Truth in Foreclosure

Foreclosure or Short Sale May Not Be the End

As lenders try to minimize losses in today’s real estate climate, they’re trying to grab every income stream they can.  For example, if you’re doing the right thing and trying to sell your home through a short sale, or pursuing a deed in lieu…or even if your home is foreclosed upon, they may still come after you for the debt you owe!

Simply going through a foreclosure or the credit damage of a short sale or deed in lieu may not be the end of your struggle.  If your home doesn’t sell for enough to cover the amount you owe, your lender could try to collect that amount in what’s known as a deficiency judgment.

Deficiency Judgment Example

For example, say you owe $200,000 on your home and your lender agrees to let you sell it for $175,000.

That means you have a $25,000 deficiency.

Depending on the state you live in, your lender could slap you with a legal judgment that requires you to repay that $25,000!

That’s right…after struggling with you payments and the bank for months and finally getting them to agree to the sale, you’re not done! You still owe them the $25,000…which means they really didn’t lose anything on the home expect a few months’ payments if you were behind.

How ludicrous is that?!

They take months to approve your sale, kill your credit, and don’t really lose anything…almost unbelievable.

Most often, when a lender has a judgment placed against you, it is in the form of a promissory note.  The terms of these notes vary, but they often have no or little interest and can have no required payments for years.

What Can You Do?

How can you protect yourself?

There’s really only one way…negotiation.

When your lender agrees to the short sale or deed in lieu, they will send you a contract to complete the transaction with you.  Read that contract carefully!  Make sure you understand every word.  If you don’t understand it, take it to your real estate agent, lawyer, or mortgage broker and ask them what it means.  You can also take it to a HUD Housing Counselor.

Almost everything is negotiable! If you see conditions you don’t like…try to negotiate them out of the final contract.  Most lenders use broiler plate documents and expect homeowners to just accept them.  Lenders know you feel like your back is against the wall…but you still have rights!

Another way out of the deficiency judgment is to file bankruptcy after the foreclosure or workout is final.  The judgment can be wiped out in a bankruptcy because it’s unsecured debt.

For More Information

See this Puget Sound Business Journal article: B o fA wording may cause more foreclosures

Listen to the ‘Streamline Refinancing’ call I did with Brent Lane in January

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Found this on the Default Servicing News web site.  If you’re in one of the areas being visited, you may want to check it out…

Government officials joined forces with local leaders in Miami on Friday to kick off a nationwide campaign to promote the federal Making Home Affordable program and the options available to struggling homeowners.

Miami Mayor Manny Diaz, Miami Gardens Mayor Shirley Gibson, other local officials, and nonprofit housing groups helped launch the event, which included specialized training for local agencies and housing counselors on federal mortgage relief programs. The Miami metro will hold its first homeowner workshop this Tuesday as part of the effort to raise awareness of the free assistance available to borrowers having trouble making their monthly mortgage payments.

Mayor Diaz said, “The city of Miami has implemented a Foreclosure Prevention Program to help our residents who are in danger of losing their homes but we cannot do it alone, and I am happy to work in partnership with the federal government to prevent this foreclosure crisis from getting worse.”

From Miami, the campaign caravan will travel to nine other cities whose housing markets have been hit hard by foreclosures. The goal of the outreach effort is to partner with local housing counseling agencies, community organizations, elected officials, and other housing agencies and advisors in the target markets to build public awareness of the Making Home Affordable initiatives and educate at-risk borrowers about the assistance available so they are better prepared to work more efficiently with their servicers.

The administration says it is ramping up on-the-ground outreach to homeowners to help ensure eligible families that could benefit have the necessary information and resources to access the program. By organizing community events, the administration hopes to maximize behavioral research which suggests that more homeowners will feel comfortable asking for help if they are among peers who are doing the same.

According to Treasury Secretary Timothy Geithner, more than 50 percent of all foreclosures occur without servicers and borrowers ever connecting. “With this targeted campaign, we can reach in to the communities most in need, bolster awareness of this program and help responsible homeowners take the first step toward getting relief – all steps that will in turn help to stabilize the housing market and get our economy on the path to recovery,” Geithner said.

