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.

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.

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.

A majority in the Senate rejected empowering banrkuptcy courts to effect mortgage modification.  Put in the best light, they apparently assume that the banks are motivated and capable of providing voluntary resolution of the mortgage crisis. [The alternative explanation came from Senator Dick Durbin: "The banks own this place (the Senate)".]

Having trouble resolving mortgage troubles with your lender?  Facing forecloure?  Call your representatives in Congress: enlist their help with keeping your home.

Enhancements to the Making Home Affordable (”MHA”) plan announced in late April were made, at least in part, because of complications second mortgages presented banks when attempting to modify or refinance a first mortgage. The new provisions, along with the integration of the Hope for Homeowners program, will assist even underwater borrowers by requiring write downs in order to increase homeowner equity, or at least subdue the urge to simply walk away.

Details of the Making Home Affordable Program Update spell out what can be done for amortizing loans as well as interest-only loans.

Amortizing Loans: (Loans on which borrowers make principal as well as interest payments)  Participating servicers are required to take specific steps when modifying amortizing liens in the second position.

1) Interest rate reduction down to 1 %,

2) Extension of the term to that of the modified first mortgage,

3) Principal forbearance on the first lien, with the option of extinguishing principal under what the MHA plan calls the Extingueshment Schedule.

Of course there is a catch, there is always a catch,

4) After five years, the interest rate on the lien in the second position will adjust to the current interest rate on the first mortgage,

5) The lien in the second position will then re-amortize over the remaining term at the higher interest rate, and

6) Investors receive an incentive payment from the U.S. Treasury equal to one half of the difference between the 1% interest rate floor and the modified interest rate on the first lien.

Interest-Only Loans: (Loans on which borrowers make only interest payments) In the case of an interest only loan, servicers are to

1) Reduce the interest rate down to 2%,

2) Forbear principal in the same proportion as forbearance on the first lien,

3) Extinguish principal under the Extinguishment Schedule, if any,

4) After five years the interest rate steps up to the interest rate on the modified first mortgage,

5) The lien in the second position amortizes either over the remaining term of the modified first loan or the originally scheduled amortization term, which ever is longer, and amortization begins at the time specified in the original contract,

6) Investors receive an incentive payment from the U.S. Treasury equal to one half of the difference between the 2% interest rate floor and the modified interest rate on the first lien.

There are also a pay-for-success structure for the second lien program similar to the first lien modification program.  Servicers can be paid $500 up-front for a successful modification and borrowers can receive up to $250 per year for as many as 5 years.  Payments made to the borrower are applied to the principal due on the first mortgage.

To give an incentive to lenders for extinguishing a second mortgage the MHA second lien program provides for an Extinguishment Price Schedule. The Extinguishment Schedule ranges from $.04 to $.12 for every dollar of debt extinguished for loans that are less than 180 days past due at the time of modification.  For loans more than 180 days past due at the time of modification there is no schedule and the lender/investor is paid $.03 for every dollar of debt extinguished.

Thus far the Obama Administration’s solution has been one of financial bargaining with banks, servicers and investors.  The money that borrowers receive in these plans amount to a reduction in loan principle, which is only another payment to the bank.

Time will tell if these changes are effective or whether the borrowers eventually end up in bankruptcy or foreclosure.  Not to mention having the banks and GSEs converting to property managers! For anyone who owns an investment property and can attest to what a headache it is, maybe there will be some sort of justice after all?

But in 2007, Congress passed the “Mortgage Forgiveness Debt Relief Act of 2007.”  That law says that should all or part of your first mortgage go away, you won’t have to pay tax on the amount that is gone.  This is the case for loans eliminated or reduced through foreclosure, short sale or modification.

There are limits on the regulation, however: it only applies to loans used to buy, build or improve a principal residence and only if the home is worth less than $1,000,000 (twice that for a couple filing jointly).

Additionally, the act was set to expire this year but has been extended through 2012.

The foreclosure crisis is all around us. Too many families are losing their homes because they can’t afford to keep making the payments.  These families are struggling primarily because of a couple of different factors: either they have a catastrophic event occur such as the loss of a job or a medical expense that insurance doesn’t completely cover; or they can’t refinance their variable mortgage because the banks have stopped lending money and there’s no equity in the house.

Consider the plight of Ms. A. At age 75 she was conned into refinancing her home to pay off a couple of credit cards.  She is living on a fixed income and now that the adjustable rate on her mortgage has raised her payments from $500 a month (interest only) to $1500 a month, she can’t make the payments.  And she can’t refinance because the loan company that assured her she would be able to do so, is refusing.  Her house has declined in value and neither the equity she has nor her retirement income can justify anyone lending her money.  She needs a loan modification.

