Marti Kilby, REALTOR®
Broker/Owner Steele Group Realty
Distressed Property Consultant
CA DRE License #01474222
© Copyright 2013 Steele Group, Inc.
What to Do
When You Can’t Pay Your Mortgage
If you find yourself waking up at 2 a.m., wondering how you’re going to pay your mortgage, you’re not alone. Since the start of the Great Recession, thousands of people who never thought they’d be worried about money are struggling every month just to stay afloat. Or, perhaps your home is now worth far less than what you owe and you wonder if it makes sense to continue to pay on negative equity.
Everyone’s situation is unique, and I certainly don’t profess to have all of the answers, but over the last four years I’ve been able to help many people find a solution to their mortgage woes. I am not an accountant or a lawyer, so I certainly encourage you to consult the appro- priate professional for answers to your specific questions.
This guide is designed to provide you with an overview of your different options so that you are in a better position to make the decision that’s right for you. It begins with a one-page overview, followed by more in-depth discussion of the various options.
If you can’t pay your mortgage please don’t ignore the problem. Chances are you won’t win the lottery, and your financial troubles are real. As soon as you are 30 days late on your pay- ment, the lender’s clock starts ticking. There is help and you have several options. Start by reviewing all of the information found at www.makinghomeaffordable.gov and call 888-995- HOPE (4673) to speak with a HUD approved housing counselor. It is okay to ask for help and advice. Just remember that time is of the essence. Acting early allows you to make the decision that is best for you. Wait too long and your choices disappear.
My real estate practice is in San Diego County. Please don’t hesitate to contact me if I can be of service to you.
Sincerely,
Marti Kilby, REALTOR®
Broker/Owner Steele Group Realty
Distressed Property Consultant
CA DRE License #01474222
619-846-9249 marti@kilby.com
www.martikilby.com http://insidesandiegoshortsales.com
Introduction
Do Nothing. It is likely the lender(s) will foreclose. Foreclosure information will stay on your credit report for up to 7 years and may make it difficult to buy again for up to 5 years. Refinance. This is generally only a viable option if there is equity in your home. However, you may qualify for a HARP 2.0 refinance even with no equity, so long as your loan is guar- anteed by Fannie Mae or Freddie Mac, AND you are not behind on your payments.
Reinstatement. This option means that you will have to pay all delinquent amounts due plus interest, attorney fees, late fees, and taxes and insurance if impounded. If withdrawing funds from a retirement account you should consult a tax advisor. If borrowing from friends or family make sure that all terms are in writing and that you can afford the re- payment plan.
Loan Modification. A loan modification re-writes your existing loan to make the monthly payments more manageable by reducing the interest rate, extending the term, and/or reduc- ing the principal amount owed. Your lender may participate in the government’s Home Affordable Modification Program (HAMP), which provides incentives for lenders to modify loans. This program has been extended through December 31, 2013.
Forbearance. In a forbearance agreement your lender arranges a repayment plan that spreads out the defaulted amounts due over an extended period of time. It may include temporary payment reductions. You will need to supply information that shows your fi- nancial problems are temporary and you will be able to meet the repayment requirements. Deed in Lieu of Foreclosure. You voluntarily sign the deed back to the bank and vacate the home instead of the bank foreclosing. Generally this has the same impact on your credit report as a foreclosure.
Bankruptcy. Consult a bankruptcy attorney. Filing Chapter 7 for liquidation of debt may stall foreclosure, but your lender may be allowed to resume proceedings. Chapter 13 may halt foreclosure, but the debt of the past due amounts will be included in a 3-5 year re- payment plan.
Short Sale. If your home has equity, you may sell the home without lender approval. Lacking equity, you can opt to sell the home for less than the amount owed. This is negoti- ated with your lender by a qualified Real Estate Professional. In a short sale the lender must agree to accept less than the amount of the debt owed. This option is more favorably re- ported on your credit report.
The most important thing you can do is not bury your head in the sand. When a home- owner calls and tells me their home is going to auction in 5 days, there is little that can be done. Be realistic about your financial situation. Put it all down on paper and know exactly what you can afford today and your anticipated income over the next year. By taking con- trol of the situation versus letting your lender direct the action, I guarantee you will have a less stressful, healthier outcome.
Overview of Your Options
A loan modification occurs when your mortgage lender agrees to modify the terms of your loan in order to make it more affordable on a monthly basis. If there is equity in the property, or you qualify for HARP 2.0, (Home Affordable Refinance Program) this is accomplished through a refinance. With little or no equity a loan modification is accomplished in one of four ways:
You are allowed to skip a certain number of payments and that amount is added to the end of your loan. This might also occur with a reduced payment for a set period, such as a forbearance agreement.