HUD Secretary Shaun Donovan added, “Leveraging local housing partners on the ground is a key component in making the Making Home Affordable program a success. Engaging community groups that are on the front line with at-risk borrowers will help broaden our outreach efforts and keep more people in their homes.”

As part of the campaign, government officials are holding training sessions with local housing counselors and community organizations to help them more effectively reach out to distressed homeowners and arm them with Making Home Affordable collateral materials. The promotion also includes neighborhood door to-door canvassing and local Making Home Affordable foreclosure prevention workshops for homeowners.

Other cities on the tour include Los Angeles, Sacramento, Las Vegas, Phoenix, and Boston, among others, with the possibility of expanding the tour to more foreclosure-ravaged areas in the coming months. Specific dates and events in these markets will be made available by the administration in the weeks ahead.

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This is a follow-up to our article on determining imminent default for a Home Affordable Modification, which lists the Freddie Mac guidelines for these calculations.  If you have questions as you go through this, please refer to that article.

Tom was laid off from his job six months ago. Although Tom has recently found new employment, his monthly income is now 50% lower than his previous monthly income. The reduction in income has forced Tom to borrow against his 401(k) in order to meet all his monthly payment obligations, including the mortgage payment on his primary residence. Currently, Tom pays his mortgage payment on time but he may not be able to continue making timely mortgage payments in the near future, due to the decrease in his income and dwindling cash reserves. The following chart outlines Tom’s current financial information.
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As a follow-up to last week’s article introducing you to NACA, I decided to let you know about one of their programs aimed at helping people going through foreclosure.  Even if NACA can’t help you, the info in on this page is very helpful.

HOME SAVE SOLUTIONS

All of the below solutions provide for an affordable mortgage payment over the long-term. In fact the Restructuring sometimes lowers the fixed interest rate to less than a NACA Refinance. As opposed to the refinance, a Restructure is available throughout the country and is not based on factors such as equity, debt ratios and credit score. NACA through its Mortgage Consultants and Home Save Department will make a determination of the solution that is most appropriate for your particular situation.

NACA’s Home Save Program provides four long-term solutions. The NACA process considers the individual characteristics for each homeowner but provides a framework and standardization to provide for the most effective long-term solution. The Affordable Budget provides an analysis of your current financial situation. If completed accurately and completely, it will show the mortgage amount you can afford. The solutions are based on what you can afford based on a tight budget.

Options:

NACA’s home save options are based on what you can afford based on our comprehensive Affordability Budget. They are provided in the order that is most appropriate for your situation. The most viable and appropriate solution for most homeowners is the Restructure. Servicers and investors are now more willing to restructure a loan given the collapse of the mortgage market and the significant loss they would incur with a foreclosure.

1.  PAYMENT PLAN (i.e. forbearance agreement):
A Payment Plan is an arrangement with the servicer for you to become current within a twelve month period. This is appropriate if your interest rate is reasonable and your mortgage payment is affordable. Payment Plans are effective when life’s circumstance (i.e. illness, short-term job loss, or personal issues) have created a short term financial setback. The past due amount is spread as an additional payment over a number of months and on completion you would be current. While Lenders/Servicers often advocate for this, it will not prevent an eventual foreclosure if your existing mortgage payment is unaffordable or will become unaffordable.

2.  MODIFICATION:
A Modification of a loan is where the past due amounts are added into the remaining balance or made payable upon loan payoff (i.e. refinance or selling of the house) This works if you have an affordable payment but have experienced a long-term financial set back and cannot become current in 12 months. The monthly payment does not decrease and often increases due to the higher loan amount (Interest rate reduction modifications are considered a Restructure Solution as described below).

