Things to Consider When Facing Foreclosure Please accept this informative report as my gift to you. I hope it will help you better understand this difficult subject and allow you to make informed decisions. Danny C. Halverson, PhD 1 What Do Fannie and Freddie Have to Do With It All? Since part of President Obama's latest housing market bailout plan involves giving $200 billion more dollars to mortgage giants Fannie Mae and Freddie Mac, it make sense to examine what exactly these two companies have provided for the good of Americans. Especially since they are declaring further losses every quarter, despite government bailouts, can they really be that indispensable? In 1998, after the collapse of economies in Southeast Asia and the Long-Term Capital Management hedge fund, the first downturn came in the subprime mortgage market. Since there was no real estate bubble by then, however, the collapse was not nearly as destructive to the economy. Government policy at that point was not to encourage people who could not afford homes to buy them. But in September of 1999, Fannie Mae began easing credit requirements for the mortgages it bought and guaranteed. As the Government Sponsored Enterprises (GSEs), as Fannie and Freddie are known as, began easing lending requirements, more buyers were able to purchase homes without positive credit histories. Fannie began this policy under pressure by the federal government. Because the two mortgage giants guarantee nearly half of the American mortgage market, their easing of credit standards created huge new markets for lenders to expand into. And they wasted little time in beginning to lend to borrowers who were more risky. With the government enterprises guaranteeing the mortgages, few lenders really cared all that much if many of the loans later went into default. And with home values increasing by 10 or 20% every year, the homeowners could just sell the property for a profit if they ever got into trouble actually making the monthly payments. So it was no wonder that lenders made riskier and riskier loans. The Federal Reserve reduced interest rates to 1% after the 2001 recession, and investors were looking for assets that produced a better yield than Treasury bonds. Mortgage-backed securities were seen as just as safe as Treasury securities, but with higher interest rates. Unfortunately, with so many borrowers who would not have qualified for loans under stricter guidelines now being given mortgages, the assets were far riskier than anyone wanted to acknowledge. The entire subprime mortgage market was based on the assumption of constantly rising home values. 2 Another assumption was that, even if home values began to decline, the government would step in and rescue Fannie Mae and Freddie Mac. Of course, even the GSEs prospectuses for investors stated the mortgage securities were specifically NOT guaranteed by the federal government. But it was always implicitly assumed that the government would step in if there was trouble. The entire mortgage market was loaded so full of risk and based on so many false assumptions that, as soon as home prices stopped increasing, problems almost immediately arose. By September of 2008, the government had stepped in to take over Fannie Mae and Freddie Mac. The era of giant company bailouts had begun in Washington. Now, with the GSEs being essentially run by the government, failure and loss only increases the amount of money that they are given by the American taxpayers. Fannie announced a third quarter of 2008 loss of $29 billion. The natural reaction would be to declare bankruptcy after so many disasters. But the government has recently given the companies an additional $200 billion. The current financial crisis is being used as an opportunity by these corporations and the government to reward risk and enrich the people who created the disaster. As well, the crisis is being used to give more power to the very people who destroyed their firms, all in the name of helping to restore stability. But how can the same people who created the environment in which a crisis would inevitably occur, did not see the crisis coming, and denied it was a crisis, ever be trusted to rescue the economy from that collapse? The Most We Can Expect of Government Solutions to Recession is Failure Since the first Wall Street bailout during the current economic crisis, that of Bear Stearns in March 2008, the government has handed out trillions of dollars to companies. Some were failing, some were healthy but the feds wanted control of the corporation in order to dictate how the business operated. In addition, there have been several "stimulus" packages designed to put more money into the hands of the people of the country. Tax rebates were sent out during spring and summer 2008, and one of President Obama's first acts upon coming into office was passing a $780 billion economic stimulus and spending bill. And to address the housing crisis, the government has created numerous new programs designed to assist borrowers with stopping foreclosure. Hope Now, Project Lifeline, Hope for Homeowners, 3 Making Home Affordable -- all designed to keep people in their homes and help them get loans guaranteed by the government or negotiate better terms with their current lenders. So what has the government to show for a whole year's worth of bailouts, handouts, stimulus, and spending? More unemployment, more failed businesses, more foreclosures, more declines in property values, and more resources siphoned off from the productive to reward the unproductive. And what are we promised in the future? More of the same. Bailing out one failed company after another has turned the federal government into a beggar's alley for corporate CEOs that now have no incentive not to loot their companies and drive them into the ground. Especially if the corporation can become enormous through credit, it will stand a better chance of being deemed "too big to fail." The so-called stimulus packages have been meant to put people back to work and get people spending again. But just the opposite has happened -- people are saving more and unemployment is rising. Of course, it is only logical in an uncertain economic time that people would save their money or pay down debt if they were worried about being laid off or having their company taken over by the government. And the housing programs designed to fix the foreclosure crisis and prop up home values? All failures, with the Hope for Homeowners program being the worst so far, having earmarked $300 billion and helped only on borrower. This is $300 billion in taxes, borrowing, and inflation that will have to be paid by every other person in the country to help that one other homeowner. Aren't we sill expecting too much of the government and how effectively politicians, lawyers, and bureaucrats can run the US economy? More laws, more statutes, more stimulus, more counterfeit money -- none of it will help the economy until the weaknesses are worked out. And as long as strong parts of the economy are forced to prop up weaker companies, the recession will go on. HUD FHA Deed in Lieu of Foreclosure Program For homeowners who have a mortgage through the Department of Housing and Urban Development (HUD) insured by the Federal Housing Administration (FHA), there may be additional options to obtain a deed in lieu of foreclosure to avoid the worst consequences of losing a home. The requirements for this program and how homeowners can find out if they qualify are surprisingly simple in theory. All homeowners who have their loan insured by the FHA are able to contact HUD at the first sign of falling behind in payments. HUD provides various services to borrowers who are in danger of 4 defaulting on a mortgage, such as free counseling and assistance with negotiating with a bank for a short sale. The deed in lieu program, although lesser-known, is another option. The assistance that HUD provides in these cases is encouraging a mortgage company to accept a deed in lieu. But homeowners are not just able to call and have HUD automatically help them. There are three main requirements that homeowners facing foreclosure must meet in order for HUD to encourage the lender the accept the proposed deed. First, borrowers must have become late on their mortgage due to no fault of their own. This may be from a job loss or transfer, serious illness, death in the family, or other involuntary financial hardship. Most homeowners will be able to meet this requirement quite easily in the current economic climate, but this is also designed to prevent against fraud or abuse of the system. The second requirement homeowners must meet is that they will be unlikely to recover financially to the point of being able to make the mortgage payment again. Even with payment assistance or a forbearance agreement, some borrowers would be unable just to pay the regular monthly bill. A deed in lieu of foreclosure may definitely be appropriate in such cases. The last requirement is the most difficult for borrowers to meet. It states that no junior liens may be present on the property or that the homeowners must pay them off within twenty (20) days of the request for the deed in lieu. For many borrowers with 80/20 loans or Home Equity Lines of Credit (HELOCs), a deed in lieu with HUD's assistance may be impossible to qualify for under this condition. For every other borrower with a loan through the FHA who can meet these three requirements and desires government assistance with a deed in lieu of foreclosure, they can contact HUD directly. Of course, they will also want to work on other solutions to foreclosure, because HUD will only encourage the bank to accept the deed in lieu -- they will not force the lender to accept it. A deed in lieu is usually a last resort for homeowners who can not save their homes any other way but do not just want to abandon it. Banks are not usually very open to this option, but with the encouragement of HUD and the persistence of the borrowers, they may decide it is in the best interests of everyone involved to end the foreclosure early and accept the deed in lieu of foreclosure. Deed in Lieu of Foreclosure - Four Reasons to Consider One Usually, homeowners do not just want to give up on their home when they begin missing payments. If there is any way to negotiate with the bank or refinance with a new lender, they often 5 take it. But it is when they realize that there is little chance of recovering enough to save the home that borrowers will consider giving the bank a deed in lieu or just walking away. A deed in lieu of foreclosure allows homeowners to give their property back to the bank in fulfillment of their loan obligation. The bank accepts the property back and the homeowners are off the hook for paying the mortgage any longer. As well, any foreclosure procedures that have been initiated in the court system or with a trustee are canceled. For borrowers who have no other option to save the home and begin making monthly payments again, a deed in lieu of foreclosure is often their last resort before just abandoning the house. Of course, this option is not for every homeowner, but there are at least four reasons to consider a deed in lieu instead of just walking away. First, if homeowners have tried to sell their property on the open market for a period of months but have just not found a buyer, it may be worth considering just giving the property back to the bank. Mortgage companies do not always want to own foreclosed homes, but if it realizes it will end up with the home anyway through a sheriff sale, it may be quicker and cheaper to accept the deed in lieu. Second, if the owners have little or no ability to pay the mortgage, they can consider giving the property back to the bank. This is often the case when there is a permanent change in the borrowers' financial situation and a once affordable home is now too expensive. Instead of going through a lengthy foreclosure process, the bank may understand that they will not be paid back and it is better to take the property back. Next, if homeowners have no equity in their home, their options are extremely limited for working out a solution to foreclosure. Refinancing is usually out of the question, even with hard money lenders, and negative equity will make selling the home very difficult. As well, the owners may just not even want to keep a home that is severely upside down, so offering a deed in lieu to the bank may be the best option. Finally, many borrowers wish to preserve their credit scores as much as possible, and having a deed in lieu appear on their credit report instead of a full foreclosure will help with this. Also, they will be able to avoid some of the late payments by giving the property back to the bank quickly. While this is often a minor concern to many homeowners just trying to get out from under a house, it is another good reason to consider a deed in lieu. While it is not always easy to convince a bank to accept a deed in lieu, it is not much more difficult than negotiating for a mortgage modification or other foreclosure help program the lender may 6 offer. Homeowners should focus on working with a company or individual who can help explain the process and help them put together a proposal to the bank, and then be persistent in following up with the deed in lieu of foreclosure. Book Review: Meltdown by Thomas Woods Since the financial collapse began with the collapse of Bear Stearns hedge funds in the summer of 2007, numerous books have been published attempting to put the blame on one factor or another. All of the likely scapegoats have been named: greedy CEOs, CDOs, deregulation, Asian investors, and so on. While books with sensational titles like Financial Shock, Chain of Blame, The Trillion Dollar Meltdown and others have pointed to one market or moral factor or another as the cause of the crisis, most seem to assume that greed was invented in 2002 with the run-up in home values and resulting real estate bubble. Some of these books have even pointed to various government programs or policies that allowed financial manipulation and greed to run rampant in the housing market. Funnily enough, though, every one of the authors points out more government intervention and regulation as one of the solutions to the financial crisis. The new book by Thomas Woods called Meltdown is different. Instead of taking a collection of symptoms of the real estate bubble, he examines the root cause of the problem that signaled to builders, borrowers, and lenders that everyone needed a new home, everyone could qualify for a home loan, and real estate prices never fell. Woods points out the Federal Reserve's manipulation of interest rates as the main cause of the housing bubble and the resulting collapse of that bubble. And he has a point -- how much damage could CDOs, the Community Reinvestment Act, ACORN, and subprime mortgages could have done in the absence of artificially cheap money? These other market players, including the Wall Street investment firms, were taking their cues from the Federal Reserve, which had inflated the tech boom of the 1990s and transitioned seamlessly into inflating the real estate boom after the mini-recession of 2001. Woods also points to other government policies also helped to distort the housing market. As Woods states, "Blaming 'greedy lenders' or even foolish borrowers begs the question. What institutional factors gave rise to all the foolish lending and borrowing in the first place? Why did the banks have so much money available to lend in the mortgage market -- so much indeed that 7 they could throw it even at applicants who lacked jobs, income, down payment money, and good credit?" But more important than just analyzing the causes of the housing market bubble is Woods' examination of the proposed solutions. Spending packages, stimulus packages, anti-thrift packages, corporate bailouts, industry bailouts, and personal bailouts are what the government has fed us so far as solutions to the crisis. The fact that none of them have worked so far is, of course, used as justification to create more programs and expanding existing failures. Woods analyzes why these types of government programs have not worked in the past during economic downturns. In fact, his arguments against the Hoover-Roosevelt market manipulations during the Great Depression are quite convincing. The more government takes from the private sector to fund various programs, the longer the economy will take to recover. The less it does, the faster the recovery. In the end, it is not how deep the downturn in the economy but the length of time needed to recover that is most important. While government programs have attempted to prop up artificial economic indicators, it has prolonged the agony of families and businesses that get hurt from such "stimulus" policies. But Woods always keeps the focus on or near the Federal Reserve as the culprit and cause of the boom-bust cycle. With a central bank forcing down interest rates artificially and creating disincentives to save money for long-term projects, how could businesses not take advantage and embark on unsustainable investments? The best part about Meltdown is that it is short enough to be finished in a day or less. However, there are numerous topics that this short review does not even touch on (myths about Keynesianism, the Great Depression, and sound money, for instance). Hopefully the book will be released in paperback form later this year and updated to include the latest government bailout debacles. However, despite whatever steps the government takes next to rescue the economy, get its heart started again, jumpstart its dead battery, or backstop its slide into depression, it will be important to keep an eye on the Fed. Having created nearly $10 trillion of new money in a little over a year can not but further erode the strength of the dollar. Regardless of the next media-created scapegoat, greed was not invented in 2002 and will not be eradicated by jailing a small time financial swindler. 