General

Earlier, I wrote an article about five things that can be done if you get behind on your house payments. I promised to take each suggestion in turn, and elaborate on the general process.

The first suggestion was to sell your house.

This of course is easier said than done as the economy is in such a state that few houses are actually selling. Nonetheless – it does happen.

Here’s how to get started in the right direction:

Step one: accurately analyze the value of your home. This can be done on-line, but it is generally a better idea to have a realtor give you a realistic value.  Your home is compared to others that have sold on the market, and an analysis of the price your home should get can be computed.  This is called a CMA – a Current Market Analysis.  It’s a lot less expensive than a full appraisal and usually quite a bit quicker.

Step two: talk to a realtor or professional about how to make your house desirable to a prospective buyer. Sometimes a new paint job and a little landscaping can dramatically raise a home’s value.  Even inexpensive manual labor can greatly enhance a home’s appeal.

Step three: hire a good realtor to help with the process. Find someone that is honest and straightforward, and won’t lead you down an expensive repair path or promise an unrealistic price.  This will cost a percentage of your proceeds; but the service provided to help you prepare the house, show it, and talk to other realtors is, in my opinion, well worth it.

Step four: be patient.  It’s a buyer’s market so be prepared for the process to take some time.   Lower the price if you have too and can afford it and be ready to negotiate when a buyer comes along.

image credit: ejhogbin

Since the hope of a judicially supervised mortgage modification in bankruptcy seems to have died in the Senate, let’s examine the available options to resolve a mortgage deficiency.

Once you get behind, mortgage arrears can snowball to a point where you can’t just “catch up.”  When that happens, there are 5 things you can do:

1.    List and sell the house. If you can’t make the payments, selling the home pays off the mortgage and may even give you some cash to buy a new home.  This used to be the quick, easy solution, but not in today’s economy.   Houses just aren’t selling and the norm is that you probably owe more than the home is worth.

2.    You can do a short sale.  This requires the mortgage company to accept less than what is due, so that you can sell your house to someone for its true market value.  This will pay the first mortgage, but may not pay a 2nd Mortgage or Line of Credit. And you won’t get anything out of the sale: any money received will go to the realtor, costs of sale and the mortgage company.

3.    You can get a mortgage modification. The mortgage company can reduce the interest rate on your mortgage (thereby lowering your monthly payment); can add arrears to the end of the loan, (so you are not behind anymore); or can even change the amount you owe altogether.  Unfortunately, in spite of the fact that there are federal and state laws that encourage such programs, modifications are scarce.  Lenders have all sorts of conditions placed on the process and there is no legal requirement that anyone be granted a modification.

4.    You can pay the arrearage. Unfortunately, mortgage companies want you to do this all at once.  If you can’t come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) and spread the amount you are behind over several years.

5.    You can walk away and allow the property to be foreclosed. (This is often a much better solution than it sounds, since you get to stay in the house for months rent-free before moving and there will be nothing due to the mortgage company even if they don’t recoup all of the money owed.)

There are advantages and disadvantages to all of the above, and over the next several weeks, we will examine each of these “remedies,” in greater detail.

Is there  home ownership after a short sale?

One of the huge fears that keeps homeowners paying on underwater homes that overload their budget  is the worry that if they bail on the present house, it will be forever before they can buy another home.

Not so, says Keith Rockmael, a Bay Area real estate advocate.  Here’s what he wrote me on the subject:

If you listen to the media, investors and experts in the real estate everyone would be buying, buying and buying more. After all, with homes prices still soft and interest rates at ridiculously minuscule levels it would make sense. Many investors (and even owner occupiers) continue to break open their  piggy banks and dig through their mattresses to pay cash for homes.

For those without a mattress full of dinero, most people think that they can’t get a loan especially after a short sale, bankruptcy or foreclosure. Not true. People just need to look in the right place and have a relationship with a loan officer who knows their stuff.

A couple of banks and credit unions can lend to homeowners after a short sale with no waiting period or only a 90 day seasoning. Wells Fargo offers a post short sale loan if the homeowner remains current with all payments and a completed Short Sale. Homeowners needs a legitimate hardship and will likely not be able to purchase in the same city. The rates are good as it is an FHA loan.

In San Francisco, the Mission SF Credit Union can lend with no waiting period after a short sale again with no lates. Even with lates, they can lend one year after a short sale. Normally, most banks will make borrowers wait two years before they can qualify for a new loan post short sale.

With both of these loans, borrowers must show improved credit history post short-sale and the guidelines can be strict. Savvy homeowners realize that options exist for those who seek to get off the bench and back into the game.

The old bromide is that “time heals all wounds”, even to credit worthiness.  But its clear, that smart shopping for home loans can shorten the time a short seller is out of the market.

