By Anthony M. Freed
So you find yourself in tough times – a job loss, health problems, falling property values, or unexpected financial distress. Whichever the circumstances that may have brought you to this point, the facts are you find yourself falling behind on your mortgage payments, and the time to make some tough decisions is upon you.
Unfortunately, once you have reached this stage, the options available to you are few, and each has their own inherent advantages and disadvantages. Depending on your particular situation, one or another of these options may prove to be more advantageous to you down the road – or at least may leave fewer black marks on your credit report.
If you are a borrower under threat of foreclosure, and you are looking for an easy, pain-free resolution, I feel obligated to tell you now that there is no such option available to you. My hope is that the Government will somehow find a way to help distressed homeowners avoid foreclosure by requiring lenders to negotiate in good faith any and every alternative, but so far there seems to be little more than rhetoric available.
As it stands, the banks and financial institutions will be the only ones receiving anything in the way of support during this crisis. Homeowners will be left to the mercy of the lenders, who will decide for themselves whether or not they want to use our tax dollars to stop the tsunami of foreclosures, or whether they just want to sit on our money and pad their pockets with hundreds of millions of dollars in unjustifiable bonuses.
I think it’s safe to say we are all on our own for now.
What are the choices available, and what are the pitfalls? Obviously there is foreclosure, the least appealing of our options. Preferably, we are looking at alternatives to foreclosure, or a troubled loan workout as the industry refers to them.
Of these options we have a few to choose from, listed generally in order of preference to the borrower’s position (although each borrower’s situation is unique and the consultation of a professional long before you are facing foreclosure is highly recommended): the Refinance; the Modification; the Short Sale; and the Deed in Lieu of Foreclosure.
Today we cover the Refinance: Probably the device most understood by borrowers, the refinance entails entering into negotiations with a lender on a completely new mortgage note, with the potential to have a completely different term (the period in which all principle and interest payments must be satisfied), interest rate (the cost of financing the mortgage), points (the cost to secure the rate), closing costs (the fees paid to secure a mortgage, often requiring some out of pocket expenses such as a new appraisal), different monthly payments (principle, interest, taxes, and insurance – PITI), and different Private Mortgage Insurance (PMI) requirements (typically required on any mortgage with a Loan to Value (LTV) greater than 80%).
Refinance is the obvious first choice for everyone involved. The problem is that the vast majority of troubled mortgages were structured in such a way as to make refinance all but impossible. This is, of course, completely contrary to the “expert” advice the borrower probably received from the Broker or Loan Officer – not to put the blame all on their professions, as most were honest people who were pressured by management heavy-weights to perform or hit the road.
It was management at the most senior levels at the banks and mortgage companies who failed to employ proper risk-abatement in their race to be number one in the market by volume: Volume x Fees = tons of money in their pockets by cutting corners.
The loans they pushed were mostly high risk loans from 90% LTV to as much as 105% LTV. These loans were booked at the height of the housing bubble, and because home prices did not continue to rise at a ridiculous pace (which is what the risk-abatement models the lenders were using needed to have happen in order to be worth a damn, hence the mess we are all now in as a nation).
The major obstacle to refinance has resulted from rapidly dropping property values that leave most borrowers “upside-down” or “underwater” in their mortgage – this means that the borrower owes more on their current mortgage than the home is currently worth in the open market.
Most of the opinions I have encountered on this subject are completely unsympathetic to the borrower in general; so, if you put no money down on your home, secured an Adjustable Rate Mortgage (ARM), an Interest Only loan (I/O), or a Pay Option ARM (POA), qualified at the minimum payment to get into a bigger home, and now you find yourself unable to make the full payment for pretty much any reason at all, don’t expect anyone to give you any quarter.
Regardless of the circumstances – even those completely outside of your control – you are now automatically lumped into the same category as greedy house-flipping profiteers who gamed the system with multiple loans that left them leveraged to the hilt.
Sorry to break the news to you, but most everyone seems to agree that even if the lender lied to you about the terms or your mortgage and promised that you could refinance into a Fixed mortgage at anytime in the future, it’s considered to be your fault for being a sucker and not looking out for yourself.
Not in my opinion, as I think the lenders are liable for damages to borrowers for breach of fiduciary duty, but conventional wisdom these days seems to be completely unsympathetic to your situation. I highly recommend you don’t go looking for any, especially on internet web forums.
Trust me, it will only be salt in your wounds.
But what of those folks who did put 20% down at the peak, who have now seen median prices drop as much as 50%, and who now find themselves upside-down in their mortgage? These folks played by more traditional rules and now find themselves in a pickle, as the lender who holds the note refuses to refinance them out of their current terms and into the nice 30 year Fixed like they said they would.
