PART TWO – How to Take Your Power Back When at Risk of Foreclosure
First of all, it’s important to recognize that each homeowner’s situation is entirely unique… like snowflakes, no two are exactly alike. And the bottom-line is that your mortgage servicer is limited as to what the solution they can offer by the limitations placed on your loan by the investor(s).
The reason you want to know if either Fannie or Freddie owns your loan is that both have specific rules that servicers must follow and neither has agreed to grant principal reductions to delinquent borrowers as part of the loan modifications they offer. And, if you’re mortgage is underwater by a significant amount, meaning you owe a lot more than it’s worth, then you have to consider whether you want to modify your loan knowing that, depending how far underwater you are, it could be that you won’t be in an equity position for some time.
The point is that for many homeowners, being underwater is not a comfortable place to be because if anything goes wrong in your life… your income goes down, you get injured or become ill, or you go through a divorce… since you can’t sell your home for what you owe, you can easily find yourself facing foreclosure.
Or, what if you need a new roof and it’s going to cost $25,000. When you had equity you could have used it to pay for the roof, but now you’ll need to come up with cash. Equity in a home is how Americans have made it through the bumps in the road that happen as the years go by.
So, in making the decision as to which path you want to be on related to your mortgage, it’s important to consider realistically how far underwater you are, if at all. Will your home’s value recover to anywhere near the level at which you purchased it, or are you so far underwater that there’s no chance of breaking even in the foreseeable future.
Remember, there are two ways to get equity in your home. The one we’re most used to is through home value appreciation, but the other way is by paying down your principal balance over time as you make your mortgage payments. Making one extra mortgage payment a year will pay off your loan much sooner, as would refinancing a 30-year loan into a loan with a 15-year term.
For millions of people today, however, none of those options are available. They bought or refinanced during the bubble… or their income has fallen and isn’t coming back any time soon… or they’ve been knocked down by another life event like illness or injury… and they’ve fallen behind on their loan, been turned down for a modification… and now aren’t entirely sure what to do next.
Well, if you’re thinking that your home’s value might come back in the next few years… here’s what you should know about home values, historically speaking: The average annual home price increase in the U.S. from 1900 to 2012 was only 3.1 percent a year, which is only a tiny bit better than our average inflation rate of 3 percent a year.
So, if your home’s value dropped in half since the meltdown of 2007… meaning it fell by 50 percent… then in order for it to return to where it was, it will have to increase by 100 percent. And so if home price appreciation in this country returns to where it was between 1900 – 2012… and there’s no reason to believe it will even be that good… even at the rate of 3.1 percent a year… it will take roughly 25 years to double in value… and it may not double in value in your lifetime.
It’s an easy calculation, called the “Rule of 72,” and it’s used to estimate how long it will take an amount to double at a certain interest rate, or the interest rate you need to earn annually for an amount to double in a certain number of years. You can learn more about the math by clicking that link above, but for now just know that at 3 percent it will take 24 years for an amount to double because 3 x 24 = 72.
If you’re far underwater, as so many homeowners are today, I think it’s time to get realistic about the future… we’re six years into this downturn and our economic recovery is not right around the corner. I know most everyone wants to keep their home, or at least that’s what they say when they may be losing it. But we should all at least consider that those that walked away from their $500,000 mortgage in 2009, could very well be buying a comparable home next year with an FHA loan… for $250,000… or maybe even less.
Now, they at least have a shot at building equity again. Had they stayed in their $500,000 mortgage, however, they had no chance at seeing their equity building for a long, long, long time… as in 24 years… and that’s IF home prices start once again appreciating at 3 percent a year, which they sure as heck haven’t started doing yet.
Home prices in Japan crashed in 1991 and today they’re roughly 60 percent of where they were… in 1991. Consider the charts that follow, and recognize that interest rates in Japan have been virtually zero since 2010 and below 1 percent since the mid-1990s.
Here we are more than twenty years since Japan’s housing bubble burst in 1991… when their banks were left with about a trillion dollars in bad loans… and they’re still “recovering.” Even though as of October 2012, the Global Property Guide ran the headline “Japanese House Prices Continue to Fall.”
So, as I said in the beginning of this section, living in a home that’s underwater can be an uncomfortable place to be. It can be a little like walking on a razor blade hoping not to slip. I’m not telling you to short sale your home or not to try to get your loan modified. Only you can make that decision.