8 Read Meltdown to understand how the government has granted a monopoly to the central bank to counterfeit and defraud us all. And then take action to defend against the manipulations of the market this institution uses to create one economic disaster after another. Four Sources of Foreclosure Information to Assist Borrowers One problem that many homeowners who are attempting to stop foreclosure on their own face is that their bank just does not seem willing to work with them. The lender, in many cases, relies on an all or nothing approach to foreclosure: either the borrowers pay back everything they owe as quickly as possible, or they lose the house to sheriff sale and eviction. Unfortunately, many borrowers attempt to negotiate with the bank for some other solution, such as a mortgage modification or short sale, but the bank is simply unwilling to consider reasonable offers. Modification agreements turn into impossible repayment plans, and lenders just turn down short sales without consideration for the offer. It is in these types of situations that homeowners may wish to turn to other sources of information to find alternatives to losing a house to foreclosure. While some sources may be expensive, they can often be used to convince a bank to negotiate or at least delay the foreclosure process for several additional months while another solution is worked out. The most expensive but potentially the most useful source of information about foreclosure is for homeowners to speak with a real estate attorney who is versed in lending laws. These attorneys can often point out mistakes the bank has made in originating or servicing the loan, or in pursuing foreclosure in the first place. While the up front expense to gain the services of a good real estate attorney may be high, the benefits can be enormous. For a few thousand dollars at the most, borrowers may be able to delay foreclosure in court for years or find enough deficiencies in the mortgage to make it in the best interests of the bank to negotiate a reasonable loan modification. Various foreclosure consultants specializing in helping people save their homes can also offer much-needed assistance to homeowners. While a small number have been exposed as scams, the vast majority of consultants work hard for homeowners and provide loads of information to make sure they are receiving the best advice possible. In fact, it is in the interests of any foreclosure consultant to make homeowners as comfortable as possible with the process of saving the home and how foreclosure works in the borrower's state. 9 Only by understanding foreclosure can homeowners really work together with a consultant and their bank to stop foreclosure for the long term. Borrowers who have some time and are willing to put in some additional work can also find useful information from law libraries. These are located throughout states and contain documents with explanations of various lending and real estate law that may apply to a homeowner's case against a bank. Especially if they are planning on attempting to defend foreclosure in court on their own, a trip to a law library may be in order for borrowers. While actual legal research is beyond the scope of this article, there are numerous books that can teach ordinary people how to find and research various legal issues. Finally, just searching online for foreclosure information is often the easiest way to begin to understand how the process works in a particular state and with a particular lender. Not only are theories and explanations of law to be found on numerous websites, there are also thousands of real-life stories from families that have faced foreclosure. If nothing else, searching for foreclosure advice on the internet is a good start and can help homeowners begin to plan what step they should take next, whether it be calling the bank to negotiate, listing the house for sale, or filing bankruptcy. In any case, borrowers can learn far more online for almost zero expense. Knowing where to turn for good advice is one of the main problems of dealing with foreclosure. Government programs, foreclosure consulting firms, real estate brokers, bankruptcy attorneys, and everyone else has an opinion on how best to save a home. However, every foreclosure situation is unique and homeowners owe it to themselves to research their own case as much as possible. Three Ways to Stop Bankruptcy - Modification, Negotiation, Litigation For many homeowners attempting to save their properties from foreclosure, bankruptcy ranks as just about the last resort before giving up on the house completely. However, before filing for bankruptcy or abandoning the house, borrowers may wish to consider at least a few other options to deal with a large debt load. While many homeowners will try to refinance as soon as they fall behind on their mortgage by a couple of months, the current housing market throughout much of the country has decimated 10 home values, making it almost impossible to qualify for a new loan. Unless borrowers have a significant amount of equity, refinancing is usually not a realistic way out of foreclosure. Selling the home, which is another tactic many homeowners attempt to avoid foreclosure, is also much more difficult now than it was just a few years ago. Again, this is due to the declines in property values, as well as the overall tightening of lending guidelines for residential mortgages. Until this market stabilizes, banks will be wary of lending on properties that may quickly depreciate. This leaves most borrowers with what they see as few options to escape a financial hardship with much of their credit scores or finances intact. There are a number of lesser known ways to stop a foreclosure, though, without having to rely on filing bankruptcy just to get a second chance or some extra time to move out of the house. Many times, the mortgage is the largest bill that homeowners have to take care of on a monthly basis. So when a financial hardship comes up, most of the other debts fall behind until the owners can no longer pay to keep their home. But what can borrowers do to address the mortgage if they are able to recover before losing the home completely? Loan modification is an option to avoid foreclosure and bankruptcy that is growing in popularity, despite several high-profile programs the government has put together that have utterly failed. But a modification, if done correctly, can lower monthly payments, put the arrears on the end of the loan, or completely renegotiate the terms of a mortgage. For homeowners who have just experienced a temporary financial hardship, mortgage modification can be an excellent solution to keep out of bankruptcy and save the home from foreclosure. The amount of money they save on their monthly loan payment can be applied to paying down other debt and recovering from the financial setback. However, loan modifications do not address the other debt that homeowners may have racked up during a hardship. Collection calls from credit card companies may increase dramatically, as well as threats of lawsuits, repossessions, or liens being placed on the home. This unsecured debt must also be taken care of somehow. Instead of filing a Chapter 7 or 13 to eliminate or reorganize these debts, borrowers can often negotiate directly with credit card companies or collection agencies to stop bankruptcy and stay out of court. Debt consolidation and settlement companies offer such services, but there are also online resources available that teach homeowners how to negotiate down their unsecured debts. 11 Finally, if worse comes to worst, and the homeowners are sued for foreclosure or by an unsecured debt holder, there is always the possibility of defending the suit in court. Most banks are easily able to walk all over borrowers in court because so few foreclosure victims defend their homes against a lawsuit. Just attempting to defend the home will often convince a bank to negotiate instead of pursue legal action. With credit card companies or collection agencies, it may be even easier to defend a lawsuit. Most collection agencies do not follow all of the lending and debt collection laws, and their attempts to sue borrowers can easily be thrown out. If nothing else, the more it will cost them to pursue such a case due to borrowers defending themselves in court, the more likely it is a settlement can be negotiated. These three options can stop bankruptcy, help homeowners deal with foreclosure, and assist them in financial recovery after a hardship. While they all require substantially more work than just filing Chapter 7 or 13, they also have more short and long term benefits to borrowers than taking the case into the federal bankruptcy courts. A Pretty Good Chance of Maybe Doing a Little Bit of Potential Good? It is becoming more apparent by the day that homeowners who rely just on government plans to stop their foreclosure will end up sorely disappointed in the results. From one disastrous plan to the next, the banks and investors have been taking advantage of the government to keep from having to provide any real services to their borrowers. The latest debacle has been the complete failure of the much-touted HOPE for Homeowners plan which has been given $300 billion to guarantee mortgages and has helped a grand total of one homeowner avoid foreclosure so far. This is money that could have been used in the private sector to fund new loans or just keep money in people's pockets to save or spend in the economy. Now Secretary Treasury Timothy Geithner told the Council on Foreign Relations that the newest Obama mortgage modification plan "has a pretty good chance of gaining traction." This plan represents another $75 billion that the government is taking from people to assist homeowners in preventing from losing their properties. And all the plan has is a "pretty good chance of gaining traction." This should strike fear into the heart of any homeowner who places all of their faith in the new program or any government plan to address the housing market. What does Secretary Geithner's statement even mean, when it comes right down to it? 12 It means that the government is entirely unsure of whether or not any of their programs will have any impact at all on the housing market or on a homeowner's ability to stop foreclosure. The economy is just like a car stuck in the mud and spending $75 billion and being optimistic about it might help it get a little bit closer to being able to drive out of the mud. What a metaphor! Either this new loan modification program is expected to be a complete disaster or the Treasury Department is hedging its bets on this plan, having seen the failures of previous ones. In either case, borrowers should not rely just on these government guaranteed mortgage refinances and modifications to save their homes. If the US Treasury Secretary is hedging his words on the ultimate success or failure of the plan and spending $75 billion to take a shot in the dark on helping homeowners, then these same homeowners also need to hedge their own bets. The more options they have to avoid losing a house, the better. So far, the government has created numerous plans and appropriated hundreds of billions of dollars to end the foreclosure crisis, with no significant reduction in the foreclosure rate to show for it. The politicians would have been better off sending out checks to borrowers to pay their mortgages or just paying off everyone's mortgages directly. But this policy of handing out money to the banks in order to get "credit flowing again" has been a disaster. Credit is not flowing again, and consumers are attempting to pay down their debts with the money that they have left, rather than borrowing more. Banks are sitting on the money while borrowers pay back loans or go into foreclosure if they experience a financial hardship. Even if the government's programs have all had noble intentions behind them, the banks have taken advantage of these new plans to grab more money while avoiding assisting their clients in default. This has only made the recession more harmful to homeowners, taking their money from them, preventing prices from falling, and creating trillions of dollars of new money. How Equity Purchasers Can Help You Save Your Home When a bank initiates a foreclosure lawsuit or begins the nonjudicial process of notification, homeowners typically find themselves swamped by an avalanche of postcards and letters offering help. The most common type of assistance offer comes from companies willing to purchase the property for cheap and then sell it quickly or lease it back to the owners. These types of companies are called equity purchasers, and they can operate in a number of slight variations. Homeowners who actually have equity in their properties are not the only ones to 13 receive these types of offers, however, as the purchasers are usually willing to negotiate with lenders for short sales or loan restructurings. Equity purchasers specialize in purchasing single family residences at distressed prices and then either selling them quickly to turn a profit or negotiating with the foreclosing lender for more beneficial loan terms. In any case, the purchasers do not intend to keep the property for very long or even move into it. In the most common form, the equity purchaser will offer the homeowners a few thousand dollars for the equity remaining in the property. They will also agree to attempt to work out a modification of the mortgage with the mortgage company, along with taking over the monthly payments from the current borrowers. Often, this type of deal may allow the homeowners to remain in the property for a period of time after selling to the purchaser. This may be done under a leaseback option or a rent-to-own agreement. The homeowners will stop foreclosure and be allowed to keep living in their house until they can qualify for a mortgage to buy it back. Some equity purchasers, though, will require that the owners move out of the house upon the closing of the sale. These are usually investors who wish to fix up the property and relist it on the market quickly in order to generate the largest profit possible in the shortest amount of time. The owners will not be able to rent the property until they can purchase it back. Homeowners who have their property currently listed for sale to avoid foreclosure will most likely receive offers from equity purchasers directly, rather than through their real estate agent. This is because the purchasers rarely want to pay the commission for the sale and would prefer to deal directly with the borrowers. While there are many risks associated with selling the home to such investors, they represent another option for homeowners facing foreclosure who need a quick sale. While a leaseback may not be in every borrower’s best interests, being able to sell quickly and get out of a property before it is too late can be a good thing. Hard Money Loans During Foreclosure - Pros and Cons Homeowners who own properties that still have a significant amount of equity in them are in a rare but powerful position when it comes to negotiating with their bank or applying for a refinance to cure a default. Even though traditional lenders may not be loaning much money to consumers right now, hard money lenders are always on the lookout for good deals. 14 Hard money loans are provided by groups of private investors who pool their money together to invest in properties that can provide a high yield. These can also be risky investments like providing funding for a house where the owners are currently in default or facing foreclosure. But because the money comes from private investors, they can take on extra risk. Most loans of this type are interest only for a short period (for example, three to five years at the most), and are designed to provide owners with a type of bridge between their current financial situation and where they would like to be. For homeowners in foreclosure, this means being able to keep their property while they repair their finances and credit until they can apply for a more traditional mortgage. For hard money lenders, a homeowner's credit is not much of an issue. Most will pull a credit report to make sure there are no surprises, but the amount of equity in the property is most important. In fact, if the property does not have much equity, even if the owners have great credit, it may be impossible to qualify for a hard money loan. Obviously, this type of mortgage is not really designed for the property owners who bought with little money down, failed to make their loan payments on time, and have experienced large property value declines. But for families that put money down, paid their bills for years, and have retained some equity, it may be a perfect solution to a temporary financial setback. However, there are significant costs associated with this type of mortgage that are not found with traditional loans. Homeowners need to be aware of these issues, especially owners who are in foreclosure and may not have fully recovered from a financial hardship yet. The most significant sticking point is usually the equity that homeowners are required to have for a hard money loan. Some lenders will provide funding up to 75% of the value of the property, but most have a cutoff of 60-65% loan-to-value (LTV). This means that owners would have to have put a lot of money down, experienced property value appreciation, or have paid down their loan over time. Unfortunately, this is the exact type of behavior the government had discouraged during the real estate boom years. Everyone was a real estate flipper who put no money down, let the property go up in value a year later, and sold for a profit. But for the homeowners who made prudent financial decisions about their real estate, they may have enough equity to qualify for a hard money loan. The costs of a mortgage from this type of lender can be quite high, from the interest rate to the closing costs associated with the loan. Many hard money lenders charge 4-5% of the loan up front 15 (known as points), while others charge up to 10 points. Interest rates can also be sky high between 12 and 15%. These costs can put many owners out of the market. If homeowners experience a temporary financial setback (most likely due to the deteriorating economy or a medical problem), a hard money loan may be applicable to their situation. However, this type of mortgage may be cost-prohibitive, and owners should also consider using more traditional solutions to foreclosure. HOPE for Homeowners - $300 Billion to Help One Homeowner Five months and $300 billion later, the federal government's HOPE For Homeowners program has helped exactly one homeowner avoid losing a property to foreclosure. This is a perfect illustration of how government solutions are worse than the problems they are supposedly designed to solve, in this case the foreclosure crisis and falling property values. CNN Money has an article describing the debacle that has become the HOPE for Homeowners program. Out of 752 applications taken for assistance, the Federal Housing Administration (FHA) has insured just that one loan. And the Obama mortgage relief plan has many of the same characteristics and requirements of this current failure. In fact, the best way in Washington for a plan to be upgraded, revamped, and improved is for it to fail spectacularly, and HOPE for Homeowners in no exception. According to CNN, "the House of Representatives recently approved an updated version of HOPE as part of the bankruptcy-reform bill that is a keystone to President Obama's Homeowner Affordability and Stabilization Plan." This offers the perfect amount of false hope to people facing facing foreclosure, which carries on the grandiose "place your hope in the changing power of hope" theme of the presidential campaign. If saving one home from foreclosure means that the government must appropriate nearly $300 billion and turn away over 750 other homeowners, what chance is there that any of its programs will really solve any of the problems in the housing market? The three hundred billion dollars set aside to save one property means that all of the other three hundred million people in America have to put in $1,000 each -- to save one house! Of course, if this were an actual tax and the government was accountable for its failures, this waste and inefficiency would be eliminated quickly. 