3.  RESTRUCTURE (modification):
A Restructure requires either a reduced interest rate and/or reduction in the mortgage amount. This is the most powerful tool for many homeowners to save their home. NACA has been extremely successful in making dramatic reductions in interest rates saving homeowners hundreds and thousands of dollars a month in their mortgage payments. You would work with your NACA Mortgage Consultant to determine a mortgage payment you can afford based on the above described Affordability Budget. The monthly taxes and insurance are deducted from the available payment leaving the principal and interest payment. The NACA Restructure Solution locks in the principal and interest for the remaining term of the loan thus allowing you to achieve true homeownership. The NACA Restructure Solution requires that the mortgage payment reflects this affordable monthly payment. This can be accomplished by adjusting either or both the interest rate and outstanding mortgage amount. The Restructure is not conditioned on the three major limitations for refinances:

1.  Equity in the home (i.e. loan-to-value)

2. Debt-to-income ratio

3. Payment History (i.e. credit score)

The mortgage payment for principal and interest is submitted to the servicer of your loan (the servicer may not be the original lender). The servicer would reduce either or both to achieve the mortgage payment over the remaining term of the loan. The servicers has certain authority to change the terms of your loan. They may need to get the investors approval for such a solution. If the investor rejects this solution, NACA may appeal the decision since your Affordability Budget documents the maximum amount you could afford for a mortgage payment. If the servicer and investor still refuse the Restructure Solution then NACA could work with you as part of the Homeowner Advocacy campaign as described below.

4.  NACA REFINANCE:
The NACA Refinance provides an important option for homeowners to achieve an affordable long-term mortgage payment. The NACA Refinance is one product that is the best in America. It is at a below-market 30 year fixed rate interest (Currently at 5.125%), no points, no closing costs, and no fees. There are also NO abusive terms: No yield spread premium; No pre-payment penalty; No balloon payment; No required credit life, and No other unnecessary or overpriced insurance. NACA has committed One Billion dollars to help homeowners who have an unaffordable mortgage keep their homes in the wake of the mortgage crisis. This continues to be the most significant refinance option for homeowners at-risk of foreclosure in this mortgage crisis.

While the NACA Refinance is the best in America, there are eligibility criteria that are not limitations with a Restructure Solution. These include Loan-to-value, Debt-to-Income Ratio, Payment History, property located within a NACA service area, and other criteria. There would also be additional documentation of income, previous mortgages and other documentation requirements. All properties to be refinanced must have thorough inspections.

OTHER OPTIONS:
NACA does not consider selling your home or a deed-in-lieu to be viable solutions. If you are determined to keep your home and are willing to engage in the Homeowner Advocacy there is a good chance that you will not lose it. If selling or doing a deed-in-lieu is your desire, we may be able to assist and work with you to reestablish yourself to become a homeowner in the future with an affordable mortgage payment. To purchase another home would likely take a significant period of time.

For more information on NACA or their Home Save Program, please check out their web site.  There’s a “Home Save” menu button on the menu at the top of every page.  If you’d like to be notified whenever we add posts to the Truth in Foreclosure site, please fill out and submit the form below.

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According to President Obama’s Home Affordable Modification Program, missing payments isn’t a requirement for you to qualify.  As a matter of fact, one of the stated goals is to reach homeowners who are in danger of “imminent default.”

One of the problems, though, is that no one has been talking about what that actually means.  For today’s article, I went straight to the source…Freddie Mac…and got the answer.  Now you’ll know exactly how to figure out if you’re in danger of imminent default from your servicer’s perspective and what to do if they say you aren’t.

This is taken directly from Freddie Mac’s Servicing Guide…so it’s straight from the horse’s mouth so to speak.  It also means it’s a little hard to read…but it’s very important to saving your home because it’s the rules your lender had to follow if you have a Freddie Mac loan.  Other lenders will be similar as well but may not work exactly like this.

How to Determine Imminent Default

A Borrower who:

(a) is current or less than 31 days delinquent,

(b) contacts the Servicer for a modification,

(c) appears potentially eligible for a modification, and

(d) claims a hardship must be screened for imminent default.

In the process of making a determination for imminent default, the Servicer must evaluate the Borrower’s financial condition in light of the Borrower’s hardship as well as inquire as to the condition of and any circumstances affecting the property securing the Mortgage loan. If the Servicer determines that the Borrower has not experienced a hardship, then the Borrower does not qualify for the Program.

The Borrower is required to identify the hardship type and detail the circumstances of the hardship on the Hardship Affidavit. In addition, the Borrower will be required to complete and sign page two of Form 1126, Borrower Financial Information, and the Servicer must legibly print the Borrower’s name below the Borrower’s signature and add the Freddie Mac loan number to the form. Servicers are to rely on the Hardship Affidavit, page 2 of Form 1126, the Borrower’s credit report, and income documentation to determine the hardship and financial condition of the Borrower.