The interest charged is reduced for a period of time, or permanently.
The loan term is extended.
The principal amount owed is reduced (rarely occurs).
Over the last two years we have seen many lenders reach out to borrowers at the first sign of delin- quency instead of waiting for serious default. The types of programs available to borrowers will vary from bank to bank, and will also vary depending on the degree of delinquency. If you think that loan modification is an option, it is better to apply as soon as possible, rather than wait for a Notice of De- fault to be filed.
Home Affordable Modification Program (HAMP)
HAMP was initiated by the Financial Stability Act of 2009. The program was built as a collaborative effort with banks, services, credit unions, the FHA, the VA, the USDA and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification. Over 110 major lenders have already signed onto the program.
The program has the following eligibility and verification criteria:
Loans originated on or before January 1, 2009
First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750
Higher limits allowed for owner-occupied properties with 2-4 units
All borrowers must fully document income, including signed IRS 4506-T, proof of income (i.e. paystubs or tax returns), and must sign an affidavit of financial hardship
Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties
Incentives to lenders and servicers to modify at risk borrowers who have not yet missed pay- ments when the servicer determines that the borrower is at imminent risk of default
Modifications must be started before December 31, 2013; loans can be modified only once under the program.
About Home Loan Modifications
Despite the fanfare, HAMP and private institutional loan modification results* are less than stellar.
As of June 2012, 1.88 million loan modifications had been initiated.
40.2% of the trial modifications failed due to borrower default or bank cancellation.
43.5% of trial modifications were converted to permanent status.
11.9% of trial modifications that were converted to permanent status failed due to borrower default
Beware of Scams
If you are considering a loan modification, I encourage you to do it yourself. Beware of companies that require an upfront fee or make specific promises about what they can nego- tiate on your behalf. If advertised services sound too good to be true….well, you know the rest. Applying for a loan modification can be a frustrating experience, but it is something that you can attempt without hiring a “specialist”. Do not expect a principal reduction as banks rarely offer that as an option.
* Source: ProPublica.org http://projects.propublica.org/bailout/loan_mods/list
Results
On May 24th, 2011 The New York Times ran an article in their Opinion section that revealed a nasty, little-known truth about loan servicing.
As most homeowners know, your mortgage is probably not owned or serviced by the bank or company from whom you originally borrowed. Not only was your loan probably sold in the secondary market, but it is likely that it is serviced by an entirely different company than the bank or company you actually owe.
Loan servicing refers to the tasks associated with collecting your monthly payment, paying the investor, and often times, managing payments for insurance and property taxes. These servicers are also responsible for sending out notices associated with delinquencies, collec- tion activities, and if needed managing defaults. In return, the servicer is paid a percentage of the principal amount owed, usually 12.5 – 50 basis points (1bp = 0.01%). Additionally, the flat servicing fee may be augmented with a variety of incentives, all designed to create additional cash flow from each loan on the books. The total value of these fees and incen- tives are noted on the servicer’s balance sheet as MSRs – Mortgage Servicing Rights.
Now here is the kicker: Banks make more from the fees and charges associated with managing a defaulted loan and foreclosure than they can make on a loan modification! Surprised? No wonder so few modifications are approved; the servicers have their MSRs to protect!
Why so Few Loan Modifications? Ask the Servicers
While foreclosure is probably not your best solution, it is important that you understand the process and time frame. Participation in a short sale or loan modification may, or may not, stall the foreclosure process.
Notice of Default
A Notice of Default is filed in the county where the property is located. This is usually recorded after 3 missed mortgage payments. The recording of the NOD starts the foreclosure clock ticking.
The Redemption Period
Day 1 – Day 90
The borrower receives a copy of the recorded Notice of Default by certified mail within 10 business day of recording, and any junior lien holders are notified within 30 days. This time period is the borrower’s opportunity to cure the default.
The Publication Period
Day 91 – Day 110
The publication period lasts for 20 days from the end of the Redemption period. A Notice of Trustee’s Sale is prepared and published in a newspaper with general circulation in the city in which the property is located. The Notice is published on time per week for three weeks. The sale date is at least 20 days after the date that the Notice of Trustee’s sale was first published in the newspaper. The Notice is posted on the property and must be recorded at least 14 days prior to the Sale date.
Trustee’s Sale
Day 111+
The Trustee’s Sale is held a minimum of 21 days after first publication. The property is sold to the high- est bidder, or if the bank’s minimum bid is not satisfied, the property automatically reverts back to the beneficiary for the debt. A Trustee’ Deed Upon Sale is recorded transferring title and allowing the bene- ficiary to market the property for sale to recover the debt. If not sold, the property becomes part of the bank’s REO (Real Estate Owned) inventory.