16 Instead, the government is able to rely on borrowing money or simply printing it, as Federal Reserve Chairman Ben Bernanke admitted the government is doing in his interview on 60 Minutes. Therefore, the HOPE for Homeowners program will be continued in the newest program to prop ,up housing prices at bubble levels. But maybe the new improved version of the failed plan will convince some lenders to participate. CNN says that "Borrowers who owed $220,000 on a house valued at $200,000, for example, would need their mortgage balances reduced to $180,000 to qualify for an original HOPE for Homeowners refi. That's a $40,000 write-off. Under the new plan, lenders would have to forgive $34,000." Is it conceivable that many banks would voluntarily participate in a program where they have to take a $34,000 cut instead of a $40,000 loss on a defaulted loan? Is there that big of a difference between $34,000, $40,000, or $60,000 (the average cost of a foreclosure) that would convince a lender to allocate additional resources to helping homeowners? Unfortunately, the answer is still no. The fact that the program is voluntary for the banks and forces them to recognize significant losses on mortgages will keep them from participating. A slightly more lenient program is not what is needed. A plan that has been willing to spend $300 billion taxpayer dollars and has helped only one family needs to be ended before it hurts more homeowners. Tips to Get a Successful Loan Modification from Your Lender Loan modification is the process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e mortgagor and mortgagee). Many American homeowners today are behind on payments or facing foreclosure. Banks more than ever are offering loan modifications to help restructure loans in default. Many homeowners are not qualified or capable of keeping up with the payments as property values have fallen and adjustable-rate mortgages have increased payments. Loan modification can be one option that can help a homeowner keep their property while providing time to rebuild credit if it has fallen, and also bring the loan up to current. Typically between 3-6 missed payments can initiate foreclosure proceedings with most banks and mortgage companies. Not everyone can qualify for refinance while involved in a loan modification. It is most likely up to your primary lien holder or mortgage holder. If you are looking to consolidate your home equity loan into one payment you will need to apply for refinance. Depending on how long ago your loan was modified and what kind of credit you have, you may be able to refinance 17 the property into one consolidated payment. You can contact your lender directly with borrower authorization and have someone walk you through your current options at your bank. If the request for a loan modification is rejected, you may want to try it again in a couple months. Some lenders do not document the loan modification attempt you make. They are often motivated by changes in the housing market and their intent changes as more and more loans go into default. It does not hurt to try again. It is smart to work with a loan modification specialist, a seasoned loan officer or an attorney who specializes in real estate, mortgage lending and loan modifications. They understand how to speak to loss mitigation department, personnel and can get a general idea of the mood and trends of your lenders loss mitigation department. Many homeowners do not learn the basics of the foreclosure process, instead trusting the first person who offers assistance. There are literally thousands of pages contained in books, magazines, and on the internet that describe what to expect when borrowers miss a mortgage payment. It would be wise for homeowners to take advantage of these cheap or free resources. Usually, reading through a little bit of information about the foreclosure process and other lending laws, homeowners will have a good idea of what the process is, as well as possible legal or other defenses against losing the home. Any option is more favorable than going through foreclosure and having it recorded against your credit score. Loan modifications are becoming more attractive for not just homeowners but banks and lenders as well. Because of the high rate of foreclosures that lenders are currently dealing with, more and more they are turning to alternative solutions to avoid the foreclosure process just as much as the average homeowner. Nonjudicial Foreclosure - File a Lis Pendens on Your Own Property Many homeowners facing foreclosure in a nonjudicial state do not really know how to respond to the bank's ability to take their home from them. In fact, the laws make it very difficult to defend against such procedures because there is no hearing in front of a judge or complaint filed in court. However, homeowners can make a nonjudicial foreclosure more difficult on a bank. This can be done by homeowners filing a lawsuit against the bank to stop the foreclosure process and requesting the court to grant them a temporary restraining order. This process is not very complicated and borrowers can call the county in which the property is located to find out more about how to file this, as well as consult with an attorney. However, once the motion to stop foreclosure procedures (known as an action to enjoin the trustee's sale) is filed, there is automatically a lawsuit pending against the property. This means 18 that the borrowers can file a lis pendens against their own house with the county recorder to alert any potential buyers of the pending court actions. But how would this help a homeowner in a fight to save the property from the bank? In nonjudicial foreclosure proceedings, the lender does not have to file a lis pendens against the property because the entire process is handled outside of the court system. And as long as the process is outside the courts, it can go remarkably smoothly for the mortgage company. When homeowners file an action to enjoin the trustee's sale, however, the process of foreclosing on the home becomes much more complicated. Filing a lis pendens alerts everyone to the fact that there is a lawsuit pending and that there may be problems with the bank's nonjudicial foreclosure. What this really means is that, even if the bank goes ahead with the trustee's sale and has the property auctioned off, any potential buyer may not be able to keep the house if the bank later loses the lawsuit. A third party buyer would have to return ownership to the original borrowers, which would make bidding on the property entirely pointless. Thus, homeowners, by filing a lawsuit in court to halt the foreclosure, and then by filing a lis pendens against their own home, dramatically reduce the chances that the property will receive any bids at a sheriff sale. Lenders, of course, do not want to own houses after foreclosing on them and do not want any complications in the foreclosure process that would discourage bids at auction. And until the lawsuit is resolved by the courts, the homeowners have no reason to remove the lis pendens. The court can remove it (known as expunging it), but will have no reason to do so as long as the lawsuit is going on and the homeowners have a case to make against the foreclosure. By filing a lawsuit to stop a nonjudicial foreclosure and then filing a lis pendens against the property, borrowers may be able to force their lender to begin negotiating with them. Otherwise, it is almost guaranteed the bank will end up owning the property at the county auction, and it would rather have more bidders than just itself. Four Uncommon Sources of Foreclosure Loan Financing Many homeowners who have begun missing mortgage payments or are facing a foreclosure find that, when they try to refinance their loan with a traditional bank or broker, it is very difficult to qualify for new mortgage. Their credit scores may be too low, or the value of their home unable to support a new loan. However, there are alternative sources for funding. 19 For homeowners who have equity in their properties and have recovered from their financial hardship but do not have decent credit, hard money lenders may be a source of financing. These are companies that pool money from various investors and make loans on real estate that has a good amount of equity. They can be found in every state and often advertise in newspapers. Professional real estate investors often act just like hard money lenders, but a local real estate investor may also be willing to consider a property with little equity. If the borrowers have the income to make a reasonable payment, the investor may also attempt to negotiate down the balance through a short sale before leasing the property back to the owners. While hard money lenders and private investors may act similarly, some lenders will provide an actual mortgage on the house while investors will take title and give the borrowers a lease. Homeowners considering the use of either of these sources of funding should make sure to understand all of the terms of the agreement, especially their future ownership in the property. A somewhat new source of mortgage financing in recent years has been actual brokerage companies. These companies often invest mostly in stocks, bonds, mutual funds, and other securities, but more have been entering the real estate market. With declines in the stock and housing markets over the past few years, these companies may be more willing to consider individual cases to help stop foreclosure. Finally, for people who own a commercial property that is facing foreclosure, life insurance companies may be able to provide funding for a refinance. Even local banks may have an insurance division, so it is commercial property owners' interests to research such sources of loans. However, life insurance companies rarely invest in residential property. Finding a loan when facing foreclosure has been getting more and more difficult as property values have been declining for the past several years. However, there are still some outlets for these types of mortgages, either from traditional sources or more uncommon ones. Homeowners with income or decent equity in a property may still be able to refinance their way out of foreclosure. Loans from Credit Unions to Get More Expensive Credit unions operating in small areas throughout the country have typically stayed away from the subprime mortgage disaster and the resulting economic collapse. Due to lending only to members of the credit union and having an actual stake in the success or failure of the loans they make to members, there have been few credit union failures compared to bank failures. 20 Credit unions operate by allowing members to open deposit accounts like checking or savings or CDs, and then lending that money to other members for home loans or personal loans. Because they lend only to existing members, credit unions are able to keep costs down and can charge interest on a loan at interest rates 1-2% lower than traditional banks. However, the relative success of credit unions compared to traditional banks, savings banks, and Wall Street investment firms is simply not good enough for the government, which seized two of the nation's largest credit union clearing houses on Friday, March 20, 2009. The ostensible reason: "a critical deterioration in the finances" of the clearing houses. This is, of course, in stark contrast to how the government has treated the failed Wall Street investment banks, which have not been seized but whose financial conditions have deteriorated to the point of bankruptcy. On the contrary, they have essentially been given close to $10 trillion dollars to paper over their insolvencies. Thus, it seems that the government is attempting to more control over local sources of financing that did not take on too much risk during the housing bubble, while just stealing money and handing it over to the largest financial institutions in the world like AIG and Citigroup. There are at least two concerns caused by the government takeover of the credit union clearing houses -- the new invasion of privacy by the government that this seizure will lead to, and the raising of costs to join or enjoy the benefits of being a member of a credit union. This can only increase the costs of getting loans from such financial institutions, which will have to deal with more bureaucracy and regulations. The government does not look too kindly on banks that take acceptable risks and only lend money to people who can afford it, so credit unions will be pressured to make bad loans and increase their costs. New government programs have also been proposed or instituted to oversee over more and more of people's personal financial and health records. Might this most recent takeover be another way for the government to seize all of the financial records of people who have kept out of the primary banking system? Four Common Sources of Foreclosure Loan Financing Unfortunately, after so many subprime mortgage loans have begun defaulting at record rates, banks and savings institutions have avoided handing out loans to borrowers. However, with all of the federal bailouts putting trillions of dollars into the economy, homeowners may be able to get some of their tax dollars back and find a reasonable loan to save a home. 21 Large commercial banks are one of the more common sources of residential mortgage financing, and some of them specialize in foreclosure or bad credit loans. For homeowners who have equity, some decent credit payment history, and only a temporary financial hardship, these banks may still offer products that would refinance a foreclosure. Smaller, more local institutions called savings banks are also heavily in the mortgage lending market. This type of bank writes the majority of mortgage loans in America, although many will sell the loans after origination. However, homeowners facing a foreclosure may be able to find a loan and have it closed quickly through a savings bank. Due to all of the different types of regulation, deregulation, and reregulation before, during, and after the collapse of the Savings and Loan industry in the late 1980s and early 1990s, it has become difficult to tell the difference between savings banks and commercial banks. In this case, homeowners should research the health of each bank individually and ask for information from the lender about which institutions regulate its activities. Small credit unions have also begun playing a greater role in residential mortgage lending, and homeowners facing foreclosure who are members of a credit union may have additional refinancing options. These institutions can also offer interest rates a point or two below prevailing market rates, so a foreclosure bailout loan may be quite a bit cheaper through a credit union, if the borrowers apply in the first place. Mortgage brokers, despite all of the abuse they have taken due to the collapse of the subprime mortgage market, can still be a good source for reasonable loans. They will shop a loan around to several different lenders who specialize in foreclosure loans and may be able to provide numerous options for a potential borrower. Another factor is that brokers can usually find a mortgage quicker than homeowners could on their own. Although refinancing out of foreclosure is still very difficult, due to the economic recession, the lack of available credit to consumers, and declining property values, homeowners should take advantage of any available option. In addition to researching loan modifications, defending a foreclosure in court, or selling quickly, refinancing can still provide borrowers with one more method to try in their efforts to save the home. Don't Just Rush Into a Government-Backed Loan Modification