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Have you been looking for a trustworthy non-profit organization to help you out of foreclosure or save your home?  We’ve been looking too…and this is what we found.

It sounds too good to be true…but rest assured it isn’t.  They’ve been around since 1988!

The Neighborhood Assistance Corporation of America (”NACA”) is a non-profit, community advocacy and homeownership organization. NACA’s primary goal is to build strong, healthy neighborhoods in urban and rural areas nationwide through affordable homeownership. NACA has made the dream of homeownership a reality for thousands of working people by counseling them honestly and effectively, enabling even those with poor credit to purchase a home or refinance a predatory loan with far better terms than those provided even in the prime market.

Investing in working people
The NACA homeownership program is our answer to the huge subprime and predatory lending industry. NACA has conclusively shown that when working people get the benefit of a prime rate loan, they can resolve their financial problems, make their mortgage payments and become prime borrowers. NACA’s track record of helping people who have credit problems become homeowners or refinance out of a predatory loan debunks the myth that high rates and fees are necessary to compensate for their “credit risk.”

Started in 1988, NACA has a tremendous track record of successful advocacy against predatory and discriminatory lenders as well as providing the best mortgage program in America with $10 billion in funding commitments. NACA is the largest housing services organization in the country and is rapidly expanding by growing its existing 30+ offices, headquartered in Boston, MA, opening many new offices nationwide, and expanding the services it offers its membership. NACA’s confrontational community organizing and unprecedented mortgage program have set the national standard for assisting low- and moderate-income people to achieve the dream of homeownership.

NACA – America’s Best Mortgage Program
The incredible NACA mortgage allows NACA Members to purchase or refinance homes with:

• no down payment,
• no closing costs,
• no fees,
• no requirement for perfect credit,
• and at a below-market interest rate.

Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors. NACA also provides free, comprehensive housing services. NACA counsels Members into the extraordinary NACA mortgage using character-based lending criteria that takes each Member’s circumstances into account to determine whether they are ready for homeownership and what they can afford. This is in contrast to risk-based pricing where people are often given loans they cannot afford while brokers and others make tremendous fees and profits.

Property renovation and foreclosure prevention
NACA also provides property renovation assistance and Membership Assistance for NACA homeowners. NACA’s Home and Neighborhood Development (”HAND”) Department addresses repair issues, and where appropriate provides rehab assistance throughout the renovation process. NACA’s Membership Assistance Program (MAP) provides comprehensive counseling for Members who are delinquent on their home payments, including establishing payment agreements and providing financial assistance to help Members avoid foreclosure.

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Your credit score is very important in today’s world. Not only can it affect the interest rate you pay on your mortgage and other credit obligations, it can also affect your ability to get insurance or even a job.

You have to decide whether you want to save your credit or save your home because it’s highly unlikely you can do both!  And if you’re a month or two behind on your payments, damage has already been done to your credit score.

To keep your home, you’ll have to put your concerns about your credit score on the back burner for now. By taking a proactive approach to solving your foreclosure and negotiating a workout and then consistently meeting the requirements of that new workout plan, you’ll show creditors your missed payments were a temporary hiccup rather than a long-term problem.

If you keep your home through a forbearance, repayment plan, or loan modification, you can expect a moderate to serious impact to your credit score. It’ isn’t uncommon for your credit report to wind up with 6 - 12 months of missed payments plus a notation that you’ve agreed upon a workout plan. And if you had to miss payments or have late payments with other creditors, the damage will be even more extensive.

The exact score drop you can expect is impossible to know or guess. What you can expect, though, is to have a difficult time getting any type of mortgage loan for at least 2 years. It could be difficult after the 2 year point as well depending on how severe your problems were and how consistently you’ve been able to pay your bills after the foreclosure is over. Your ability to get other types of credit like car loans or credit cards will depend on individual creditors. Credit agencies are required to stop reporting negative information after 7 years (except for bankruptcies, which stay for 10 years), but as you consistently pay your bills the impact will be less and less as you get closer to that 7 year limit.