Eviction
How long a person can remain in the home after foreclosure depends entirely on who now owns the property. If the property was purchased at sale, the new owner can post a 3 Day Notice to Vacate which can be enforced by the Sheriff’s department. If on the other hand it has reverted to the bank, it could be weeks or even months before they hire an asset management company, who in turn hires a local real estate agent to market and sell the property. Even then, they might offer “cash for keys”, of- fering $1000 - $3000 for the property to be vacated in 7-14 days and left in broom-clean condition. If the foreclosed property is tenant occupied they have 60 days to vacate.
The Foreclosure Time Frame in California
Deed in Lieu of Foreclosure
A Deed in Lieu of Foreclosure simply means that the lender has agreed to accept the deed to the property from the borrower instead of pursuing a foreclosure action. It is not a special form. It is simply the conveyance of the property to the lender by Grant Deed or Quitclaim Deed. In exchange for the deed, the lender cancels the promissory note that is secured by the property. In this way, the lender gains title to the property without the expense of fore- closing. However, this is not as simple as it may seem as the lender must approve of the conveyance in order for the borrower to be released from obligation of the debt. Most lend- ers do not agree to accept a deed in lieu of foreclosure when there are 2 loans on the same property, because the junior liens aren't released from the property. If the borrowers qual- ify according to HAFA guidelines they may receive $3,000 relocation assistance.
Strategic Default
A strategic default occurs when a borrower has sufficient income to continue to pay their mortgage, but decides to let the home go to foreclosure because the value has significantly dropped. This generally occurs when the amount owed on the mortgage is substantially greater than the current value. Given the drop in real estate values, many borrowers do not think that it makes sense to continue to put money into negative equity, waiting perhaps 10 or more years to recoup lost equity.
Before considering a strategic default it is advisable to consult an attorney. In California, you may be protected by anti-deficiency laws which would prevent your lender from filing a judgment against you. One should also consider the negative impact on credit scores. A foreclosure will stay on your credit report for 7 years and may have a detrimental impact on your ability to purchase a home for up to 5 years, as well as other negative effects.
Bankruptcy and Foreclosure
If you qualify and file personal bankruptcy under Chapter 7, an automatic stay is put on all your creditors, including the foreclosing lender. However, this is only a temporary stay as filing Chapter 7 does not discharge your secured debts and your mortgage is a debt secured by your home. At any time before your unsecured debts, (such as credit cards), are dis- charged, the judge can allow your lender’s request for “relief from the automatic stay” and the foreclosure can proceed.
Filing Chapter 13 however may allow you to save your home from foreclosure. In a Chapter 13 bankruptcy you are allowed to make arrangements with your debtors for repayment of amounts owed, including your mortgage. However, foreclosure will be stopped only if you continue to make all payments, as agreed.
Additional Options
Short sales are often viewed negatively….largely because the review and approval process does take time. But, the upside can be considerable and allow you to get out from under your mortgage debt and make a fresh start.
Future Ability to Purchase a Home: When you apply for a home loan, there is a question on the application that asks, “Have you had a property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?” A positive response may impact your ability to qualify for up to 5 years and will certainly influence the interest rate you are charged. Gen- erally, after a short sale you can purchase again after 3 years, and in some cases 2.
Impact on Credit Score: With a foreclosure, credit scores can drop 250 – 300 points. Con- versely, with a short sale only late payments will impact the credit score. After a short sale, the mortgage that was paid-off short will be reported as ‘paid as agreed’, ‘negotiated’, or
‘settled for less than agreed’. This can lower your score as little as 50 points and will usually have little to no effect in twelve to eighteen months.
Impact on Credit History: Foreclosure remains on your credit history for seven years. Since short sales are not specifically reported their impact is only as great as the number of missed payments, as noted above.
Relocation Allowance: Though a relocation allowance cannot be guaranteed, it is not un- common for the seller to be paid $2,000 – 3,000 by the lender at the close of escrow to help with the costs of moving into a rental. It all depends on who the investor is on the loan, but there have been cases where relocation assistance has been upwards of $10,000.
Deficiency Judgment: In California it is against the law for a bank to file a deficiency judg- ment when the loan was a first mortgage on a property from 1-4 units.
Current and Future Employment and Security Clearance: Many employers require credit checks for all employees, and certainly for anyone hoping to attain a security clearance. While individual companies and agencies have different requirements, a foreclosure can have a negative impact on your ability to get a job, keep your job, or get certain clearances. No Cost to the Seller: In a traditional equity sale, the seller usually pays the real estate com- missions to the listing and buyer’s agent, along with his/her share of the closing costs. In a short sale, the bank pays those costs. Additionally, there is no expectation of the seller (or the bank) paying for any repairs to the home. The property is sold “As Is”.