One piece of good news for the housing market may be that thousands of new homeowners a day facing foreclosure are attempting to take advantage of the various government programs to save 22 their homes. But while more options are better than fewer options, borrowers should consider more solutions than just applying for government assistance. The government, because it has taken so much money from taxpayers, is facing heavy pressure to produce results in its various mortgage relief programs. This gives the bureaucrats running the programs a large incentive to push through a large number of loan modifications and workout agreements as quickly as possible. This is contributing to a problem in re-default rates for homeowners who have received assistance from the foreclosure relief programs. Quality is being sacrificed for speed in an attempt by the politicians to pad the numbers of people who have been helped to keep their houses. But if these people later default again, have they really been helped at all? The newest program put forward by the Obama administration is also creating a moral hazard risk among residential borrowers. Because the plan allows financing of a home up to 105% of its value and does not have adequate property valuation requirements, the government must be handing out money on some homes based on previously inflated, artificial values. The most troubling aspect of the high re-default rate, though, is that most of these government programs are one shot deals. If the borrowers begin missing payments again, even if the program was unaffordable in the first place, the lender will be able to go ahead with the foreclosure and take the property back. This puts both homeowners and taxpayers in a bad situation. Taxpayers have their money taken from them in order to guarantee these mortgages. The government does not have adequate valuation requirements on properties receiving bailout funds in a real estate market where prices are declining by the day. Homeowners who have no equity have little incentive to keep paying these government loans. They may just borrow from their neighbors to remain in the house rent-free for a few extra months at the expense of the taxpayers before going back into foreclosure. And owners who borrow up to 105% of an inflated value will have no other options even if they wanted to keep their home. While some responsible homeowners who have fallen on temporary hard times and who have a decent amount of equity in their properties despite the falling market will be able to receive help from the government, there is a far greater chance that others will take advantage of the system or realize that they still have no equity and could rent for much cheaper. 23 It is the homeowners who have the least to lose who default on their mortgages regardless of financial hardships. When property value declines wipe out equity and the government offers to guarantee a loan, borrowers re-default at high rates. Even the government is estimating that 55% of the loan modifications done through their various programs have fallen behind again. Thus, homeowners should consider every options possible to stop foreclosure before they run out of time. But rushing into a government-backed workout program may be a setup for another failure. Too many people have already lost jobs and lost homes for the government to step in and make the situation even worse by guaranteeing bad loans with taxpayer money. Avoid the Collection Calls, Contact the Bank Manager... Now What? Taking and return phone calls from a mortgage lender's collection department is almost always a losing proposition for homeowners attempting to save their properties from foreclosure. Collection agents usually do not have enough authority to negotiate an agreement, and homeowners may not have the funds necessary to pay the entire amount they are behind. This is why it is better for borrowers to attempt to get in touch with a senior loan officer, vice president of some sort, branch manager, or the legal department of the bank. In fact, homeowners may want to politely refuse to speak with the collection department since it lacks any means of coming to an agreement to stop foreclosure. But once the borrowers have gotten the name of someone who can negotiate a workout plan, what next? If the person never calls back, should the property owners give up? And if they do get in touch with that person, what should they say? What is the entire objective in contacting a higher level manager with the mortgage company? If the branch manager or loan officer does not take the homeowners' calls or refuses to respond to voicemails, the borrowers should document each attempt at communication. All of this documentation should be sent to the president of the company to show how poorly the company responds to foreclosure situations. But once the borrowers do finally get in touch with someone at the bank who can make important decisions about a loan in default, they should attempt to set up a face to face meeting. This will be easiest if the company has local offices, but many large companies also have higher level representatives who travel in a geographic region and may be able to meet. Having a face to face meeting with someone at the bank (whether the bank is local or multinational) will dramatically increase the chances of being able to negotiate a solution that is 24 beneficial for the homeowners and the bank itself. If there is any way to get such a meeting, borrowers should take it as soon as possible. At the meeting, the owners should ask the bank to outline how its own foreclosure process works. Each bank handles a foreclosure a little differently, depending on the bank's internal procedures as well as how many properties it currently has in default. If the bank has a large number of homeowners facing foreclosure, it may be easier to negotiate, since the bank will want to avoid owning more properties. It is also important for the borrowers to explain their financial situation and propose various agreements that would allow them to save the home. It is up to the borrowers to submit potential solutions, and this will prevent the bank from proposing a plan that is simply impossible for the owners to afford. Most of the time, the borrowers will speak with someone who is somewhat sympathetic to their situation and will attempt to meet them in the middle with an agreement. But occasionally, banks will hire the more belligerent, mean-spirited person they can and have that person deal with their clients who are not paying their loans on time. Although this arrangement makes the least amount of sense, bank collections departments are full of such cruel people. If they are forced to deal with such a person, homeowners should not lose their cool, although they may bring up the possibility of filing bankruptcy to stop foreclosure if they are unable to work out a solution. Another tactic homeowners should use when negotiating with the bank is to remind the manager how much it really costs to foreclose. Attorney fees, maintenance costs, lost loan revenue, property taxes, and insurance all add up. Negotiating a mortgage modification or repayment plan can cost significantly less. Homeowners should keep in mind a simple structure to the meeting and attempt to follow it as closely as possible to achieve success. Learning how the bank pursues foreclosure is important, and coming to the table with reasonable proposals to stop foreclosure is even better. Remaining calm and mentioning the costs of foreclosure and bankruptcy can also help, if the situation warrants it. But attending the meeting and negotiating with the bank manager is not nearly as difficult as just getting the meeting in the first place. Lenders do not want to meet with every single person facing foreclosure, but they will take the time to do so with borrowers who are persistent and serious about working out a solution. 25 Four Ways to Find Out Who Owns Your Mortgage One of the problems that homeowners may run into when defending a home against foreclosure is finding out what company really owns their loan. The original lender may sell the loan but keep collecting payments, or a mortgage servicer may be hired to do this. But finding the actual owner of the loan is important in negotiating a solution to foreclosure. In fact, mortgage servicing companies have little incentive to negotiate with borrowers, as they actually make more money by jacking up foreclosure-related fees, as opposed to a mortgage modification or other agreement. This makes is essential for homeowners to find out just who owns the note at the time they begin missing payments. There are a number of ways to do this, the first being a simple call to the current company collecting payments to ask who owns the original note. Sometimes the original lender will sell the mortgage after originating it, while retaining the right to collect the payments and act as the servicer. But even in this case, the servicer has a greater incentive to foreclose. A second easy method to determine which company is the actual lender in the transaction is for borrowers to search their monthly bill and payment information for any other company's name. If a second company is listed on the monthly bill besides the company the homeowners make their payment out to, this may be the actual owner of the loan. Another way to find out if the loan has been transferred and to what company is to call a local title company and request a search. A routine title and lien search can cost about $100 or less, depending on the title agency and the work involved (not to be confused with purchasing title insurance, which can be much more expensive). Homeowners can also perform a title search on their own by contacting their county recorder's office. Many counties have this information online now, which makes searching for transfer documents much easier than in the past. However, borrowers should call to make sure there are no further documents that have been filed but are not in the online system yet. The main problem with these types of title searches, of course, is that the paper trail may run cold. Many banks sold loans amongst each other but never recorded an assignment with the county recorder, which would make it much more difficult for a lender to prove that it actually has a right to foreclose on a particular property. But homeowners who find it almost impossible to determine which company actually owns their loan may want to bring this issue up if the bank claiming to be the lender files a foreclosure. 26 Numerous lawsuits have been thrown out of court because a mortgage company could not prove that it owned the loan. Borrowers will find it very difficult to defend against a foreclosure action if it is not clear which institution has the right to collect on the loan. If there is no document recorded on the property indicating an assignment to the foreclosing bank, what prevents another company from showing up later on and insisting it really owns the loan? Foreclosure Laws Designed to Benefit Banks and Hurt Borrowers Foreclosure laws are designed to prevent banks from being able to steal a property and to protect homeowners from fraudulent collection actions, right? In fact, all laws are designed to protect the children, save the environment, and assist Main Street while not rewarding Wall Street -- but how can we explain all of the laws that specifically harm borrowers? For instance, so-called fast track foreclosures and nonjudicial foreclosure procedures deny due process rights to homeowners who may have fallen behind on their mortgages or are victims of predatory mortgage servicing. But without an actual trial, or even the right to respond to a bank's foreclosure, lenders can just steal homes with no adverse consequences. This type of foreclosure is allowed in 30 states and the Washington, DC area, taking the right of a trial away from more than half of the country. The worst part? Judges have actually ruled that such foreclosure procedures do not violate Constitutional rights, despite the fact that in these cases, the burden of proof is on borrowers to show how a foreclosure is invalid. Another loophole in all these laws designed to protect the little guy against the big Wall Street banks is that, in all states besides California, banks have no obligation to try and work out an agreement that would stop foreclosure. In fact, banks are allowed to proceed directly to the foreclosure process after the first missed payment. Thus, the negotiation process is almost entirely determined and run by mortgage lenders and servicers. They do not have to administer adequate loss mitigation departments or provide any solutions to foreclosure besides homeowners defending their properties in court, if they are allowed and can afford to do so. Furthermore, in all but three states, the lender can begin piling on outrageous default, foreclosure, and late fees as soon as the first payment is late. These huge fees are usually directly responsible for most homeowners who experience a temporary financial setback being unable to afford to pay tens of thousands of dollars to reinstate a loan that is only behind by a few months. 27 It is routine for a bank, in the space of six months or less, to charge a single borrower tens of thousands of dollars in late fees and interest, while its attorneys charge another ten thousand. By the time the foreclosure paperwork is finally filed in court, it is almost impossible for the homeowners to pay back what they owe even if they want to. Thus, foreclosure laws around the country allow banks to loot borrowers' loan accounts by piling on outrageous fees, refuse to negotiate with homeowners for a mortgage modification or other agreement, and then pursue a fast track foreclosure that denies people basic due process rights. And all of it is legal and sanctioned by the courts. Is it any wonder that so many homeowners find it difficult to believe that "the law is on their side" in the case of a foreclosure? Is it any wonder so many borrowers do not even bother to respond to a foreclosure lawsuit or show up at the court hearing? Is it any wonder so many find it necessary to take out their frustration at the bank directly on the house itself? House Prices No Longer at 2006 Levels - Adjust Expectations Accordingly When home prices were rising every year, it was a much simpler matter to avoid foreclosure. Homeowners who fell behind on their monthly payments just listed the property on the open market and it sold a few days or weeks later for more than they paid for it. But with high foreclosure rates and a recession, property values have been dropping precipitously. This is making it more and more difficult for homeowners facing a financial hardship to sell to avoid foreclosure. Two methods of saving a home during the bubble, refinancing and selling high, have been almost entirely eliminated as the collapse of the mortgage lending industry has dragged down house values. Despite (or because of) all of the economic stimulus and corporate bailout packages the government has put into place, home prices are still falling across the country. Every region of the nation experienced falling median home prices in January of 2008, and there is little sign of recovery in the real estate market yet. Thus, homeowners and anyone attempting to help people stop foreclosure may need to adjust their expectations in regards to home values. Few new homes are being built relative to a couple years ago, and the inventory of houses and foreclosures already on the market will need to be sold before prices begin to rise again. 28 One of the symptoms of a bubble in stocks, real estate, or any other asset is rapid price appreciation in the absence of fundamental changes in the economy or asset itself. Is there any doubt now that homes increasing in value by 20-30% a year for nearly a decade was an artificial bubble that could not last forever? Depreciation of prices is one of the few good aspects of the bursting of a bubble or a recession, from the perspective of consumers and homeowners. As home values fall from the artificial bubble level, more buyers will be willing to purchase homes again, and banks will be willing to lend money on properties that are not falling in value by the day. Of course, this will make it more difficult for those already in homes in some parts of the country to save them to avoid being foreclosed on, but this may be better for their long term financial goals. No one wants to struggle to pay $600,000 in principal and interest on a home worth only $150,000. And foreclosure is not the end of the world. By the time a consumer's credit has begun to repair in 2-3 years, home prices may be much more affordable. If the bank is unwilling to allow a short sale or a loan modification, homeowners deep underwater may be better off letting the house go and renting for the next few years. But the unrealistic expectation that home values are still at 2006 levels, and government efforts to keep them at that level, are continuing to destabilize the market. Because of this intervention in the housing market, sellers are keeping prices artificially high, hoping the government solves their problem. Buyers, though, are uncertain and not buying. What Happens at a Foreclosure Auction? You hear a lot of talk about foreclosure auctions; now learn what exactly goes on at them. It doesn’t matter if you are an investor looking to buy property at the auction, if you are the homeowner being foreclosed on or trying to get your house back, you should have a good idea on what to expect. This article is to give you general knowledge on what happens, keep in mind things can vary slightly depending on what state you live in. Find an Auction Most foreclosure auctions are going to be listed in your local newspaper. Before you attend that auction you may want to find out details on how to pre-qualify for bidding. Most of the time you will have to put down a deposit so the auctioneer knows that you are a serious bidder and can afford the property it you win. Getting pre-qualified is a good idea if you are serious and it saves time the day of the auction. 