I’m just telling you the facts involved… and that it’s time to face them.
THE SIX ALTERNATIVES TO FORECLOSURE
There are six alternatives to foreclosure: loan modification, short sale, Deed in Lieu, Chapter 13 repayment plans, some type of litigation, or bring the loan current. That’s it and that’s all. So first, it’s important to understand the pros and cons, qualification and ramification of each path.
If you’re trying to remain in your home, a loan modification represents the least expensive path with the highest probability of success… by far. And with many servicers, getting your loan modified is MUCH easier today than it was even a year or two ago. It’s never going to be fun to apply to have your loan modified, but if you go into it prepared and know what to expect, you can do it with the minimal amount of stress involved… people do it every day… in fact, the latest figures show 243,000 permanent modifications granted by servicers this calendar year. What’s the number two way to save a home… nothing else is anywhere close.
You will need to qualify for a loan modification and that means you need to have enough income to make a modified payment… and be able to document that income with paycheck stubs, tax returns and Profit & Loss Statements, if self-employed.
Sooner is always better than later. If you’re not making a mortgage payment, then the meter is running. The amount you owe is going up every month, and the higher your balance goes, the higher your income needs to be to qualify for the loan modification. So, really… I know it’s no fun, but don’t put it off. Get your application in, and expect it to be stressful and a headache. Then it may just end up being a better experience than you expected.
Having your loan modified WILL negatively impact your FICO credit score. Loan modifications are also “hardship” programs, which means that you will have to demonstrate that you have undergone a financial hardship to qualify. This also means that you will probably have to be at least 60 days delinquent before your servicer will start processing your application for a loan modification.
You can, however, try remaining no more than 60 days delinquent on your mortgage payments. That way, should you be denied, you may be able to make up your back payments and avoid foreclosure… assuming that’s financially possible, of course.
Assuming you are approved, it is most likely that your modification will reduce your interest rate and perhaps extend the term of your loan up to 40 years. It is least likely that your principal balance will be reduced, but if your goal truly is to remain in your home then it’s really the amount of the monthly payment that matters most.
You’ll need to update certain documents and perhaps more than once. Don’t fight your servicer… just do it. In fact, make extra copies of your documents, so if they need another copy or an updated document, it’s easy to send it off to them.
The old adage about how you’ll catch more flies with honey than with vinegar holds true here big time. People that work at servicers hear unbelievably sad stories every day. They also hear plenty of people get angry over what’s happening.
Remember… it’s not their bank. They’re just people with a job and they’re simply more likely to care about the customers who care about them. So, let your representative know that you understand how hard their job must be, and do whatever you can to make it easier on them, and chances are… your extra effort will pay off.
Save money. If you’re not making your mortgage payment, you should be saving money every month. Stop your Starbucks habit. Have garage sales. Babysitting on weekends… I’m for it. You may need the money to save your home from foreclosure. You may need it to pay a lawyer to represent you for one reason or another. And if you don’t need it for those or other reasons… then when it’s over… one way or another, you’ll need a vacation for sure.
Regardless of the program, loan modifications are voluntary concessions on the part of servicers, so it’s entirely up to your servicer as to whether they will approve you for a modification or not. No one can force your servicer to modify your loan… not the government… not a judge… no one.
Getting your loan modification approved, and the terms of that modification are going to be largely dependent not on who services your mortgage, but on who the investor is that owns it. Some loans are delegated, which means that the servicer is allowed to modify the loan… others are non-delegated, which means that the servicer must get permission from the investor before the loan can be modified. It’s not fair… and your servicer knows that it’s not fair. But it is what it is.
The federal government’s Making Home Affordable program’s loan modification is called HAMP, which stands for Home Affordable Modification Program. There is also a HAMP 2 program, which has its own criteria for qualification, and can allow for those who have been awarded a HAMP modification but failed to maintain their payments, or it can allow for a rental property to be modified.
The government also has a refinancing program called HARP, which stands for Home Affordable Refinancing Program, but you must have a loan owned by Fannie Mae or Freddie Mac as of May 31, 2009, and you have to be current for the last 12 months to qualify. Also, not all servicers participate in HARP, so ask your servicer to be sure.
Almost all major servicers also have internal programs for loan modifications, so even if you can’t qualify for HAMP, you may be able to qualify for an internal program. In fact, there are roughly four million internal modifications compared with roughly one million loans modified under HAMP.