Or consider Mr. and Mrs. L.  They had a thriving business, cleaning office buildings.  So, they bought their dream house, having plenty of saved money for the down payment and enough steady income to easily make the monthly payment.  But the business is now failing due to the economy, and the house isn’t worth what they paid for it, or even what they owe against it.  They need a loan modification.

Finally, consider the plight of Mr. and Mrs. G.  He just got word that the factory he has worked for the past twenty years is closing and his 6 digit supervisor position is a thing of the past. Oh, he’ll get unemployment insurance for a while but that won’t replace his salary and won’t cover the household expenses.  And the housing market is such that his house, which he has lived in for 15 years, making every payment, isn’t worth the money he owes against it. This family needs a modification.

Waiting for the banks and loan companies to help isn’t working.  We need a judge to mediate the process and help lenders and home owners reach a compromise that will allow mortgage companies to get paid and families to keep their homes.

The problem is some of these “services” are simple scam artists trying to make a quick buck by preying on the unfortunate home-owner struggling to keep her home in this economy.  

How do you know who to trust?  There are a couple of basic rules to follow when seeking this kind of help.

1. First, check out the company.  Have they been around for more than a week?  Are the owners and managers trained professionals in the real estate or legal community?  Do they have a bad track record with the local Better Business Bureau or the California Department of Consumer Affairs?

2. Make sure that whoever you are speaking with is more interested in learning about your loan and the financing of your house, than how you are going to come up with the money to pay them.

3. Get some deadlines. These kinds of modifications take time, certainly, but a reputable company should be able to give you some specific periods of action.  

4. Follow your instincts.  If the salesperson is telling you what seems too good to be true, it probably is – find another company.

Modifications are out there.  They can turn around a nasty loan or difficult situation, but you need to be careful not to throw a couple of thousand dollars away on a “here today; gone tomorrow” company.  

The better answer is the “Helping Families Save Thier Homes in Bankruptcy Act of 2009.” Let’s get that bill passed!

Since a foreclosure hadn’t started, it seemed the best thing to do was to try and help her get a loan modification.  Maybe the lender would see the errors of the broker who put the refinance together and be cooperative.  

So, I filed out, with the client’s help stacks of papers and submitted them to the lender.  They called about 2 weeks later to ask for some additional information and we immediately provided that.  I heard nothing for two weeks.

Then my client received a notice of foreclosure.  That gives her, under California law, 90 days to resolve the delinquency or the house gets put on the market for sale.  So I called the number the lender had given me when they asked for more papers.  Wrong number.  I called the lender and asked for their modification department.  A couple of hours of phone trees later, I ended up with a clerk who couldn’t locate the file, couldn’t find any paperwork, but who offered to send me another set of papers.

I received the second set of papers and sent them back immediately.  I heard nothing.  Meanwhile the time was running on the foreclosure.  I called several more times and was told that they were working on a modification offer, would get back to me, and to “sit tight” and wait.

About two months into the 90 day pre-sale waiting period, my client received a band new solicitation from the lender to apply for a modification, and yes, it contained the same set of papers!

We filled those out and resubmitted.  I’ve heard nothing.   

It’s now quickly approaching the 90 day mark, so I will be filing a bankruptcy to stop the foreclosure in the next couple of days.  No doubt I’ll hear from the lender wondering why my client simply didn’t do a modification!

We need this new bill: “Helping Families Save Their Homes in Bankruptcy Act of 2009” so that judges can make these decisions and the thousands of homeowners like my client  won’t lose their homes!

For years the courts have had the power to modify loans on property that is not the debtor’s principal residence.  No doubt the new law will work similarly.

Specifically, the Act will allow a Bankruptcy Judge to reduce the secured amount of the loan to the fair market value of the home.  Thus, if the house is only worth $250,000 but the debt is $300,000 the judge can reduce the secured portion to $250,000 and the debtor can treat the other $50,000 as wholly unsecured.   A debtor in a chapter 13 plan pays only a portion of her unsecured debts depending on several factors.  A likely scenario is that the debtor may only have to pay 5 to 10% of that $50,000.

Additionally, the Act will allow a judge to dictate a reasonable interest rate for the loan.  He will also be able to extend the term of the loan to 40 years from the normal 30. Both of these provisions will dramatically and substantially reduce the monthly payment amount.

All in all, the Act will save thousands, if not millions, of homeowners from losing their houses to foreclosure.