29 Do Your Research Also, if you see a place that you’re interested in bidding on, you should go and do some research on the home. Look into any liens that may be on it, how much it is worth, what kind of area it is in, and what the value is of other places next to it. If there are a lot of foreclosure properties in the neighborhood, you may want to keep in mind that it lowers the value of the property. Also go and check out the home, look to see if it needs repairs and consider those cost if you are trying to come up with a price to bid. It is very important to do your research before the auction, this way you know what you are getting yourself into, before you bid. The Day of the Auction When you get to the auction, it will start with the auctioneer reading legal notices as well as a legal description of the property. Then the auctioneer will begin taking bids on the property. Things can go quickly here, so be alert try to station your self in the middle front of the room, that way you can here what is going on. If no one was pre-qualified before the bidding, the auctioneer will ask the bidders for a deposit check, usually around 5 thousand for residential property. Each time someone bids, the auctioneer with try to encourage higher bids from other people. It is their job to try and get the most money they can from the bidders. It really depends on the auctioneer, but bidding increments can be by $100, $500 or $1,000 per bid. The auctioneer will continue to increase bids; until it is completely obvious that no one else is will be bidding. This is where you get to hear “Going once, going twice, three times, sold!” The auction is now over. After The Bidding Has Ended Once the bidding has ended a foreclosure deed and purchase papers are drawn up and validated by the new owner or purchaser and the mortgage holder. Usually there will be a grace period of 30 days to allow the purchaser to find financing or come up with the money. After the 30 days a closing will take place, so that the new owner can officially take the title to the property. This is the end of Part I for what happens at a foreclosure auction. Please read Part II if you would like to find out what happens after the purchaser has the property and what happens with the original owner. Calling Your Lender - How to Make Collection Calls More Productive Many homeowners seem to personalize a collection call from a lender, fearing that admitting they can not pay the loan will damage their self-esteem beyond repair. Unfortunately, talking to the bank is the first, most important step in working out a solution or finding a way of avoiding foreclosure altogether. Homeowners, though, can make these calls far more productive. 30 It is essential for borrowers who are serious about saving their homes to document every time the lender calls, where they call (home, work, cell phone), who leaves the message (or if it an automated message), and what the message was about. Also, owners should either take the call if they can, or return it as soon they are able. However, homeowners do not have to speak with the collection agent and give out all of their personal information and deal with the typical amount of belligerence and intimidation. Asking for a manager from the bank's collection department, it should be noted, will usually result in 15% more belligerence and 25% more threats of foreclosure, with 10% less work actually done on the file. The best way to deal with the collection or loss mitigation employees may be for the borrowers to acknowledge they are having difficulty paying their loan, request the fax number for the department, and make sure to send any letters or correspondence to them. But listening to threats of foreclosure all day from a collector will not solve the problem of foreclosure. Instead of dealing with low-level collectors, homeowners can begin attempts to get in touch with someone with actual decision-making abilities, such as the bank CEO, branch manager, senior loan officer, or the legal department of the bank. At the bare minimum, any correspondence sent to the bank should also be forwarded to these other departments and senior managers. Whenever the collections department calls, homeowners should take or return the call, but politely hang up the phone without getting into too much discussion. But as soon as they do have a problem paying the mortgage, borrowers should call the main office of the bank and request some very specific information. With larger banks, it may be difficult to know who to talk to or ask for, but homeowners can ask for a manager from the regular customer service division or someone who can help with legal matters (foreclosure is a legal matter). With smaller banks, it may be easier to call the main branch, ask for the name and extension number of the manager or senior loan officer, and get off the phone after receiving this information. Then, the homeowners can wait a while and call back and ask for the manager or loan officer by his or her name. This will put them in contact with a higher level employee who is more able to make decisions about a loan and work out more flexible arrangements than a collection department employee (or even a collections manager). Again, it should be noted that any documents or correspondence sent to senior management at the bank should also be copied to the bank president, the collections department, any lawyers 31 office involved with the foreclosure, and anyone else applicable. Homeowners should also keep track of how often they call the bank and are called by the bank, including if they leave voicemails for the manager. Too many homeowners waste valuable time when they do not call the lender or return its calls; too many more waste extra time dealing with low-level collectors. This may be one reason to consult a foreclosure attorney to handle the foreclosure, since it would be easier to get in touch with the legal department, but borrowers can contact a senior manager at a bank on their own and reach an agreement to stop foreclosure much quicker. Documents You Need to Fight Your Foreclosure It should be no secret by now that most mortgage lenders are hopelessly disorganized. Many of them routinely lose faxes or never receive letters that are sent to them by borrowers, and they are terrible at acknowledging voicemails or returning phone calls from homeowners attempting to work out an alternative to foreclosure. Some even lose entire loan documents. This puts the organized homeowner at an advantage when attempting to defend a home. Just having copies of loan documents and having kept track of all correspondence between them and the lender will help borrowers keep on top of the foreclosure. In the event the situation goes before a judge, homeowners will be able to prove their attempts to save the home. There are a number of documents that homeowners should keep track of, including any specific loan workout packages that they are sent by the mortgage company itself. These documents include real estate and mortgage paperwork, escrow documents, copies of other liens attached to the property, a record of communications, any letters sent by or to the lender, payment statements, and foreclosure notices. Homeowners need to have a copy of all of the real estate contracts and mortgage or deed of trust paperwork that were used in the original purchase or any subsequent refinance of the property. There may be grounds to dismiss a foreclosure if any of these documents indicated an invalid loan or show potential predatory lending. Copies of this paperwork is given to homeowners at the closing of the loan, but can also be obtained through the county clerk or recorder's office. Escrow documents will be especially important if the bank or mortgage servicer is claiming that the homeowners did not adequately fund the escrow account and were charged extra fees. Homeowners can contact the original title company to obtain copies, although they should have received copies when the loan closed, as well. 32 Any other liens on the property and any other document filed with the county affecting the property should also be retained by the borrowers. This may include other mortgages, tax liens, or court judgments. Many counties have copies of these documents available online now, and the originals can be examined at the county recorder's office. Homeowners should also keep track of every phone call they receive from the lender, as well as when they make calls to the bank. If they do not record the actual conversations, they should at least document when the call was made, to whom the homeowners spoke, what was discussed, and if any agreements were made or follow-up required. In addition, after every phone call in which the homeowners speak with someone live, they should send a follow-up letter or fax to confirm what was said and create a longer paper trail. Borrowers should also respond in writing to every letter that the mortgage company sends them, even if just to show that they have attempted to work out a solution to foreclosure in as many ways as possible. Sending a letter via fax is alright, as long as the owners can prove the fax went through -- claiming not to have received faxes is a favorite tactic of mortgage servicers participating in fraud. All mortgage statements or monthly bills should also be retained by the homeowners -- just ignoring them and throwing them away unopened is a bad idea! These documents can prove if a lender overcharges for late fees or interest or adds any other outrageous fees on the account. All payment information should also be kept, including any partial payments sent to the lender or payments made online or over the phone. Finally, once the foreclosure begins, homeowners should keep track of all the legal documents that are sent to them by the lender, its attorneys, or delivered by the county itself. When attempting to stop foreclosure through the courts, there are specific time lines for filing responses, which will depend on when the homeowners received copies of the paperwork. As an aside, homeowners attempting to save their home should absolutely keep the envelopes that contain the lender's communications. Lenders can be notorious for sending out a notice or important letter a few days (or weeks) later than they should, thereby giving the borrowers even less time to respond or work out a solution. This is a favorite tactic of fraudulent companies -- sending out documents late, giving little time for response, or not even sending the documents out a all but claiming to have done so. This may seem like a lot of information the homeowners have to keep track of, but putting in just this little extra amount of work can pay huge dividends when it comes to defending a home in court. Banks do not have a right to a property -- they have a right to have their loan satisfied. If they make it difficult-to-impossible for homeowners to satisfy the loan or work out an alternative 33 to foreclosure, there may be serious lender misconduct going on, and legal defenses may have a better chance of success. Obama's Making Home Affordable Plan - Still Depressing Housing Values President Obama's new foreclosure relief program has been named, appropriately vaguely enough, the Making Home Affordable plan. Which party, the lenders or the homeowners, are getting a more affordable home is debatable, but the plan is to spend another $75 billion to fix the housing crisis by covering up property values and lowering monthly mortgage payments. Seventy-five billion dollars has been allocated to helping close to nine million homeowners fight foreclosure through either a refinancing plan or a mortgage modification. This represents an average of over $8,000 the government will directly spend for each at-risk borrower, along with another $200 billion used to support Fannie Mae and Freddie Mac. The plan leaves out a number of homeowners and borrowers who were instrumental in keeping the housing bubble inflating. Second homes are not involved in the home. Neither are jumbo mortgages. And neither are those homeowners who own a primary residence but would be unable to document their incomes. The final group that is left out is the most disturbing. MSN Money describes this segment of homeowners as "Those who owe so much more than their houses are worth that a lender would do better by foreclosing." Thus, lenders are still in charge of the foreclosure process and will keep taking homes from borrowers when it is a better deal for the bank. With close to 10% of all loans on one- to four-unit properties at least one payment behind, Obama's mortgage relief plan will leave out a significant portion of the housing market. And it is not that investors, speculators, and people who can not prove their incomes should receive help -- in fact, probably no homeowner should receive direct federal government help. However, the point of all these government foreclosure relief plans has been to stabilize housing prices, reduce the number of properties facing foreclosure, and assist banks in working with borrowers. Each plan has helped a small number of homeowners, and most have targeted only one group or another, while leaving other groups to fend for themselves. But the housing boom was made up of investors, speculators, jumbo loans on inflated properties, and people who did not have to document their incomes to receive a mortgage. Taking these 34 groups out of the market (by raising lending standards and not relying on falsified appraisals) and not offering them federal government assistance will depress housing prices. So the government is dealing with a very tricky situation in attempting to prop up housing prices and help responsible borrowers stay in their homes while simultaneously not offering assistance to the groups of borrowers most responsible for keeping the bubble inflated. If these irresponsible groups are not given help, their foreclosures will lower property values. Unfortunately, it seems as if the government does not know what the final goal is with all of these contradictory plans. Should they encourage savings or spending? Prop up house prices or allow large numbers of borrowers to fail? Support competition and markets or bail out insolvent institutions? In trying to do all at once, the government is creating more uncertainty and the potential for more foreclosures and business failures. Banks Unfreezing Credit Markets by Freezing Credit Markets Decades of making money cheap, easy to print, and similarly easy to loan out have resulted in a large number of Americans struggling under a huge debt burden. The banks which have lent out this money are now restricting credit to borrowers, despite their creditworthiness, and actually damaging peoples' credit histories for no rational reason. Instead of saving money to purchase a car or home, for years it was easier just to borrow the money from a lender. Giant companies like General Motors and General Electric established finance divisions to sell losing assets at a gain through the availability of loans and interest payments. But these days are over and the so-called credit crisis is here. In response to the larger than average number of homeowners and consumers defaulting on their debts, facing foreclosure, or not paying their credit cards, issuers of lines of credit are not cutting back on those lines. This action, though, is having the opposite effect that every other government and bank plan is purported to have: freeing up credit to consumers. In fact, the banks are begging for and receiving hundreds of billions of dollars to unfreeze their consumer lending divisions, even as they are cutting back the amount of money being offered to consumers who already have loans. The effect is that people who were once creditworthy are being hit on their credit scores. One small part of the subprime mortgage crisis and foreclosure crisis in general was that lenders, during the boom years, did not worry about credit scores or incomes. House prices were always 35 rising, so anyone could be given a home loan, and even if they could not pay it back, they could just sell at a gain and pay back the mortgage company. But that era ended when house values began to fall as a result of fewer loans being made to bad borrowers and more foreclosures as a result of bad loans. There are no more Alt-A Option Adjustable Rate Stated-or-No Documentation Pay-If-You-Want-Sell-If-You-Don't Mortgages available from hundreds of lenders. Credit scores are beginning to mean something again for prospective borrowers and lenders, and a good credit score and an on-time payment history will be just as important as having a down payment to obtain a loan. But this is exactly what the banks are now sabotaging in their misguided efforts to reduce risk. The banks are actually lowering credit limits for consumers based on risk-assessment algorithms, which are supposed to predict which borrowers are at a higher risk of default. This is despite the fact that some of these borrowers may have already-high credit scores and no late payments on these lines of credit. One impact of this will be lowered credit ratings for borrowers who are paying off their loans on time every month. Despite their wise use of credit, if they spend a little too much like an at-risk consumer, they may find that the lender has lowered the amount they can borrow and given them a hit on their credit report. Increased credit limits will invariably raise a credit score, all else being equal. On the flip side, lowering credit limits decreases consumers' credit scores. If these people ever do face a financial hardship, even their on-time payment histories may prevent them qualifying for a foreclosure refinance or other program. The bottom line: banks are destroying consumers' credit scores by lowering their credit limits, despite their on-time payment history. If these borrowers ever experience a financial hardship, they will be unable to qualify for a refinance (despite being creditworthy) from their bank (which destroyed their credit) or any other (which relies on their destroyed credit rating). But -- the government and the banks are working together to take trillions of dollars and unfreeze the consumer credit markets? 