You could also qualify under the terms of the National Mortgage Settlement, if your loan is serviced by one of the five major servicers, Bank of America, JPMorgan Chase, Citibank, Wells Fargo or GMAC. Your servicer should notify you if you are eligible to qualify under that settlement program, and neither Fannie, nor Freddie are participating in the program.
Don’t drink alcohol to avoid the stress.
It’s stressful, going through a loan modification process. And many people think that having a few drinks will help… but they’re wrong. Alcohol will disrupt your sleep, and that will make stress harder to deal with for sure. It will also make you more emotional, and that’s the last thing you need to be when at risk of losing a home to foreclosure. So, don’t drink. And if you do decide to drink… don’t think. The worst combination when under stress is drinking and thinking.
Increase the amount of exercise you get and decrease the amount of sugar you consume. Take a walk every evening for 45 minutes will make a big difference, but if you’re a gym person, then do that too. Yoga… absolutely. Any physical activity will help you deal with the stress that much better. And cut down on sugar in every form. Like alcohol, it will disrupt your sleep and lead to more emotional ups and downs.
Besides… if you listen to the advice I’ve offered here, then six months later, even if you haven’t gotten your loan modified, you’ll have saved up twenty grand, lost 30 pounds and you’ll feel like a million bucks.
A short sale is when the bank agrees to let you sell your house for less than you owe on it. The government’s program to encourage short sales is known as HAFA, which stands for Home Affordable Foreclosure Alternatives.
The advantage is that you’ll qualify to buy another home sooner after a short sale than after a foreclosure. If applying for a Fannie Mae or Freddie Mac loan, it will need to be 5-7 years after a short sale. If applying for an FHA loan, then it will only have to be 2-4 years since your short sale, and in some cases even less.
Notify your single point of contact at your bank that you want to short sale your home.
You’ll still have to send in your financial documents pretty much like you would when applying for a loan modification, so don’t expect anything less.
Be prepared to document your financial hardship and your income. And you’ll need to update your documents just as you would if applying for a loan. And remember… you only need to document the borrower’s income, not the household income.
Find out if the bank has a cooperative short sale program that will put some money in your pocket at the close of the sale. Some homeowners have received very significant amounts to short sale their homes, as in $2500, $5,000, $10,000 or even more. It will depend on your servicer and your home, of course, but it’s worth investigating.
Contact a Realtor and list your home for sale. Your servicer may even be able to recommend a Realtor in your area that has completed short sales in the past.
Start saving money if you haven’t already. You’re going to be moving once the home sells, so you should be saving money each month. You won’t be making your mortgage payment, so you can save at least that amount. But you’re in a financial crisis, so cut back wherever you can and put as much as possible into your savings account.
Most states are non-recourse meaning they don’t come after you for a deficiency judgement. But it depends on the state where the property is located, and there are states that allow for deficiency judgements. You should consult an attorney or a CPA to understand your potential for a tax liability or deficiency judgement after a short sale.
If your short sale is under HAFA, your first lien holder will give you a full release with no recourse, and if there’s a second lien holder, are limited as to how much they can get and must provide a full release as well.
The Debt Reduction Act of 2007, which allowed for debt reductions to be tax free, is set to expire at the end of the year. Many people, me included, believe that Congress will extend the program before the end of this year, although no one knows for sure. The Act allows for debt forgiveness to be tax free as long as the money was used to purchase your primary residence. Consult a CPA to make sure you’re not going to be stuck with a bill from the IRS.
Get your home ready to show, but that doesn’t mean put lots of money into it. Clean the carpets, keep the yard in good shape and the home neat and clean. You want it to sell, remember? So, it should show as nice as possible.
DEED in LIEU of FORECLOSURE
If you simply cannot afford your home, and just want out… this may be an option that’s right for you. It’s simple… the bank agrees to let you out, and you agree to move on a certain date. You may even be able to negotiate for a cash-for-keys check and get a substantial amount paid to you on moving day.
It’s very important that you be able to document your financial hardship when attempting to get this option approved by your servicer, and it’s important to know that this option probably won’t work if you have a second or third lien against your property, but tax liens, however, can often be worked out.
The government program that deals with Deeds in Lieu as an alternative to foreclosure is the same program that encourages short sales, as described above… HAFA.
