also allow you to qualify for another mortgage sooner than if you had gone through foreclosure.
When plummeting home values sent Lori and Andy Saczynski of Destin, Fla., down the road to foreclosure, they decided to bail. They bought their three-bedroom home in May 2005, just as the local market peaked, for $292,000 with 100% financing -- a 70% first mortgage and a 30% second mortgage. They expected to sell the house for a profit in just a few years so that they could build their dream home. When the market began its free fall, they hung on, hoping it would recover.
Meanwhile, Lori and Andy both worked -- Andy at two jobs totaling about 80 hours a week. They also cut back on everything they could to continue making their monthly payment, which rose twice with interest-rate adjustments. The last straw was when Lori got laid off. Lori says that she and Andy weren't raised to "walk away from our debts," but they also knew they couldn't sustain the mortgage payment.
They asked real estate agent Wendy Rulnick to help them with a short sale -- selling the property for less than the amount owed on the mortgage. It took three months to get an offer -- for $180,000 -- and another couple of months for the bank to accept it. The first-mortgage holder accepted a loss of about $24,000. The second-lien holder was out about $85,000. Since then, the couple and their three children -- Taylor, 11, Nathan, 6, and Noah, 1 -- have moved into a home that Andy's dad bought for them. Lori and Andy are paying him back.
Help From the Feds
The federal government has talked a lot about stemming the tide of foreclosures, and most policymakers agree that keeping people in their homes is better for the housing market. But the feds haven't provided much help so far. The programs introduced are so narrowly focused that they leave out a lot of homeowners who could use help, says Guy Cecala, publisher of Inside Mortgage Finance newsletter.
Last October, the Federal Housing Administration launched the Hope for Homeowners program to help underwater homeowners refinance. But mere hundreds of homeowners have been helped, and few lenders have climbed aboard.
In November, federal agencies and the Hope Now coalition (made up of 27 lenders and nonprofit consumer organizations) announced a program to bring "affordable" loan payments to borrowers who live in their homes, have missed three or more payments and haven't filed for bankruptcy. Any reduction in principal on the front end of the loan modification would be paid at the end of the loan.
Reader Comments (13)
Posted by: Sean at 01/10/2009 05:54:44 PM
I direct a housng program in the Bay Area and we are SWAMPED with people who need help. A couple of additional comments for your readers: 1) Look out for "loan modification experts" who promise to get your loan modified or get your principal reduced. These companies are making promises that they can't deliver on and they are often breaking the law. You are paying $1,500 to $3,000 for these companies to make the same phone calls you can make yourself to your lenders. 2) It is also important for borrowers to find out if their servicer owns the loan or is only servicing it for an investment pool. Oftentimes, borrowers can't get modifications because the investors won't allow the servicers to do it. 3) I can only hope that our new President will require lenders/servicers to offer good, realistic modifications to people who have jobs (with enough income to support a mortgage payment) and are committed to staying in their homes. Perhaps the legislation introduced last week (allowing bankruptcy judges to modify home loans) is a good start and will also kick-start lenders/servicers to address this issue.
Posted by: TG at 01/15/2009 01:07:21 PM
Sorry, but I think a large percentage of these people should not have bought homes to begin with. Take the example of Lori and Andy. They bought a home with no money down. If you have not saved a nickel to put a down payment down on a house, then you need to continue renting for a few more years while you build up some savings instead of succumbing to your need for instant gratification. I am also tired of the "my rate reset" excuse. Rather than sign up for a slightly higher fixed rate loan, this couple opted for an ARM. They were happy to take advantage of the low starting rate, but then when it was time for them to pay up and the bank to start making some money, the couple bailed out. I also see this couple had enough money to have a 3rd child during all this time, but not enough to pay thier mortgage. I think baby #3 should have been put on hold while they sorted out their finances. And if their situation was bad enough that Andy had to work 80 hours per week even when Lori was working too, then they were in way over their heads no matter what the market did. Now the rest of us that purchased responsibly have to pay for their mistakes.
Posted by: EB at 01/16/2009 03:45:31 PM
Sorry, but you're wrong (if you are) putting most of the blame on people like Lori & Andy. They might have been naive and a bit greedy but most of the blame goes to the banks, mortgage companies and real estate brokers. Those are the people who convinced the Lori/Andy's of the world that they can afford homes with little or no down payments. They make it happen even knowing that they really don't have the financial backing for a venture like this....
Posted by: John at 01/16/2009 08:51:10 PM
If these lenders had any brains they would offer a 4% or less loan for 3 to 5 years to keep the home owner in provided they are able to afford .
