Monday, February 10, 2014
When You Have No Choice but to Walk Away--What You Should Know if You Are Facing Foreclosure
A few years ago I wrote a post entitled, Suze Orman is Wrong, Don't Walk Away. That post is my all-time highest-read post in the nearly four years that I have been writing this blog. The content of that post was a response to a practice called "strategic default" which encouraged homeowners to walk away from mortgages they had the ability to pay on properties that had lost value. As the idea of "strategic default" grew popular and as housing values sank, more and more property owners began to toy with the idea of "letting their houses go" simply because they had no equity or now had negative equity, and Orman encouraged homeowners to do so. I wrote that this is a terrible idea, and that homeowners who have the ability to pay for their homes should do so.
Three years later, a lot has changed. I still stand by the original article--no one should stop paying a mortgage simply and solely because their equity has dropped in the house. For those who are worried about negative equity, property values are rising nationwide, and housing prices are correcting, so negative equity is going to be much less of a problem than it was three years ago. However, as Obamacare strips hours from the workforce and turns more and more people into part-time employees, and as the workforce participation continues to drop, unemployment and inability to cover expenses is going to be a growing problem for many Americans. Right now there are an estimated 92 million unemployed Americans--almost one-third of our workforce. Each month the jobless numbers reveal a stagnant economy. Last week we learned from the CBO that Obamacare will cost our economy an additional 2.5 million full-time jobs over the next ten years. Bearing in mind that unemployment filings do not include self-employed business owners who pay unemployment taxes in their states but are ineligible to file for unemployment when their businesses fail, our country has serious economic issues. A real-life consequence of long-term unemployment and being unable to secure new work at pay commensurate to your previous position is often mortgage delinquency and foreclosure. For that reason, I have decided to write this follow-up post to help anyone who is unemployed or underemployed and struggling with mortgage delinquency and foreclosure. I hope that no one reading this has to experience loss of a home through financial crisis, but if you do so, hopefully this information will help you.
First, you need to communicate with your mortgage company as soon as you realize that the mortgage is going delinquent. Although it sounds trite, mortgage servicers in 2014 really are under pressure from the government not to foreclose, so the sooner you talk to your mortgage company and complete the paperwork that they send you, the sooner you may be able to find some kind of resolution. And there are solutions that can help you avoid foreclosure, even if you still lose your home.
Your mortgage company will assign you to a specialist, but you will probably continue to receive mail with conflicting messages from other departments of the company. Stay in touch with your assigned specialist and let him or her know about each document your receive. Because multiple departments are at work attempting to collect your mortgage payment, you may receive multiple, conflicting messages from various departments about the state of your mortgage. Likewise, you may receive notices that you have been turned down or denied for specific programs that you have requested when in fact your request is actually being processed. Let your specialist know about each offer you receive--don't take for granted that a letter or an offer or even a denial for assistance is correct just because the mortgage company has sent it out.
If you have a good solid payment history with your mortgage company prior to the loss of income, they may offer you a forbearance--an opportunity to waive the payments for a set period of time--or a loan modification. Bear in mind that if you take a loan modification you and the lender are doing so with the understanding that you can make the payments on time for at least six months, so you need to make certain that you are working again before you enter into such an agreement. If you do not successfully complete the modification process, your loan will be referred for foreclosure.
Under the Dodd-Frank servicing rules, you cannot be referred for foreclosure until you have missed 120 days of payments--four months. If during that time you are able to secure new employment, you may be able to get a modification with a lower payment based on your new income. If after 120 days you are still not employed, you may need to look at your other alternatives--a short sale or a deed in lieu of foreclosure.