Unfortunately, there is not much more sympathy for you than those that took the 100% financing. Sorry, but someone has to tell you.
Even more unfortunate is the fact that the rates on a Conforming ARM(less than $417k in most areas, but may be higher in some high-cost markets) are still more attractive than the current 30 year fixed rate, and they still allow homebuyers to borrow more for the purchase of a home than if they were to apply for the Fixed rate.
This is because a lower initial interest rate translates into a lower initial monthly payment, and thus can translate into a larger initial principle balance while maintaining the current Debt-to-Income ratio (DTI). The lenders only look at your ability to make the payment now, and give little regard to your ability to make the payment after the initial terms expire and the interest rate – and therefore the payment – adjusts to a significantly higher monthly payment than what the borrower can afford.
This is a major reason we are in such trouble now – so no matter how attractive those ARM rates are, my suggestion is that you seriously consider your ability to pay the adjusted rate, and not count on variables like rising property values or a future pay raise at work when considering the best mortgage product for your situation.
If you had put 20% down and now find that you owe more on your property than it is worth in the open market, I am sorry to tell you that there are no easy options for you at this point. The most important thing you can do is to take action before you miss any payments. If you are already behind in your payments, it is imperative that you act immediately to protect your interests.
The longer a borrower who is having, or anticipates having, financial problems that will prevent them from satisfying their contractual obligations as outlined in their mortgage waits to seek help, the fewer the options that will be available to them to prevent a foreclosure. Act now to get help before your credit is damaged.
The first step is to contact your Lender or Loan Servicer. The Servicer of your loan may be different than the lender who originated the loan, and also may be different than the current owner of the loan. This is because many lenders originate a loan and take the corresponding fees, then sell the loan to an investor, or to another lender. They may or may not retain the Servicing rights – which only means they act as the billing service for the note holder – and they may have no authority to negotiate a resolution.
You can waste a lot of time and energy barking up the wrong tree, so take the time to determine who the appropriate party to negotiate with is. If your loan was sold, you would have received a fairly non-explanatory letter to that effect, and you might have noticed you are getting billed by someone you have never heard of.
Once you have identified the correct party to negotiate with, you should make attempts to contact multiple parties within the company through multiple channels – regular mail, email, and by phone. If you want to find the person who can help you, you will need to blitz them with requests, because although the lenders and the Government have unveiled multiple programs to help distressed homeowners under threat of foreclosure, that does not mean they are actually doing them to the extent they like to pretend they are in the media.
Be sure to look for departments that have to do with legal, loss-mitigation, or modification. There will also be well-hidden departments who specifically handle the applications for Hope Now, the Hope for Homeowners, and other nearly-nonexistent programs designed to help homeowners avoid foreclosure. Unless you are lucky enough to be under or completely un-employed, you will probably not find enough hours in the day to jump through all of the hoops and do all of the self-educating you will need to do in order to save your home and credit rating.
Seek outside help.
There are multiple for-profit businesses and not-for-profit and organizations that are actively helping borrowers avoid foreclosure. Caution, there are a lot of scammers out there taking advantage of distressed homeowners, too.
Avoid any program that wants you to walk away from your mortgage, any program that encourages you to delay a foreclosure by filing for bankruptcy, and any program that stipulates you sign over interest-in or ownership-of your home to any other party. This includes any lease/buy-back programs that offer to buy your home and lease it back to you until you are able to repurchase the home in the future.
Although there may be valid options among these listed, generally they prove to be more problem than solution. I highly advise seeking the advice of a lawyer or community legal service prior to signing any contracts or obligating yourself any further.
Finally, if anyone offers you a solution to your current mortgage problem that does not involve some financial pain and loss, I would tend to believe that they are not giving you all of the facts. There are solutions beyond Refinance, as listed above, and articles to follow will address them one at a time in detail.
The takeaways from this article should be that there is some hope for help, and the earlier a homeowner can see the trouble coming and begin a dialogue with their lender, the better chance they will achieve a loan workout with the minimum of pain and loss.
(NEXT ARTICLE: Loan Modifications)
Related: “A Hardship Letter to Countrywide – Family on the Brink of Disaster”
“No Hope for Homeowners – Foreclosure Prevention Program Falters”
Your Mortgage or Your Life... 
I just wanted to make a comment in regards to the feelings of the responsible borrower and the ones who were tricked into the loan.
I think the anger comes from the fact that these people, the ones who are now stuck in ARM resets who can’t afford much of their loans anymore, are in some ways getting a break. Particularly because of the way the media and the government have portrayed them as victims who need help. (truth is none of them are getting a break and the bailout was a sham). But the ill feelings from the general public never lifted.