Things to think about…
Whether you short sale or walk away from your property under a Deed in Lieu arrangement, chances are excellent that you will be living in the house for at least six months, and probably longer if handle it right. One thing about foreclosures today is that they don’t happen quickly unless you do nothing to slow them down. In some states the average foreclosure is taking two years or more.
So, ask yourself… how much money could you save up in a year, if you tried your hardest and weren’t making your mortgage payment? If your mortgage payment is $2,000 a month, that would be $24,000, but don’t forget to add in the property taxes, and then how much more could you put in savings if it was your goal? Do the math and you may find that you can save more than you ever thought… $25,000? $30,000? Or even more in some cases, I’m sure.
Now, stop to consider that most servicers will be willing to make a deal known as cash for keys that will put some amount of money into your hands in exchange for either the short sale or Deed in Lieu of your home. That amount could be a few thousand dollars, or it could be significantly more, but the point is that if you add it to your savings balance, you might be able to move into a rental home or condo and pay your rent for the entire year to come.
During that year your renting, you won’t have to pay property taxes or maintenance as you did as a homeowner, so you should be able to save quite a bit since you will have already pre-paid the year’s rent. So, by the end of the second year, you could expect to have saved more than enough for a down payment on your next home, which you’ll be buying at or near the bottom of the market, so you’ll have equity again, and have the chance to build more as your property appreciates from its market low price.
I know, your credit won’t be what it once was, but you’d be surprised at how quickly your score will rise once you’re paying your bills, spending conservatively, and saving for your next home. Although every situation is different, I’m told that FHA loans can be approved three years after a foreclosure and with FICO scores as low as 520. And the more you save to put down, the easier getting your new loan will be.
The real point is, don’t think that you’ll never be able to buy a home again because you decided to short sale or Deed in Lieu the one you have now that’s underwater by too much to wait around for its recovery. A few years passes quickly, and you can have equity and be rebuilding your credit before you know it.
Do you have kids that you don’t want to tell that you’re moving… rent a house with a pool. Kids don’t know from owning or renting… but they know if they have a pool. Or, if you live in the mountains, rent a place near a lake, or at the shore… or in the desert… or in a cool part of the city.
My wife and I have talked about it and we’ve decided that if you look at it as being an adventure and a freeing experience, renting can be fun… something you’ll enjoy, not something to avoid. You can even plan to move around each year as a renter… you won’t be tied down as you were when you owned your home.
CHAPTER 13 BANKRUPTCY
Bankruptcy is a specialized area of law, and the attorneys that specialize in bankruptcy are the experts. Attempting to go through bankruptcy on your own is not something I’d ever recommend, so if you’re considering it, consult with an attorney before you do anything else.
If you can stay current on your mortgage, Chapter 13 bankruptcy can allow you to take the amount of your arrearages and spread repayment of these amounts out over a period up to five years.
You may be able to strip second or third liens on the property.
Chapter 7 is another form of bankruptcy, but it only delays the foreclosure process, it doesn’t save the home from foreclosure. But, after a Chapter 7, you can still probably do a short sale or possibly even a loan modification. Again, if you’re thinking about filing bankruptcy, consult an attorney who specializes in bankruptcy before you do anything else.
LITIGATION… SHOULD YOU TAKE YOUR CASE TO COURT
In response to the ineffectiveness of government programs, and servicers that appeared unwilling to work with distressed borrowers, we’ve seen a plethora of lawsuits alleging the securitization of loans failed, defenses centered on forged signatures, invalid assignments and improper notaries, and theories that describe broken chains of title, lost notes, the involvement of MERS and other improprieties… but to-date, none of these has had any significant or widespread impact on homeowners saving their homes.
Yes, there have been decisions in various courts that have resulted in delays of the foreclosure process, but out of the countless thousands of cases heard in our nation’s courts over the last five years, literally only a relative handful have ended by forgiving the debt owed by the homeowner while allowing that homeowner to remain in his or her home.
Last on the list of possibilities is the category of litigation against your lender and there are a lot of people who have been “sold” on this approach over the past few years, in large part because it was seen as being difficult if not impossible to get a loan modified.
Since it was so hard to modify a loan, many lawyers tried filing lawsuits alleging all sorts of technical violations in an effort to slow down the foreclosure process in order to hopefully obtain some leverage or otherwise persuade the bank to agree to a modification. And in some cases the strategy worked.