36 Never Waste a Bad Foreclosure Crisis "You never want a serious crisis to go to waste." - Rahm Emanuel "Never waste a good crisis." - Hilary Clinton "With crisis - and certainly foreclosure is a crisis -- comes the possibility for change." -- David M. Petrovich, author of Fight Foreclosure! With so many homeowners currently facing foreclosure and the economy in the grips of a far greater recession than most could have predicted, there are many new opportunities. And these are not just opportunities for rich investors to grab up distressed properties are fire-sale prices or for corporations to get free taxpayer money. No, far more opportunities are available for individual families and communities across the nation than has been acknowledged thus far. Facing foreclosure during the boom years made it easier to sell the property quickly, but far more difficult to find an affordable rental property and an understanding landlord. But now, home values have declined by large amounts across the country and many more properties are just sitting vacant on the market, looking for buyers or renters. This makes finding a new place to rent after losing a home much easier, and some landlords are facing foreclosure themselves and just looking for good tenants to help provide cash flow. The banks are also beginning to find out that extraordinary foreclosure rates are a good opportunity to renegotiate mortgage loans. The more properties pile up on bank balance sheets, the lower their value and the more the banks have to pay just to keep up on maintenance and property taxes. Although the financial giants are primarily looking for direct bailouts from the citizens of the country via the federal government, more lenders have been modifying loans in recent months and even Citigroup is supporting bankruptcy judges being able to reduce balances on loans on primary residences, a policy which it opposed just months ago when it was solvent. The federal government is wasting no time or looted resources to take advantage of the financial crisis, and homeowners should be no different (although take care not to loot -- the government claims a monopoly on this). The banks are weaker and they know that foreclosure is becoming a more risky option. Homeowners can capitalize on this knowledge by aggressively negotiating with banks or hiring a lawyer to do it. Loan modifications, short sales, and deed in lieu of foreclosure opportunities are 37 becoming more available, as lenders with huge mortgage exposures know that solving more foreclosures means the difference between survival and failure. What Does the Obama Mortgage Plan and Nationalization Have in Common? People are confused. Something is missing from the newest $275 billion Wall Street and housing market rescue plan. And without this one important part of the program, no one will know if taxpayer money is going to be used to bail out homeowners who are deeply underwater in homes that were grossly inflated during the housing boom. President Obama's new mortgage relief plan does not include a real property valuation for homeowners to qualify for it. Is this a sign that the plan was rushed, creating a massive oversight that should have been caught but was simply missed? Because this can not really be the Change that taxpayers were promised, right? Unfortunately, it seems that the Obama definition of Change has more to do with creating even less stringent requirements than the recently-departed Bush administration did for banks and homeowners to receive help from the federal government to cover up losses from overvalued real estate and subprime mortgage loans. Without adequate appraisal requirements to qualify for the Obama foreclosure relief plan, the current value of properties participating in the plan will not be officially determined. This means that the banks and investment firms that own the loans on these properties will not have to acknowledge declining real estate prices on their books. Falling property values were the problem that had to be addressed for any correction in the housing market to occur. One solution would be simply to let properties go through foreclosure that could not be saved, and help homeowners who could stop foreclosure find ways to do so using the dozen or so methods already available. Another solution would be simply to take money from workers and have the federal government create a new program that allows homeowners facing foreclosure to get free money and a modification of their loan without have to prove the value of the property they are receiving assistance for. This latest plan, unfortunately, is little more than a way for the government to help prevent the banks and Wall Street firms from ever having to admit the huge losses they are carrying due to 38 bad loans and declining real estate prices. Suddenly, the housing market crash is not the problem -- writedowns of worthless housing market assets are the problem. All we can hope is that the government stops interfering in the stock market and the housing market and allows some of this bad debt to be cleared off the books. The government and the banks have created a mess of mortgage loans and covering up the damage or nationalizing failed institutions only creates more uncertainty. Mortgage giants Fannie Mae and Freddie Mac, insurance giant AIG, banking giant Citigroup -- all have been essentially nationalized after sustaining huge losses from bad loans. Finance giants GE and GM may be next. And who will be next after that? Is any company safe from being nationalized? Should anyone invest in the stock market with the threat of nationalization? Nationalization and this latest mortgage bailout plan have in common that they are designed only to help companies prevent from recognizing losses, thereby keeping them artificially alive at taxpayer expense. But none of us can afford this much longer. It is disheartening to see more people lose their homes day by day so that failed corporations can be kept alive. The loss of a few companies or some overvalued homes may be tragic, but no healing will begin until they are liquidated. So far, President Obama only seems to be accelerating and increasing Bush-era failed policies, rather than fundamentally changing them. Until we get change, expect more nationalizations and attempts to prevent losses from being recognized. How to Fix Toxic Mortgage Assets -- Prop Up Artificial Home Values! Giving a blood transfusion to a dying economic patient, jump starting the dead battery of the economy, and providing a federal backstop to prevent wild financial baseballs from injuring spectators have all had one goal so far: propping up housing prices. This is also known as stabilizing the housing market, and is designed to help the banks. In fact, everything the government has done so far to "fix the economy" has been for the benefit of the banks. From the Federal Reserve (actually not a part of the government but close enough) providing new "windows" at which banks can trade bad assets for good, to the Treasury shoveling $350 billion at various banks, all of it has helped financial institutions. The problem, according to the banks, is that mortgage securities have fallen in value. If the value of these securities' underlying assets, mortgages on residential homes, could be propped up, then the problem would disappear, regardless of the fact that the people who own the properties would still be unable to pay them. 39 The problem is not the fact that so many people were sold mortgages that they would never be able to pay back. The problem is that the prices of homes collapsed from the artificially high levels of 2005-2006. Mortgage companies were unable to flip the homes that went into foreclosure as a result of poor lending decisions. If the banks could only get home values back to levels seen during the bubble, the mortgage securities would not be underwater anymore. In fact, the Ponzi scheme could pick up steam again, if home values would just go back up to levels that were grossly inflated to begin with. Then more securities could be sold to more unsuspecting investors. This strategy of helping the banks applies to President Obama's foreclosure bailout package, recently unleashed upon the housing market. The plan is designed to help homeowners reduce their monthly mortgage payments to avoid foreclosure, as well as hide the steep declines in home prices across the country. In effect, people are being asked to ignore the fact that their property has fallen in price in exchange for the government stepping in and helping lower their monthly housing bill. No foreclosure, no forced sale of the property, and no inconvenient sheriff sale or appraisal to determine the value of the home will help hide the true value of a house. The question no one seems to be asking is if homeowners will be willing to keep paying anything every month for a home that is deeply into negative equity, even with government assistance. Of course, some will, but others will be willing to let the house go through foreclosure and rent for a few years. This might, in fact, be a better way to dispose of a truly inflated house -- fight the foreclosure, get a short sale or a deed in lieu, and rent for a few years while saving money for a down payment on a vastly cheaper home. President Obama's mortgage plan attempts to convince people to accept being locked into a lower payment while still overpaying for their home. It is unfortunate but not very surprising to see another foreclosure relief plan put forward by the government where the primary purpose is to hide a much-needed correction in home values. Instead of addressing the problem and lowering mortgage balances, the plan tries to solve the symptom of the problem and hide a true valuation of home prices. 40 TALF - Another Government Program to Force You to Borrow More Money There has almost been too much economic bailout news in the past few days to keep up with. The government is wildly inflating the currency supply and providing one program after another in scatter-shot attempts to prevent more failures. But with each passing day, the stock market declines as investors can not predict the next government intervention. On Tuesday, March 3, 2009, the Federal Reserve launched a new program called the Term Asset- Backed Securities Loan Facility, or TALF, to buy up financial securities backed by credit card debt, auto loans, student loans, and small business debts. Now companies and investors holding toxic consumer lending assets can get access at the Fed to US Treasury securities and cash to facilitate even more bad loans to consumers. What is the point of this new program? Well of course, it is to unfreeze the credit freeze, cure the credit crisis, and jumpstart the dead battery of consumer lending. Investors taking part in the $200 billion program must be willing to make new loans to consumers, even though previous loans to consumers had caused the credit market freeze in the first place. Thus, the new Fed program is another attempt to hide the flaws in the financial markets by dumping bad loans onto the government, while attempting to stimulate more bad lending. Investors receiving these funds from the government are expected to make loans to consumers, even though too many defaulted loans to consumers are the problem. Two hundred billion dollars, though, will be just the beginning, and this could be the start of another nearly $1 trillion or more bailout. The politicians know that poor lending caused the subprime meltdown, but the only solution being proposed is hiding the bad debt and forcing financial institutions to make more bad loans. Most Americans, though, have had their fill of credit cards, student loans, and subprime mortgages, and would not take another one out even if they qualified for it. Homeowners have lost significant portions of their equity, and the nice banks that offered them loans even though they lacked jobs are not so nice once the mortgage is late. In fact, the majority of people who I have received emails from have stated that they are much more cynical of the banking and legal systems in general, and the idea of borrowing more money in particular. More people are realizing that debt is a trap, that money is debt, and that the government controls the supply of money. 41 Homeowners realize it watching their equity disappear by the day as the foreclosure rate devastates communities, and investors realize it watching the stock market tumble further every day. And there is nothing to show for it all besides more government programs, more government control of the housing and financial markets, and more money given to failures. Until the bad debt is liquidated properly and the government gets out of the business of forcing taxpayers and successful businesses to prop up failing institutions, the recession is here to stay. Hiding debts in new Federal Reserve acronyms will not solve the problem of too much bad debt -- it will only prolong the downturn. Beware of Obama Economic Stimulus Scams, Says the FTC With the current high approval ratings of President Obama and his high degree of popularity among people, it should be no surprise that many websites and marketers are attempting to cash in. While companies are mostly free to use Obama's image on their products or services, it is still a "buyer beware" world. Take, for example, the new Homeowners Affordability and Stability Act of 2009, President Obama's so-called mortgage foreclosure bailout plan. The plan is designed to provide $200 billion to Government Sponsored Enterprises Fannie Mae and Freddie Mac, with another $75 billion to be used to modify mortgages or provide government-backed guarantees. According to the Federal Trade Commission, a number of scammers have already begun to capitalize on Obama's popularity and the new plan to trick homeowners in foreclosure. The FTC is holding a press conference tomorrow, March 4, 2009, to address some of these new scams that are attempting to pass as legitimate providers of government assistance. PRESS CONFERENCE to unveil bogus Web sites and other scams claiming they can help individual consumers qualify for a share of stimulus package money. Many sites use photos of President Obama and Vice President Biden to give the appearance of authenticity. Sites also use logos from ABC, CBS, CNBC, CNN, FOX, NBC, MSNBC, US News and other major media outlets to make them appear legitimate. With all of the news coverage on the plan so far, every homeowner experiencing financial trouble is asking the obvious question: "Do I qualify?" Unfortunately, any homeowner trusting a seemingly legitimate news- or government-type website to find out if they qualify for the Obama mortgage bailout will run into a number of problems. 42 First of all, full details of the plan have not even been released yet, so it would be impossible to know if one borrower or another qualifies or not. While some different types of assistance and requirements have been put out by the government in preceding weeks, full details are not expected until at least March 4, 2009. Second, from the details already released by the government, the Obama mortgage bailout may be difficult, if not impossible, for many owners to qualify for. Properties with a second mortgage or HELOC are disqualified, as are jumbo loans (over $417,000), and investment properties or second homes are ineligible for assistance. Third, this program is still voluntary for banks and lenders that have not taken money from the government's Troubled Assets Relief Program (TARP). As with most of the voluntary programs so far, banks have done little to dedicate resources into assisting borrowers qualify for such government programs. Voluntary government foreclosure relief programs like Hope Now, Project Lifeline, and the Hope for Homeowners Act have thus far failed to decrease the foreclosure rate. While the number of loans being modified has increased, the redefault rate has been disappointingly high. Can we expect Obama's plan to succeed where previous ones have failed? Homeowners attempting to save their homes have much more work to do than just putting their faith in President Obama to solve the foreclosure crisis. While the new plan may be one more option borrowers can attempt to qualify for, every foreclosure situation is unique and requires a specialized approach, which cookie-cutter government programs can not provide. Any website or company attempting to pass itself off as being affiliated with a major news network or as a government approved program should have homeowners running the opposite direction. Hopefully, the FTC will be doing borrowers a service tomorrow by warning them of such scams and explaining how to avoid them. But in the meantime, it is still up to foreclosure victims themselves to do the necessary research to understand how foreclosure works and what methods, publicly or privately offered, can stop it. Ignorance of how mortgages operated helped create the housing crisis -- only a knowledge of foreclosure and awareness of scams and solutions will help end it. 43 Four Steps to a Successful Deed in Lieu of Foreclosure Homeowners who can not afford to or who simply are not interested in saving their home from foreclosure typically just walk away from the property. Once they have found a new place to live, they lock the doors of the foreclosed property, shut off the utilities, and mail the keys back to the lender. But this is not the most useful method of addressing the situation, and a deed in lieu of foreclosure may present a better option for borrowers. Unfortunately, mortgage companies are rarely interested in homeowners who just offer the deed back to the house in exchange for no foreclosure. Lenders are not usually in the business of owning foreclosed homes, and would rather see the borrowers