When I wrote the Suze Orman piece, lenders and credit providers were looking at short sales and deeds in lieu of foreclosure the same as they did a foreclosure. For that reason, homeowners had little incentive to try to avoid foreclosure through either of these methods. This is no longer the case. New guidelines released last year allow a homeowner who has successfully completed a short sale or a deed in lieu of foreclosure to secure Fannie Mae or Freddie Mac financing for a new home in two years, provided that you have a new job and have worked out your other credit issues. If at all possible, you want to avoid a foreclosure for several reasons:
1. It's horrible for your credit. A foreclosure will shut you out of Fannie Mae or Freddie Mac financing for seven years--although I believe that FHA still has only a three year moratorium on financing a homeowner who has been through a foreclosure. A foreclosure can have a long-lasting impact on your ability to get anything financed.
2. You may have tax consequences. If you go through a foreclosure, the mortgage company can send the IRS a 1099 for the difference between what you owed on the house and the amount they received for it at the foreclosure sale. That 1099 is reported as income to you. In other words, if you owe $150,000 on your home and the mortgage company receives $100,000 in the foreclosure sale, you are liable for the taxes on $50,000 of "income". (If you can prove that you were insolvent at the time the foreclosure took place, you may not have to pay the taxes, but you will probably have to hire a tax attorney to make your case for you.)
3. In some states, the mortgage company can file a deficiency judgment against you for the difference between the debt you owed and what they received when the house was sold. In my example above, that would mean a $50,000 judgment. Such a judgment can effectively keep you from ever buying another home, getting an SBA loan to start a business, or securing certain professional licenses or jobs that require credit and background checks.
If all else has failed, a short sale or a deed-in-lieu of foreclosure are your two primary alternatives. For the short sale you need a contract from a pre-approved borrower and you need to send that to the mortgage specialist assigned to you by the mortgage company. Remember that the mortgage company has to approve the short sale since they are agreeing to take less than the balance owed to let you sell the home. Short sales were very popular a few years ago, but over the last few months, mortgage companies have begun refusing short sales on the grounds that they make more money through their REO's. As values have risen across the country, mortgage companies are increasingly taking the view that property values are rising, and they won't sell the house for less than is owed. Of course, in practical terms, the fact that values are rising nationally does not mean that they are rising in your specific spot on this planet. There could be a very real problem in your development or subdivision which prevents you from getting an offer that will match what you owe on the house, regardless of how nice your individual property is. If they decline your short sale, then you need to ask for a deed-in-lieu of foreclosure (a mortgage release.)
A mortgage release will release you from all liability in the property. The mortgage company does not have the legal expense of foreclosure; you do not have any liability for any losses they incur. To secure a release, you need to have a property that is clean and in good condition. You will have to vacate the property before they send a third-party inspector. The title must be clear of defects--you cannot have a second lien, mechanics' lien or tax lien. If the property and the title pass inspection, you can deed the property back to the mortgage company, and they will release you from any future claims. This is a good solution if you need to move to another area for work, if you cannot secure employment that will allow you to cover the payments on your mortgage, or if you have a house you simply cannot sell at a price which will cover the mortgage.
If you have a mortgage secured by either Fannie Mae or Freddie Mac and you are not getting the help you need, surprisingly these two agencies may be able to help you. A counselor from Fannie or Freddie can work with your mortgage company to cut through the red tape and get them to be responsive so that you don't end up in foreclosure. Again, communication is key here--when you get the letters from Fannie Mae or Freddie Mac offering assistance, call the number provided and explain your situation as clearly and accurately as possible.
If none of these options works for you, and you are going through the foreclosure process, you may still be able to save your property by enlisting the help of a foreclosure attorney. In states that require judicial foreclosure, foreclosure is a long process, and an attorney can buy you some time while you get back on your feet. He or she may also be able to stop the foreclosure process and get your payment reinstated when you are able to find a job.
Loss of a property is devastating, but by knowing your options and how to navigate the red tape you may be able to salvage your future finances and get through this process with the minimum amount of suffering, so that you can get on with your life.
When the mafia extorts money from you to allow you to live, they call it "protection money." When the government does it, they call it "consumer protection." Either way, you are paying for protection from someone who has the power to take everything you have.