Of course I’m not a lawyer or accountant, and each individual’s situation is different, and not everyone will qualify for a short sale. You should always consult the appropriate profes- sional for advice. But as a real estate professional, I would definitely give the short sale seri- ous consideration before deciding to just walk away.
Short Sale vs. Foreclosure: You Be the Judge
A short sale is an attractive alternative to foreclosure, mainly because the impact on your credit is far less severe. However, just because you owe more on your mortgage than your home is worth doesn’t necessarily mean that a short sale is a viable option.
In a short sale, the lender agrees to accept a pay-off on your mortgage for less than the amount owed. Usually, the lender is not going to agree to receive less money if there is evidence that you can continue to pay your mortgage as promised. Thus, a homeowner hoping to sell their home in a short sale must generally demonstrate that they can no longer afford the mortgage payments.
The first question the lender will ask is “What happened?” At the time of loan origination you were able to make your payments….why not now? You will be asked to identify one or more recent hard- ship factors that have negatively impacted your ability to pay. Examples of hardship factors include:
Illness/Disability
Death of a Spouse
Unemployment
Reduced Income
Medical Bills
Too much Debt
Divorce/Separation
Military Service
Incarceration
Business Failure
The lender will also request that you complete a financial worksheet that lists all of your monthly ex- penses and income. You will need to provide bank statements and pay stubs to document the informa- tion on the financial worksheet. Contrary to popular belief, it is OK to have a small amount of money in savings and lenders do not expect you to drain your 401K to pay your bills.
So the bottom line is that if you have experienced an event(s) that triggered a financial hardship and your monthly expenses are greater than your monthly income you probably qualify for a short sale. But, there are exceptions and more and more, we are seeing lenders approve a short sale, even if the borrower could continue to pay, but they owe more than the house is worth. Every loan needs to be evaluated on an individual basis. Please feel free to contact me with specific questions about your situation.
Do You Qualify for a Short Sale?
Submit a quality offer. Here are a few things your Realtor should look for in any offer you receive:
The offered price shouldn’t be significantly less than market value. The lender is less likely to approve the sale if he feels that his loss is greater than necessary. 10% off full market value is usually the max that will be approved, but again this depends on the lender and whether or not there is mortgage insurance.
The buyer can show more than sufficient funds to close the deal. The larger the down payment the better. Banks will consider a contribution to closing costs, but remember, they are looking for the highest possible net return on the sale.
The buyer agrees to put his/her earnest money deposit into escrow before short sale approval. This shows the lender that the buyer is committed and less likely to walk away from the deal. If the sale is not approved, the deposit is of course returned to the buyer.
The buyer should plan on paying for any needed repairs, including termite. Don’t submit an of- fer that asks for repairs or a home warranty.
The offer must not be contingent on the sale of the buyer’s current home. Buyer should be flexi- ble about when they need to move out of their current residence.
The offer should be well written and easy to understand. Submit all required documents.
Make sure your Realtor has confirmed with your lender regarding every required document. They should all be submitted at one time to help prevent certain items from getting lost in the lender’s system.
If additional (or yes, duplicate) documents are requested, submit them as quickly as possible and have your Realtor confirm receipt.
Remember the squeaky wheel….
Your Realtor who is representing your short sale to the bank, needs to be in regular communica- tion with the lender, inquiring about progress on your file. The negotiator on the bank’s side needs to understand that you are very serious about gaining their approval and selling your home. Ask for regular updates from your Realtor.
Keep track of where you are on the foreclosure timeline. Make sure you immediately provide your Realtor with any letters you receive from your lender or any legal notices.
There are many important details in a short sale that are very different from a standard equity sale. When listing your home, make sure you select a Realtor who is experienced with short sales. Saving your home from foreclosure is way too important a task to trust to an inexperienced agent.
Improve Your Odds for Short Sale Approval
I hope that you have found this information helpful. As I mentioned in the Introduction, everyone’s situation is different and it is important that you consult the appropriate professional for tax or legal ad- vice.
If you live in San Diego County and would like to discuss your options please give me a call or drop me an email. I am happy to provide a no-cost, no-obligation consultation. References from satisfied clients who I have helped out of a mortgage they could no longer afford are available upon request. The impor- tant thing is to take action now! There is a way to end those sleepless nights.
Marti Kilby, REALTOR®
Broker/Owner Steele Group Realty Distressed Property Consultant CA DRE License #01474222
619-846-9249 marti@kilby.com
www.martikilby.com http://insidesandiegoshortsales.com
Steele Group Realty 7317 El Cajon Blvd, Suite 222, La Mesa, CA 91942