If you know you can’t keep your home, you can help your credit score by selling it as quickly as possible. A refinance will have no negative impact on your score. A mortgage assumption will probably cause the least impact of all the workout solutions, but your lender has to agree to it and you have to find someone to buy the house for at least what you owe on it. A pre-foreclosure or short sale is your next best option, but these will take anywhere from 6 - 9 months to complete so your credit will be heavily damaged by late/missing payments if you’re unable to make payments the whole time.

According to myFICO (the company that figures your FICO credit score):

Credit bureau reports are limited in how they represent foreclosures today, so it’s generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation.

The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.

For more information, I recommend you check out this article from CNN/Money Magazine…one of their readers asked

We have to relocate because of my husband’s job. Our home value has fallen nearly $100,000. We would like to get rid of it, but we don’t want to go into foreclosure. Someone mentioned a short sale. What impact would that have on our credit rating?

The short answer is a short sale and a foreclosure will do equal amounts of damage to your credit score.  It’s the number of late/missed payments that make a huge difference.  The big difference between short sales and foreclosures is how quickly you can obtain new mortgage-related credit after each.

In the end, regardless of whether you stay in your home or leave, you’ll probably have a significant amount of damage done to your credit score. That’s simply the way the credit reporting system is designed. But the damage is repairable with time and effort on your part. Right now, though, focus on getting out of the situation you’re in. Once you’re out, you can focus on improving your credit score.

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Ever wondered how your lender determines what workout to offer you?  It seems like black magic sometimes, but there really is rhyme and reason to it.

They have standard guidelines they have to follow as they consider your hardship package and decide what workout option to offer you.  By knowing what they’re looking for and shaping your hardship package in a truthful, yet most beneficial, way, you can stack the odds in your favor.

Below are the Fannie Mae guidance to lenders about their standard workout hierarchy.  While Fannie Mae is just one servicer, they are one of the largest and are quasi-government.  That means that what they say usually trickles down to most lenders across the country.

Even if your loan isn’t Fannie Mae, there’s a pretty good chance their guidelines are pretty similar to this.  They may call the programs different things, but your lender is trying to reach the same goal Fannie Mae is, so they probably have similar programs.

These Fannie Mae guideline lay out exactly what they’re looking for as they review your package.  If you know what they’re looking for, you can use it to your advantage in your negotiations.

Fannie Mae is establishing a new workout hierarchy, which supersedes the previously announced “RAMPD” hierarchy introduced in Announcement 08-14: Introduction of the HomeSaver Advance™ (HSA). This new hierarchy establishes the preferred order of consideration of foreclosure prevention alternatives to resolve a borrower delinquency.

Summary of the New Workout Hierarchy

TEMPORARY HARDSHIP
(For a borrower expected to overcome a temporary financial hardship AND be able to make future scheduled payments in addition to an amount to cure any outstanding arrearage)

1. Forbearance
2. Repayment Plan
3. HomeSaver Advance

LONG-TERM OR PERMANENT HARDSHIP
(For a borrower experiencing a long-term or permanent financial hardship)

1. Home Affordable Modification
2. HomeSaver Forbearance
3. Other Forbearance
4. Modification
5. Pre-foreclosure sale
6. Deed-in-lieu

So the first thing you have to determine and prove to your lender is whether your hardship is temporary or permanent.  How do you do that?

Through your hardship package and your financial information.

To find out more about how negotiating with your lender, sign up for site updates below–we plan several articles on this topic over the next few weeks that you won’t want to miss.

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In a move aimed at furthering the success of President Obama’s Making Home Affordable Program, Freddie Mac announced several changes to its refinance offering under the program. Freddie Mac’s Relief Refinance Mortgage is designed to assist borrowers who are current on their mortgage payments but who would benefit from refinancing into mortgages with terms that better position them for long-term home ownership.

Once these changes are available,you’ll be able to refinance a Freddie Mac-owned or guaranteed mortgage with any lender affiliated with Freddie Mac. Previously, you had to work with the same lender who currently services your mortgage. In addition, to help reach more borrowers, Freddie Mac is increasing the amount of closing costs that can be rolled into the new refinanced mortgage.