However, litigation against a bank is never cheap, quick, easy or certain… in fact, it’s ALWAYS expensive, time consuming, difficult… and you very likely will lose, as the vast majority do. Even the few that win are often appealed by the bank and overturned. If we’ve learned anything since 2009, litigation to prevent foreclosure is no picnic, and it’s costly to do it effectively.
If someone tells you otherwise or offers to sue your bank for five or ten grand… or calls you to solicit your participation in a lawsuit against your bank… or if someone says they can sue your bank to stop foreclosure without knowing the details of your situation… just say no and avoid getting ripped off.
You have to realize that even though there may be quite a few defects with your loans paperwork, that doesn’t mean that you don’t have to make your payments as agreed. Your servicer may have violated the OCC’s consent order, but you’re not the none that’s allowed to enforce the issue… only the OCC can do that. Some say the IRS ‘s REMIC rules were broken, but unless you’re representing the IRS, the judge won’t care what you have to say about it.
And we all know that the robo-signing of signatures has been a huge problem, with improper signatures, among other things, appearing all over the place on documents used in the foreclosure process. And while you may be absolutely correct about the signature issue, at best it can create a delay, and very often it won’t even do that by itself.
Going to court over a foreclosure means being in a court of equity and that means the judge is there to create an equitable outcome. Yes, the signature is wrong, but neither is you being in default on your loan, and in essentially all cases, if the judge does anything as a result of such a defect, he will still allow the bank to fix the problem and return to court to proceed with the foreclosure action. So, at best, it can mean a delay, but nothing more.
MY PROMISE TO YOU…
I promise you that facing reality and getting on a path that makes the best of your situation will make you feel much better than you do now. Once you realize what you have to do… you start doing it. And you make progress. And you start saving money, and getting in better shape… and before you know it, you’re feeling stronger, healthier, and overall better about yourself and your situation.
What has happened in this country wasn’t your fault and you’re far from alone. We’ve already lost something like 4.5 million homes to foreclosure, and there are another 4.5 million in line to be lost to foreclosure. No matter what happens going forward, what’s already transpired will go down in history as one of this country’s greatest tragedies. You can’t change that… and before you can do anything for others, you have to do what it takes to save yourself.
Maybe that means saving your home, or maybe it means moving into a rental for a few years while you rebuild. And maybe you emerge feeling so strongly about fighting for the rights of consumers that you become more politically active. And if enough people do that same thing, then our country’s future will most assuredly be saved.
Who’s fault was this economic meltdown… that’s an easy question to answer… it was our fault. Us. The people of this country let this happen over thirty years. While we went shopping with our gold and platinum cards, displaying our FICO scores like badges of honor, we lost sight of what’s truly important in life… what truly makes a country great… and it’s not things… it’s not stuff… we are not what we drive or where we live.
It’s compassion for the poor, the elderly and the disadvantaged in our society. It’s caring about the education of our children… about future generations and what they will be left with when we’re gone. It’s about a society that demands fairness… equal justice under the law… about a government that represents its citizens above monied interests.
We forgot how important those things were to our society… until we found them missing. And then we screamed and cried at their having been lost. But we’re the ones that allowed them to be lost… and it will be we who restores them to the fabric of our democracy. It won’t happen quickly… it took time to deteriorate and it will take time to restore.
But the silver lining is that our children are learning as we are, and they will take the lessons we’re learning today forward as they shape the world they’ll live in long after we’re gone. What’s happened is teaching them of what not to do… what not to tolerate… what not to allow… what’s not to be valued and what is to be cherished.
Our economic meltdown is an educational marvel… it has much to teach us, if we’re willing to learn. It is teaching our children far more than we could have ever taught them, back when were confusing borrowing with buying, caring not for our neighbor, but rather only for ourselves and our riches.
If the price of that education is the equity in my home or the home itself… so be it.
Understand… I’m not telling you which path you should choose, but I am saying that you should choose one and then do everything in your power to achieve the goals that lie at the end of that path. Just take the blinders off… the rose colored glasses too… we’re six years into this crisis… do your homework… trust but verify… twice… no, three times. And that applies to everything your told… including what I’ve written here.
We’ve suffered enough. It’s time for action. Time to take control and take our power back, regardless the cost, because the cost we’re paying not doing so is far, far greater.