The hope for judicially supervised mortgage modification in bankruptcy spurred us to start this site.  That hope died in the Senate  last session.

Though Congress walked away from a workable solution, and no one has produced a viable alternative, the problems of the California housing market continue.

We are widening our focus here to discuss not just legislative solutions but negotiated solutions and litigation tied to the mortgage mess.  Send us your questions and suggest housing related topics for exploration.

We live here in Northern California and we’re here to further your knowledge about your options for living through the mortgage mess.

I tell my bankruptcy clients that we can either laugh or cry about their situation.  If you are willing to laugh about the current mortgage mess, the sham of “mortgage modification” as a economy-wide solution, and the two facedness of the banks, try this version of  the old favorite, BofA  is Coming to Town.

Merry Christmas.

In part 1, we discussed what you can do to keep your home.  Here, we will look at your choices if you are willing to leave the house.

If you aren’t going to keep the house; you can either sell or abandon it.  Selling property in this day and age usually means a short sale – convincing the mortgage company to take less than is owed in order not to have to take the property back in foreclosure.  That has proved a workable solution and many lenders will make those arrangements.  But, is it worth it to you?

Anyone who has ever sold a house knows how much work it is: keeping the house clean for prospective buyers, filling out paperwork, meeting with realtors, being gone on weekends so it can be shown, etc.  And if you do get an offer on then house and get the bank to compromise, you get absolutely nothing back! The bank and the realtor get some money, but there isn’t anything left for the seller.  So, you’ve knocked yourself out for no gain.  Of course, your neighbors will appreciate the fact that you just didn’t leave and create another foreclosed home on the street.  There can also be personal income tax implications for a short sale.

Generally, the lender will take what they can get and forget the rest of your obligation.  But Bank of America recently enacted a new program to ask sellers in a short sale to agree to repay the difference that the bank is compromising!  This language was quietly added to their standard short sale agreement, and hopefully, no other banks will follow suit.  So, if your lender is Bank of America (or was Countrywide who was purchased by Bank of America), it’s one more reason to avoid a short sale.

Finally, you can always walk away and the house will be foreclosed.  In California, the holder of the first loan on the property can’t get a deficiency judgment against you under almost all circumstances.  Thus, if they get the house and sell it for only a fraction of what you owed, you are still in the clear: they can’t come after you.  But, a second deed of trust or home equity line of credit can, in most instances, pursue you if they have been wiped out by the foreclosure of the home.  That needs to be considered in a foreclosure.  Always check with a good real estate or bankruptcy attorney if you are going this route to protect yourself from any unforeseen consequences.

There are basically four choices for a homeowner who is behind in his mortgage payment.

1.    You can get caught up by paying the arrearage.  Most mortgage companies want you to do this all at once, but if you can’t afford to come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) to spread the amount you are behind over several years.

2.    You can seek, and sometimes receive a mortgage modification. These are pretty hard to get, in spite of the fact that there are federal and state laws to encourage such programs. But the lenders have all sorts of conditions placed on the application process and there is no legal requirement that anyone be granted a modification. Worse, there is no court, judge or administrator to oversee the process.

3.    You can do a short sale.  This requires the mortgage company to reduce their loan so that you can sell your house to someone for its true value in today’s market.

4.     You can walk away and allow the property to be foreclosed.

There are advantages and disadvantages to all of the above, but only 1. and 2. will allow you to keep your home.

Generally if you do want to keep the home, try the mortgage modification program as a first step.  If that works realistically (something that actually reduces your payments so you can afford to stay there and doesn’t just delay the inevitable), great.  If not, you can try 1. – paying off the arrears.

To pay off the arrears, you either need to have a lump sum of money or to file bankruptcy.  I don’t know of any mortgage companies that will allow you to make payments if you’ve gotten behind except under very limited circumstances, and those usually include being completely caught up in 90 days.

By filing a chapter 13 or chapter 11 bankruptcy, you can spread the arrears out over the length of the bankruptcy plan.  Thus, a $10,000 arrearage becomes slightly less than $300 a month for 3 years or $166 a month for 5 years.   That’s usually a lot more doable than coming up with the $10,000 in cash.

Please see Part 2 for a discussion of what you can do if you are willing to leave the house.

Between the Obama plan and the loan modification ads on TV, you’d assume that everyone who need a loan modification can get one.  Is that your experience?

If you’ve tried to get a mortgage modification in the past three months, please share your experience with us.  Were you offered a modification?  What were the terms?  Did it reduce the amount you owed?  Were there conditions on qualifying?  Did you have to pay money in the process?

If you were unsuccessful, what prevented a modification?  Were you facing foreclosure?   Did the foreclosure go forward anyway?  Were you treated politely?  Knowledgeably?

Please report your experiences as a comment to this blog.