Posted by: Susan at 01/21/2009 03:30:23 PM
We bought a house in May 2007 with 5% ($42500) down at a fixed rate of 6.25%. We had excellent credit and my husband was on his way to making partner at a solid law firm. Then the economy crashed, the firm downsized and suddenly we're both scrambling to find jobs (nobody's hiring lawyers right now) and wondering how long we can or should continue to drain our savings and retirement to pay the mortgage, which now is well more than the house is worth. We listed the house for sale, but haven't gotten a single offer in two months. It's depressing -- we thought we were doing everything right. Our lender won't even discuss modification or forbearance until we're behind at least three months. Looks like our credit will be ruined no matter what.
Posted by: Lori at 01/26/2009 02:11:51 PM
I'm in the just about the same position as Susan except I am a single mother who lost a Management position in construction after 12 years. I blew through my savings while looking for a new job. After dozens of phone calls and an untold numbers of unanswered voice mail messages all Freddie Mac is willing to do is extend my terms to 40 years, drop the interest rate 1% and tack the arrears on to the principal. All that gets me is a $144.00 a month reduction in my payment. I took a $1,000 a month pay cut. Also, my local Housing Authority has funds to pay the arrears for me but the bank refuses to accept payment prior to modification and the Housing Authority's rules state they can only pay arrears. Not make payments that will be applied to the principal after the modification is complete. And if all this wasn't bad enough my condo is now worth $53,000 less than I owe and the completely upgraded across from me is up for short sale for $66,000. Have no choice but to walk away or do this all over again in six months.
Posted by: Kelly at 01/26/2009 03:00:29 PM
I don't think the federal programs or lenders are doing enough! My sister was steered into an ARM by a realtor and mortgage co.. Of course the ARM went up but she also has had 4 surgeries in two years. 1st time she got behind Wells Fargo told her to fill out hardship papers, we did, then they said in order to help she needs to get loan current, she borrowed from family & paid up loan.Then she was told your loan is current we can't do any thing. This is the 2nd foreclosure & she was told they would review her file.They didn't ask for current information they were using year old documents.She called HOPE but they also had no luck because Wells Fargo won't deal with them...She has left a message every day for 2 weeks,so I guess she will lose her home.
Posted by: mark at 01/26/2009 03:29:53 PM
what happened to the golden rule (that) one paycheck goes to housepayment?
Posted by: ROSA LOPEZ at 01/26/2009 05:52:21 PM
I bought a house for $360,000. Its price today is $232,000. I am in the trucking business, I have less than half (my usual) income, but I have tried to pay my mortgage on time, I call(ed) my lender (who) told me that maybe I should get another job. My neighbors are moving to a new development where the houses are cheaper. Why (don't) the lenders help people who are trying to pay on time? I just want them to lower our interest for 5 years, while the economy is getting better. But they prefer to get the house and sell it. They lose and we lose, too. Why if the government helps them (the mortgage lenders), they do not help us.
Posted by: Arnie at 01/28/2009 07:55:02 PM
If your loan is a FHA loan,check out the possibility of getting a "Partial Claim" loan from HUD to bring the interest and reserves up to date. Check the HUD website to find out more. And please restrain yourself from bashing people in trouble, lets just fix it.
Posted by: wendy at 02/11/2009 04:49:16 PM
The problem is the paychecks have dropped, too.
Posted by: John at 03/12/2009 10:42:36 AM
The problem is these people bought houses they could not afford to begin with. An 80/20 or 70/30 loan should not be an option just so you can buy a house. Owning property is part of the American dream, not a God given right. Get an apartment and save your money for a down payment. People want everything now, there's no waiting and saving anymore. I would love to have a big house, but that's something I will work my way up to and do the right way. Living in your dream house using candles and eating mac and cheese so you can make the mortgage is no way to live. People need to take responsibility for the choices they made and quit blaming everyone but themselves. It's simple math to figure out if you can afford a house and all that comes with it, not rocket science. There is no doubt that there were predatory lenders that took advantage of some people and that should be looked at and taken care of. Everyone else should be left to fend for themselves.
Posted by: RJU at 04/07/2009 03:09:41 PM
Unfortunately, the lenders are not cooperating. Sure, they might call or send you a nice letter offering a workout option but that's the extent of it - they have no interest in actually helping anyone. I have personally submitted all the requested paperwork, updated it as asked, kept in contact, and still, they refuse to offer any modification, forbearance or other option and keep marching toward foreclosure even though home values in this area have declined by almost 50%. I even sent in payments that were returned to me! So they would rather take a $200k loss than modify my loan for a gain - what kind of business is that?!? And they're getting government assistance at taxpayer expense!! At this point, I had no choice but to get a lawyer involved to protect my interests.