“We are responding to consumers’ desires to have more refinancing options,” said Freddie Mac Executive Vice President Don Bisenius. “As an added benefit, we are expanding the program and providing greater flexibility in financing closing costs. Freddie Mac is committed to doing everything we can to bring the benefits of the Administration’s Making Home Affordable program to as many borrowers as possible.”

You can continue to work with your existing servicer to refinance your mortgage if you want to. In the vast majority of cases, the current servicer won’t have to re-underwrite you, where a new lender would.

Freddie Mac will allow the lesser of 4 percent of the new refinance mortgage amount or $5,000 of closing costs, financing costs and prepaids/escrows to be rolled into the new refinance mortgage.

Freddie Mac’s standard post settlement delivery fees, up to a maximum of 2 percent, will apply to the Relief Refinance Program.

You can visit https://www.freddiemac.com/corporate/ and complete the online form to determine if Freddie Mac owns their mortgage.

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I wrote Monday about the changes to HUD’s Hope for Homeowners (H4H) program.  In that post, I promised to describe the equity sharing arrangement you must agree to if you want to refinance through H4H.

As a quick review, H4H allows you to refinance your current mortgage at 90% of what your home is worth.  If your lender agrees to write down your principle balance, your new loan will be a 30-year, fixed-rate loan.  The changes announced in late May provide several incentives for lenders to participate, but you and all of your lenders have to make several concessions.  The biggest of these is that if you sell your home or refinance it within the next 5 years, you have to share any appreciation that happens between now and then.

Here’s How Equity Sharing Works

Keep in mind that these are only examples, and your actual experience will depend on many things, including how much your home increases or decreases in value.

Current value of your home                                              $200,000

Your new FHA mortgage is 90%, which equals          $180,000

Equity created by your new loan                                       $20,000

In this example, you, the FHA, and (possibly your lenders) share this $20,000 when you sell your home or refinance your loan.  Here’s how that $20,000 would be split if you sell or refinance:

During Year 1          FHA gets 100% of this equity ($20,000)                You get 0% ($0)

During Year 2          FHA gets 90%  ($18,000)                                         You get 10% ($2,000)

During Year 3          FHA gets 80% ($16,000)                                          You get 20% ($4,000)

During Year 4          FHA gets 70% ($14,000)                                          You get 30% ($6,000)

During Year 5          FHA gets 60% ($12,000)                                          You get 40% ($8,000)

After Year 5             FHA gets 50% ($10,000)                                            You get 50% ($10,000)

So, if you sell or refinance right after receiving the new loan, the FHA keeps the equity that was created, and you don’t receive any of it.  On the other hand, let’s assume you stay in this loan and don’t sell or refinance for ten years.  At that point, you’re entitled to half of the equity - in this example, that’s $10,000 - and the FHA is entitled to the other half.

Here’s How Appreciation Sharing Works

In addition to this equity sharing, you will have to share any future home price appreciation with the FHA.  This means that, if your home has gone up in value between the time you receive your FHA mortgage and the time of your home sale (or other disposition), you will share the amount of this increase with the FHA (less closing costs and a portion of any improvements you have made).  This is a 50/50 split that does not change over time.

For example, if:

Value of your home when this loan is taken out                                                     $200,000

You sell (after any period) for                                                                                      $250,000

Your home appreciated                                                                                                 $50,000

In this example, you would keep half of this, or $25,000.  The FHA (and potentially your original lender(s)) would also receive half ($25,000).

But what if the value of the home goes down?

Value of your home when this loan is taken out                                                     $200,000

You sell (after any period) for                                                                                      $175,000

Your home depreciated                                                                                                -$25,000

In this example, the appreciation is actually negative (the home has depreciated), so there is nothing of financial value to share.  As far as the appreciation sharing feature of your HOPE for Homeowners loan, neither you nor the FHA would receive anything.

These examples assume that there are no closing costs when you sell your home and that you have made no improvements to your home.

Again, keep in mind that these are just examples, and your actual experience will vary depending on factors such as:  How much your home is worth when you get a new HOPE for Homeowners loan, how long you stay in your home, and how much your home is worth when you sell.

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