attempt to sell, negotiate a workout arrangement, or refinance the loan before considering a deed in lieu. Thus, homeowners should be aware of four issues to help this process succeed. First, the lender will only accept a deed in lieu of foreclosure on a first mortgage. This means that a second mortgage company will not be able to accept this as a solution to foreclosure. Home Equity Lines of Credit are also not eligible for a deed in lieu. The only exception to this policy may be if a borrower has several mortgages through the same company, but the balances on these loans will usually have to be reduced. Furthermore, any second mortgages, equity lines of credit, or other liens (such as property taxes, IRS liens, judgments, etc.) will need to be paid off or released before the deed in lieu will be accepted. Banks will not accept the deed to a property to stop foreclosure when that property is burdened with even more liens. This is often a sticking point for homeowners because other creditors may be unwilling to release a lien. Third, most lenders will require that the owners attempt to sell the property for a period of months before it will consider a deed in lieu offer. This relates directly to the fact that banks would rather mortgages be paid off in full rather than have to take on a property to manage, even if it means that the owners fall behind a few more months in payments as they attempt to sell the property on the open market. Finally, the mortgage company will not accept the borrowers' offer of a deed in lieu of foreclosure if it does not benefit the bank financially. If the bank believes that taking the property back with a deed in lieu will cost more than taking the house through foreclosure, it will foreclose. Homeowners, when preparing their offer, should clearly show how it will benefit the lender more than a foreclosure and sheriff sale. 44 While there are no guarantees of a bank accepting this type of plan to avoid foreclosure, by keeping these four issues in mind, homeowners may be able to increase their chances of success with a deed in lieu of foreclosure. They allow the lender and borrowers to work out a solution outside of the courts, avoid expensive foreclosure costs, and allow owners to move on with their lives and not worry about more lawsuits. Avoid Foreclosure: Money Saving Tips When facing foreclosure every penny really does count. Did you know that most clothes you buy, are marked up at least 75 percent. That means even when you see sale signs, your not going to really be getting a good deal. If you have a big family, you know a lot of money can be spent on clothes, which isn’t the best idea for avoiding foreclosure. You can save thousands of dollars on clothes if you know some of the trade secrets that I share with you today. AVOID SALES First of all, like mentioned earlier, sales don’t mean a thing. Most stores over mark and up sell everything. Even if there is a sale on an item, your probably paying retail price for it. For instance the other day I was in a store that was going out of business and it said 45% off everything. Well when I went in and shopped around, I realized everything had been marked up before being marked down so basically there was no sale at all. Remember sale means nothing, usually if there is sale sign in a window, it probably has dust on it, from being left up all year, trying to lure you in. SHOP OUT OF SEASON Another tip is to shop out season, yah its not exciting getting winter coat in the summer, but you really can save yourself some money here. There is nothing worse then going to the mall buying something new and a month later seeing on the sale rack. COMPARE DEALS If you see something you like, compare deals. Take down the name and model of a pair of jeans you like and look online to see if you can find it for a better deal. If it is the same deal as the store you may consider buying at the store, just to support local businesses or bring in the sale price you found online and see if they will match it. BUY SECOND HAND Most towns have a place where you can buy and sell used clothing. If you buy nice clothes to start with, most of these stores will purchase them from you and you can get cash for them. They don’t give you much money, probably only 10 percent of what it is you paid. But this is still a good place 45 to shop around; usually you can find name brand and nice conditioned items. A bit more expensive then thrift stores, but usually nicer things, since the sales clerks are very particular about what used clothes they buy from people. AVOID TRENDS Watch how much you spend on “trendy” clothes. Most trendy things go out of season quickly. Try to spend your money on nice pieces that won’t go out of date or you can update the rest of your wardrobe around. This will save you money in the long run and give you some quality outfits to wear. SHOP DISCOUNT It is worth going to discount stores to see what they have, such as T.J Maxx, Nordstrom’s rack. Here you can find name brand items such as jeans or slacks for 100 dollars cheaper sometimes. Both places are good places to pick up, shoes, bangs and accessories as well, they will definitely be cheaper then if you went to a department store. When trying to avoid foreclosure, do everything you can, cut back on those expenses. If you do it soon enough, you might just find that extra money in pocket is enough to pay your mortgage. New 2009 Tax Credit for First Time Home Buyers On Wednesday, February 25, 2009, the US Treasury Department announced a new tax credit for first time home buyers. This is part of the Obama administration's American Recovery and Reinvestment Act of 2009 and is designed to give those purchasing a home in 2009 for the first time a tax break of up to $8,000. The most important aspect of this new tax credit for buyers to be aware of is that it can be used to offset either 2008 or 2009 taxes. The house must be purchased before December 1, 2009, and is a legitimate tax credit. The previous tax credit for first time home purchases was designed to be paid back over time. Tax credits can be helpful to the economy for a number of reasons, and so this aspect of the Obama mortgage relief plan is welcome. Giving home buyers a credit against their income taxes may encourage more people to purchase homes while still being able to keep more of their hard- earned money at tax time. However, the government is also trying to accomplish too many contradictory goals. This latest tax credit is supposed to stimulate the housing market and make purchasing a home cheaper for 46 new buyers. But the government is also attempting to "stabilize the housing market" and keep real estate prices from continuing to fall -- thereby making it more expensive to buy a home. Also, the Obama administration has put forward vast new spending programs, including the nearly $800 billion stimulus package and the $275 mortgage bailout plan. A new tax credit will decrease revenue to the federal government, which will have to rely on borrowing or printing money to fund the programs -- both of which will have to be paid for. At the same time, in his speech to a joint session of Congress and the nation on Tuesday night, Obama also pledged to cut the deficit in half by the end of his first term in office. This will require even more tax revenue to accomplish, if the government does not default on its debt. But how we can have spending and deficit reduction along with taxes is unclear. Consumer credit also presents an issue on which the government has issued contradictory statements. Congress realizes that making loans to people that could never pay them back had caused the bubble in real estate prices and the lack of lending guidelines by banks led to massive defaults and record foreclosure rates. Yes, the government has shoveled out hundreds of billions and even trillions of dollars to these same banks to attempt to get consumer credit flowing again. But credit can only flow to the same people who were given loans who could not pay them back. Giving these people more mortgages and car loans will only increase defaults and further bankruptcy the banks. So what is it that the government is encouraging? Better lending standards or more loans to consumers? Vast new spending or a reduction in current government debt? Tax credits or the need to sacrifice to preserve the government's credit rating? Keeping home prices artificially high or making housing more affordable to those least creditworthy? Because all of these actions involve government intervention in the economy, markets do not know how to react except by selling out. It is impossible to predict which companies will be bailed out, which will be nationalized, and which will be allowed to fail. Government is introducing more uncertainty into the markets than ever. We Expect Too Much from Politicians We expect too much of our politicians. We listen to their campaign speeches and hear nothing but promises of what they intend to "do about" all of the problems we face. If we want real change, though, it is time to stop trusting the politicians and bureaucrats to run our lives for us, and to start taking responsibility for our own lives and communities. 47 Politicians, on the other hand, promise us entirely too much, but even as nearly every one has broken every promise they have ever made during the campaign upon coming into office, we still believe them. In fact, we judge other and competing candidates on what they are promising us, even though we have no reason to expect the promises to be kept. Far too often, these promises are vague and vacuous -- creating jobs, putting people back to work, restoring the economy -- or they are cloaked in irrelevant metaphors -- kickstarting the flow of credit, backstops against failure. Just as often, though, we fall for this rhetoric and put our own meanings into the language, rather than accepting it at its empty face value. Bureaucrats promise us things, and then, when they fail to deliver, they state that they had no real obligation to do what they promised, or the promises are scaled back almost immediately after the election. We are all disappointed, but at least we did not really expect the promises to be kept in the first place. One promise we hear frequently is getting the economy going again, as if politicians created any wealth in the marketplace. Unfortunately, all government can do is send the wrong signals to the economy through interest rate manipulations or take money from all the people to give to a small number of special interests. Neither action helps in the long run. Even a vague promise such as stimulating the economy is impossible for government to keep. All it can do is take wealth away from everyone to reward a small number of people or groups. If you are one of the small number, you may feel as if you won the lottery -- but the rest of the people will be poorer, and this will affect you anyway. We see this now with the Wall Street and auto bailouts. These industries asked government to take money from all of us to give to them. As a result, we all got poorer and the corporations got richer for a little while. But the illusion did not last long, wealth was not created, and now the industries are looking for more handouts. Government promises to keep us safe, but when we are in danger or hurt, the politicians claim they have no duty to protect any individual. Their only duty is to the public -- a complete abstraction if there is no duty to any one person or another. Every state in the country has determined that police have no duty to protect you or me -- just to protect the public. This leads, of course, to the promise of government courts to provide justice, which has been another failure. The lawyers in and out of government have created a system so unnecessarily confusing that the average person is locked out of it. Cookie-cutter legal concepts are applied to complex cases through confusing language and termed "justice." 48 Thus, it is no surprise that both lawyers and bureaucrats are in high salary positions but both hate their jobs enormously. Both exist in a make-believe world with its own language (legalese) specifically designed to ostracize everyone else in their lives. Yet these people get nothing but our respect and awe, and some are even termed "our leaders." We expect too much of the government. Although much of the blame rests with the politicians themselves, just as much rests with all of us who expect anything of substance from them. The failures keep coming, but so do the promises, and we accept both and declare them successes. Will we ever learn? How to Handle Collection Calls During Foreclosure It is almost automatic. The second you are late paying your mortgage, the lender begins to call, looking for its money. At first, the collector may be nice and gently remind you of the due date and that you missed your payment for that month. But soon enough, the calls start coming almost every hour, both at home and at work. When you are facing a financial hardship, how do you tell the mortgage company that you can not pay them? Many homeowners are quite put off by the collection department of a mortgage lender. The callers seem rude and uncaring, only demanding money, asking when the borrowers can pay, and intimidating them with threats of foreclosure or eviction. The collectors for many lenders, however, are nothing to be afraid of. In fact, they are more like trained monkeys or programmed machines than real human beings. Collection department representatives are typically paid a percentage of any past due money that they intimidate homeowners into sending in. Their success at this job is posted throughout the department, turning the collection of mortgage payments into a game. It is no wonder, then, that in such an anxiety-creating job environment, collectors are usually unable to react like normal, compassionate people attempting to help homeowners solve a problem. Instead, they take their own anxiety and force it onto the borrowers in their attempts to collect just one more payment before the inevitable foreclosure starts. But it is this negativity and intimidation factor that causes many homeowners to avoid the calls from the mortgage company. Instead, they turn to other companies to contact the lender for them, which may be an even worse experience if they fall for a foreclosure scam. Thus, borrowers the loss of a home must somehow get over their fears of contacting the mortgage company, if they wish to begin the process of working out any solution to foreclosure. The 49 following tips for dealing with collection departments may help homeowners put together an outline of how they want the conversation to do, as well as controlling the tone of their interactions with the bank. First, homeowners should understand that feeling an enormous amount of anxiety before calling the lender is completely understandable and natural. It is a combination of fear of the unknown, fear of failure, fear of being humiliated, and many other feelings that will coalesce around that one phone call. But it is usually only the first call that is the hardest. Second, once borrowers actually get through to someone (after potentially more than an hour on hold and several disconnects), it can be important to take a moment to gather their thoughts and relax. In his book, Fight Foreclosure, David M. Petrovich suggests the following when beginning a conversation with the lender: "Take time to recovery. Tell the collector you need a moment, and ask if it would be okay to put the phone down for a minute to get your file." After relaxing for a second, get back on the phone. A third tip is for homeowners to introduce themselves first as they expect the lender to address them for the duration of the interaction. For example, saying, "Hello, this is Mr. Smith, and I am having a problem with my mortgage. What is your name? Would you be able to help me?" will let the collector know that the borrowers wish to be addressed as "Mr. Smith," rather than just by their first name. This keeps the interaction on a more business-like level. While this introduction begins to set the tone of the interaction, homeowners should also focus on keeping the conversation polite, focused on solutions and how to achieve them, and a basic understanding of the facts of the matter. Crying on the phone or shouting at the collector will not persuade the collection department to turn the file over to loss mitigation or otherwise work out a solution. Another good idea is for homeowners to be prepared to give information to the lender, but also have a list of questions for the bank when they call. The bank will ask about the financial hardship and basic financial data, and then request a package of documents. Homeowners, on the other hand, can ask who owns the loan, who services the mortgage, what type of loan they have (ARM, Option-ARM, fixed rate, and so on), the current interest rate, and if the loan has private mortgage insurance (PMI). Asking these questions will give the borrowers their own agenda for calling, as opposed to calling just to fall into line with the lender's agenda. Even if some of the questions the owners ask are somewhat irrelevant, or they already know the answers, just asking puts the borrowers in control of the interaction, even for a short while. This can markedly decreases their anxiety. 