DEALING WITH MORTGAGE ARREARS AND FORECLOSURE
One of the biggest lingering effects of the housing crash in 2008 remains the high volume of homeowners who continue to have trouble paying their mortgages.
In many cases, homeowners bought their homes on the high end of the housing market bubble and obtained financing via adjustable rate mortgages. These mortgages lured many borrowers with low initial interest rates which, in many cases, “adjusted” to much higher rates, often rendering the monthly payments unaffordable thereafter.
In many other cases, borrowers have fallen behind on their mortgage payments because of loss of employment or falling wages and benefits. Illnesses, loss of second spouse income and divorce are other common causes of mortgage arrears and foreclosures.
We receive many calls on a weekly basis from homeowners who are in various stages of difficulty with their mortgages, ranging from those a month or two (2) behind, to those several months behind and already in foreclosure.
So long as the caller’s house has not already been sold by the foreclosure referee at the time he or she calls us, we can generally offer many alternative solutions to address the homeowner experiencing mortgage difficulties.
Ironically, many of the alternatives now available to defaulting borrowers are a direct result of the very economic crisis which has thrust many homeowners into default. In response to the overwhelming number of distressed mortgages statewide and nationwide, Congress and New York State have implemented many new programs designed to assist homeowners in pursuing various options to address their defaulted mortgages.
Even if a homeowner is not yet in foreclosure, but has experienced difficulty making mortgage payments, there are many programs available to assist defaulting borrowers.
If the lender in question accepted bailout money in the aftermath of the mortgage and banking crisis, they are required to participate in programs such as HAMP, which set forth specific criteria under which they must provide certain types of relief to different types of borrowers.
These programs focus on certain major categories of potential borrower relief: loan modification, short sales, and surrender of the property.
The latter two (2) options would be available if and when the borrower cannot qualify for a modification or where he or she has decided, for whatever reason, that they no longer want to stay in the house or cannot afford it in the long run.
In many cases, borrowers are saddled with homes which are “under water”, i.e. the amount left to pay off the mortgage is less than the fait market value of the home. Buyers who purchased on the high end of the market and borrowed accordingly fall into this category. Many homeowners in this scenario decide they would rather just try to sell the house and cut their losses.
The problem is that, if the house value is below the mortgage balance, the owners can’t sell. Unless they can sell for enough money to cover brokers’ commissions, legal fees and other costs and still have enough to pay off the mortgage, the lender will not provide a release of the mortgage lien, rendering the house unsaleable.
The remedy is to try to negotiate what is called a “short sale” with the mortgage lender. The trick is to try to convince the lender to accept a price which will net them less than the full payoff amount but, for which, they will agree to supply the mortgage release.
This is a fairly complicated and time-consuming process, with many moving parts, and with no guarantee of success. A combination of competent and experienced counsel and real estate broker is essential to having any real chance of success in the short sale process.
Another option for the homeowner who wants to avoid foreclosure but still walk away from the house is what is called a “deed in lieu of foreclosure” which is pretty much what it sounds like.
The idea here is to negotiate a settlement with the lender wherein, in return for the owner signing the property over to the lender, they agree to release the borrower from any further possible liability on the underlying note. In other words, the bank agrees to accept solely the house as collateral to settle the debt, even if the value of that collateral is no longer sufficient to cover the outstanding loan balance. In this respect the theory is similar to that of a short sale. The difference is that the house is purchased back by the bank and not by a third party.
If, as is often the case, the homeowner wishes to try to keep the house, the approach would be to seek a loan modification. The idea is to bring the loan back current and/or negotiate a lower monthly payment for the mortgage going forward.
There are three (3) basic ways to reduce the monthly payment: reduction of interest rate, extension of the term of the mortgage, and/or reduction of the outstanding principal balance (where the property is under water). These three (3) approaches can all potentially come into play, depending on the specifics of a given loan, the lender involved, the fair market value of the home, and the types of programs available on a given defaulted loan.
Modifications can be negotiated and achieved in one of three (3) ways: via informal negotiations with the lender, via state court mediation, and via loss mitigation programs in Bankruptcy Court.
In practice, the first approach rarely works because, typically, lenders, unless and until they are forced to by Courts, rarely negotiate in good faith to try to modify a loan.
If a person’s home goes into foreclosure, in New York, his or her case is referred to mandatory mediation. Unless the homeowner waives this process, he is allowed to benefit from the State Court handling the foreclosure to supervise the borrower’s request for loan modification. Although the Court cannot order the lender to offer or accept any particular modification, they can and do require the lender to negotiate in good faith and make all available programs available to the borrower. While this process proceeds, the foreclosure case itself is stayed.
A similar program is available in Bankruptcy Court. If a borrower files either a Chapter 7 or a Chapter 13 Bankruptcy, he is entitled to request that the Bankruptcy Court supervise the loan modification process of a person’s primary residence.
Although the Bankruptcy Court is also prevented from imposing modification terms upon a lender, the Bankruptcy loss mitigation program is even broader, in that second and even third mortgages can be modified and, in some cases, converted to unsecured debt, all in one comprehensive Court proceeding.
As discussed, there are many options available to the distressed homeowner, both in and outside Court. The key is to secure sound and experienced advice, based upon each individual’s circumstances, to formulate the best plan tailored to that person’s circumstances, needs and goals.