50 Furthermore, asking questions will allow the homeowners to get a feel for how difficult it may be to get answers from the bank later on. If the bank can not state who owns the loan, a big red flag should go up in the borrowers' minds. This may indicate that the bank would be unable to produce the original mortgage note, if requested -- important information if the loan goes to a foreclosure lawsuit. Finally, homeowners should either tape record or document every conversation they have with the lender. Both parties already know (usually from an automatic voice telling them so) that the conversation with the bank will be recorded -- homeowners might as well keep their own copies. These can be extremely important if the case goes to court and the owners need to request a judge's help in negotiating a loan modification or other repayment plan. Homeowners trying to stop foreclosure on a property should understand that their anxiety about speaking with the lender is an irrational fear. Although the fear will only go away once they call the bank, the benefits they get from avoiding calling are far outweighed by the risks of not talking to the mortgage company. Having an agenda, controlling the interaction from the beginning, and keeping the conversation business-like should give borrowers an advantage, though, in working out some agreement to avoid the foreclosure. The Obama Mortgage Foreclosure Bailout Act - Do You Qualify? On Wednesday, February 18, President Obama unveiled his administration's latest attempt to stabilize prices in the housing market and help stop the rising tide of foreclosures. Will this plan be any better than the half-dozen that the Bush administration passed? With a $275 billion price tag, we should expect the foreclosure problem to be resolved, but this latest bailout act seems to be just another way to avoid helping homeowners. As with the FHA Hope for Homeowners Act, Obama's newest plan is simply out of the financial reach of many homeowners. The requirements are quite strict, which should have been no surprise when the president announced a longer list of people who would not be helped by the plan than who would receive assistance. But taking hundreds of billions of dollars away from homeowners, employers, and everyone else to avoid helping people will not promote economic recovery. As the government spreads pain and misery around the economy, redistributing poverty from the banks to the rest of us, homeowners may not want to put too much hope in this latest plan. But for those interested in having another government-sponsored program to stop foreclosure, the following is a list some of the requirements to qualify for the plan. 51 To qualify for a foreclosure refinance loan from the government at a fixed rate of around 4-5% for 15-30 years fixed, all of the following requirements must be met: • The loan must be a conforming loan under Fannie Mae and Freddie mac guidelines. • The mortgage must be owned by either of the Government Sponsored Enterprises, Fannie Mae or Freddie Mac. • Alternatively, the loan may have been sold by Fannie Mae or Freddie Mac in a mortgage security. • The homeowners are not currently behind on payments or have a history of on-time payments. • The homeowners must continue to pay any second mortgage on the property even after the refinance. • The first mortgage on the house must not be more than 5% of the fair market value of the property, or it must be written down to that amount. For example, if the house is worth $100,000, the first mortgage may not be more than $105,000. Looking at this list of requirements, it will become apparent that many, many homeowners will not qualify for this program with current housing market declines. Borrowers with 80/20 loans whose home values have fallen under the amount due on the first mortgage will have to keep paying on the second mortgage, as well as either pay down the first or have the bank agree to reduce the balance due. And this program is voluntary for banks who have not received federal bailout money from the Troubled Assets Relief Program (TARP). While most of the big banks have received funds, many smaller regional banks have not -- and these banks may not be willing to write down the value of their loans by 10-20%. Writing down the value of bad mortgage securities is what has caused so many paper losses on bank balance sheets already; it is inconceivable that many struggling banks will want to admit to even more. There is also a second part of the bailout plan that may allow homeowners to qualify for a government-guaranteed mortgage modification program. This involves the bank modifying the loan to be within 38% of the borrowers' gross income and the government stepping in with money to help reduce the payment to 31%. The requirements for this part of the plan are the following: • The mortgage must be conforming under Fannie and Freddie guidelines -- jumbo loans are not permitted. • This program must be done on a principal residence -- investment homes, second homes, or vacation properties do not qualify. 52 • The homeowners must be in danger of default on the loan or have already defaulted. In danger of default can be a mortgage where the payment is more than 31% of the borrowers' gross (before tax) income. • The lender must be willing to modify the mortgage to reduce the homeowners' monthly payment to 38% of their gross income or less. While the new bailout program gives banks more incentives to negotiate with borrowers, it may not give enough to convince banks to change their normal business practices and dedicate more resources to helping homeowners. As mentioned above, participation is voluntary, except for banks that have received TARP money and Fannie Mae and Freddie Mac, which are under government conservatorship. Does the plan go too far? Some critics point out that using taxpayer money to bail out failing banks or failing individual borrowers will only create more moral hazard in the future. Once debts are paid back or discharged and banks loosen up lending, there will be a strong incentive to re- inflate a housing bubble, especially in the presence of low interest rate targets set by the government. A new bubble and collapse will send all of the same players back for more government bailouts. Or does the plan not go far enough? Other critics point out that this is not nearly enough money that the government is taking away from taxpayers to bail out the housing market. Property values fall for everyone in areas hard hit by foreclosure, so it is in everyone's best interest to do whatever it takes to prevent more foreclosures, or so the argument goes. In either case, the full details of the plan will be released on March 4th, which gives all of us a week to contemplate how the government's latest bailout plan will save the housing market. Unfortunately, previous plans have failed to assist many borrowers, and this plan seems to offer little in the way of really novel proposals. For most homeowners facing foreclosure, it will probably be best to keep looking at other options, in addition to considering receiving mortgage assistance from the federal government. Homesteading Not a Way to Get a Home Back After Foreclosure If there is one bad idea for homeowners in foreclosure, it has to be what the community organization group ACORN has termed "homesteading." This is when the former owners, along with members of ACORN, break into the house so that the former owners can take back possession of the property. The video newscast from WJZ.com shows the story of one woman in Baltimore, Maryland losing and reclaiming her home. 53 The number of things wrong with this video are almost too many to count. First of all, the property is no longer the former owner's, but the home is also no longer owned by the bank that foreclosed. Breaking into a taxpayer-subsidized bank's foreclosed house to protest is much different than invading the private property of another person. It is doubtful that the woman profiled in the video would have been happy with another person breaking into her house when she owned it just because that other person thought he deserved a home. Breaking into the home is illegal, as the ACORN representative freely admits, but that is of little concern here. The government and banks worked together to set up the housing market to fail by encouraging people to believe that homes rose in value by 20-40% a year. Banks are given the benefit of the doubt in 99.9% of foreclosure cases, while homeowners are railroaded through the legal system and forced out of their homes by judges and sheriff's departments for the benefit of the banks. Despite this, however, homeowners should not, as a general rule, be breaking into their former properties. The risks of being arrested by a government/bank minion are too great, and the rewards too small. Protesting against the fact that the house was unjustly foreclosed (if this is what the former owners believe) can be done in more productive ways. Maybe dozens of former homeowners moving into the foreclosing judge's chambers at the courthouse, for instance. Homesteading is a tactic that has been used to transfer title in some states, but it is quite rare. Typically, the people who move into a property must live there for nearly twenty years without the real owners making a claim to the house or attempting to have the squatters removed. It is unlikely that government-subsidized banks owning foreclosed homes will let them sit for that long. Invading the house of another private citizen is also wrong and will only engender more negative feelings towards former homeowners who lost properties to foreclosure. In any event, there are far better ways to get a house back after foreclosure. If the woman was that interested in keeping her home, she could easily have kept up with who owned the property -- records of ownership and liens for this house are available online. She could have stayed for as long as possible when the bank owned the house, and she could have contacted the new private owner once it was sold and attempted to work out a lease. There are better options than trespassing. Unfortunately, now the road to financial recovery will be even more difficult for this woman. Not only has her credit rating been destroyed by this foreclosure, she may end up with a criminal record for breaking and entering and trespassing on private property. These two items will show up in credit and background checks that landlords do on prospective renters, and she may find herself turned down for higher quality leasing options. 54 Use the district courts in self-defense against foreclosure for as long as possible. Then use the federal bankruptcy courts to discharge any other bank debt and prolong the legal process further. Negotiate with the bank or the new owner to get more time to move out and avoid eviction. Or negotiate with the new owner to buy the house back or rent it, if possible. But don't infringe on someone's private property rights just to make a stand against the banks -- this only hurts homeowners more than the lenders. Chapter 13 Bankruptcy to Reclassify Mortgages as Unsecured Debts Most homeowners facing foreclosure would rather avoid both losing the home and having to file bankruptcy. They are concerned about the social stigma of filing, the damage to their credit record for the next seven years, and the difficulty of borrowing money for a home or auto loan in the future. However, there are a number of benefits, under the right circumstances, to filing for protection under the federal bankruptcy laws to reduce mortgage debt. One of the greatest of these benefits is that, with a Chapter 13 (reorganization) bankruptcy, the courts are able to take secured junior mortgage loans and have them unsecured. Any second or third mortgage or Home Equity Line of Credit (HELOC) can be reclassified as an unsecured debt for the purposes of bankruptcy. Of course, this can not be done in every instance, and there are requirements that must be met by the loan and the value of the property. To take a mortgage off of a property, the loan must no longer be secured by the home's value. For example, take the following case of a property that has declined in value after several loans were taken out on it: Home Value: $250,000 First Mortgage: $265,000 Second Mortgage: $40,000 HELOC: $15,000 The second mortgage and HELOC in the above example are no longer secured by the value of the property; in fact, even the first mortgage is only partially secured. This is not a rare example, either, as many homeowners have taken out more than one loan on a house, lenders relied on inflated appraisals, and now property values have crashed back down to reality. If the owners of the property declared bankruptcy, these two junior liens could be reclassified as unsecured. Even if the house could be sold for its fair market value at the present time ($250,000), the second mortgage company and HELOC provider would receive nothing from the proceeds – therefore, they are, for all practical purposes, unsecured by the property right now. 55 But what does this really mean for homeowners? Who cares if a debt is classified as secured or unsecured? After all, the bankruptcy filers have to pay back the money they borrowed and pledged their home as collateral, right? Wrong. When bankruptcy judges take a secured lien on a home and reclassify it as unsecured debt, the balance can be reduced on it. Homeowners would not have to pay back nearly as much as they owed on the debt and the mortgage would be treated just like any other unsecured loan like a credit card or personal loan. This can represent a significant savings to the homeowners and a large loss to lenders that made ill-advised loans on properties whose values have now fallen. Even better, the amount that homeowners are required to pay back to a lender is determined by their income – not the original amount of the debt. In a Chapter 13 bankruptcy case, petitioners are put on either a three or five year payment plan, and their disposable income is used to calculate how much money the lenders will paid back on their loans. For families whose income has dramatically fallen due to job loss, this may be a way of bringing their debt load back in line with their ability to pay. Chapter 13 bankruptcy, just like any other solution to foreclosure, is not right for everyone. But for homeowners who qualify, can afford the payment plan, and have consulted with a good personal bankruptcy lawyer, the ability to reduce their debt burden on second mortgages or equity lines of credit represents a large benefit for filing. The Biggest Foreclosure Mistake - Not Taking Action Soon Enough When homeowners first lose a job, suffer a medical emergency, or otherwise have their finances turned upside down, the first reaction always seems to be hoping that problems go away and things turn out for the best. Unfortunately, too many people have found out the hard way that this rarely happens, and a financial hardship can last far longer than expected. But homeowners seem to have an infinite amount of optimism (or anxiety ) that they will be able to turn their situation around and get back on top of all the bills that are piling up on their kitchen tables. A payment is missed but it is within the grace period; a call to the auto insurance company allows the borrowers to pay a few days late with no penalty; student loans can be deferred. Soon, however, the situation spirals out of control, with more payments being sent in late and some not being sent in at all. The mortgage, of course, is the first priority but also the most expensive of the bills, and falling behind on that one will result in the most severe negative consequences to the homeowners. Inevitably, though, the mortgage also falls behind. 56 It is usually around this point that the collection letters and phone calls begin to arrive, with bankers and collectors telling borrowers what they already know. Their account is behind, bad things will happen if they do not pay, they would wish to avoid that, right? All they have to do is send in a payment and everything will get better. The homeowners usually promise to make a payment even when they know that it will be late or nonexistent. After all, it is easier to make the promise and get the phone calls to stop for a day or two than it is to admit their financial failures. But when the payment is never sent it, the phone calls start again, combined with the letters and then certified mail and foreclosure lawsuit paperwork served by a sheriff. This is an all too common story for many homeowners who end up being unable to save their homes after they have missed too many payments. The main problem is that they wait so long for a solution to fall out of the sky that they miss every opportunity to work out other arrangements with their lenders. If you are facing the loss of a job, cutbacks in hours, a temporary layoff, or have suffered another type of financial hardship, the time to act is now -- not after you have already begun to fall behind in your payments. The sooner you can inform the bank that you are going to be late paying the mortgage (or credit cards, car loans, and everything else), the more options they can offer you to stay out of collections. Regardless of any new foreclosure bill the government comes up with to help modify loans or bail out homeowners, there are already a large number of solutions to foreclosure. But the most effective, like foreclosure refinancing or mortgage modification, for instance, almost require that the borrowers address the problem before it gets out of hand. The consequences of waiting too long to save the house do not just include a more expensive plan. They include losing the home completely; witnessing foreclosure costs, attorney fees, and interest eat away the equity of the home, and having to move out before you are ready just to avoid being evicted. Most or all of these can be avoided simply by acting sooner. So take action today if you are facing a significant change in your monthly finances. The banks will waste no time in beginning to pursue your debts. Find out your rights, research foreclosure advice, and put together a plan to stop the collection processes before they begin. Dealing with a small problem now will mean that you do not have do deal with a much larger, possibly insolvable, one later on. ---------------- [ ] ---------------- 57 I hope you have found the information contained in this document helpful in understanding some of the things to consider when facing foreclosure. If you are interested in my working with you to set up a plan, please call or email me now. Thanks and good luck. Danny C. Halverson, PhD 469-328-0014 email@example.com 58
"Things to Consider When Facing Foreclosure"