That would most obviously anger someone like myself who at this moment doesn’t have enough saved to buy a home, and choose to sit back and not take out a interest only or an ARM loan. I feel bad or sorry, not quite sure which emotion I have and it alternates randomly, for these people because I feel like reality is that they did get tricked into a dream life that everyone wanted. The lenders wagged candy in front of their faces and it’s hard not to accept it.
Some people wanted to flip homes, after watching too many episodes of what’s my house worth, they thought they could do it too. And not to mention the influx of real estate agents in the last five years, but for those who were in it for the money, it was a get rich quick scheme to many of them.
Another reason why many are angry comes from the fact that most of us won’t get a bailout in the future and are left to fend for ourselves, (although now it’s revealed none of them got bailed out either).
But the way the media generalized everyone’s situation as either a home flipper or a desperate person trying to live above their means, that is whats created this anger and lack of sympathy for those underwater.
What can be said of those who put down 20% and are still suffering though is that they are way too vested into their home now to walk away, whereas someone who didn’t put any down payment can walk away with a hit to their credit which isn’t very equitable.
[…] If you’re in a situation where you may lose your home or are just interested I recommend that you take a read. Message to Distressed Homeowners at Your Mortgage or Your Life […]
You got it Harry – there is a whole class of people who were ripped off at their mortgage closing, ripped off by being denied a refinance, and ripped off again by having their tax dollars stolen by Paulson and the grifters.
There are people who deserve help.
One of my biggest gripes is that I would rather my tax dollars be spent on solid educational foundations for the next generation of students heading into the workforce, rather than these already privileged ivy league employees to throw lavish parties.
There is hope for many of thee homeowners who were lured into these loans by the brokers and lenders. That hope is to use the threat of court action to go after them.
I have been doing forensic audits for a year now, assisting attorneys with court cases. My audits are different from the “garbage audits” you read about people doing. I use TILA and RESPA violations, but that is not the red meat. I use fraud, deception and other issues to build a true case for predatory lending.
That is the only way to get lenders to work with you, and even then, if it is Wachovia, that will often not work. Wachovia doesn’t care about a thing, but themselves.
SUE YOUR LENDER FOR PREDATORY LENDING, FRAUD, DECEPTIVE BUSINESS PRACTICES, CONCEALMENT, ETC…………….. CONSULT WITH AN ATTORNEY WHO SPECIALIZES IN PREDATORY LENDING BEFORE YOU DO ANYTHING!!!!!!
This is exactly why we are in the situation in the first place. Let’s blame everyone else except for where the blame should lay.
Did some borrowers out there get talked into a mortgage that they could not really afford? Yes. But the majority of borrowers wanted that house regardless if they could afford it or not. A very small percentage of people were “tricked” into buying a house that they could not afford.
If I recall how the process works, the buyer comes to the broker or the bank after they have been looking for a house. Then they want to see what they can qualify for. Most always wanted different programs to see if they could stretch their dollars.
At the peak of the housing boom, there were more brokers and banks competing for business and just a few calls could have saved many people thousands of dollars, but very few were made.
Very few people predicted the fraud and cooking of the nooks that the banks and investment companies were doing so with the data that we had available to us, we were advising people who wanted that bigger house to take an interest only ARM. In most cases just like in the past, 3 to 5 years and a refinance would not have been an issue.
I did not see anyone complaining about how fast their homes were increasing and that something must be wrong with the system from 2002 to 2006 when most people were seeing double digit increases.
Let’s put the blame were it should be…with the person who signed off on the dotted line. The banks and the investment companies who created this false market, the real estate agents that were helping the builder increase sales prices, the builder who was working with the mortgage company adding in points to the price of the home and the few brokers out there that falsified documents or lied to the borrowers about the mortgage product.
But let’s fail to continue to learn from this mistake and have another repeat 10 years down the road!
If you’re underwater, you don’t need help. The best thing to do is to stay in the house as long as possible without making large payments, then walk away.
Isn’t it simple?
If someone in trouble has an option like that, I surely don’t want to burden the taxpayers so the borrower doesn’t even have to go to the trouble of moving.
My concern is more for the people who have equity in their houses (or are upside down by much less than transaction costs), where the lender is trying to grab the real estate because of the borrower’s cash flow problem. These are people we should help. Equity-sharing should be made available on a mandatory basis (mandatory to the banks) so the payments can be reduced. It’s only fair in this serious recession.
I just read Bart Horn’s story “Armed with Experience …” where he did walk away, and it contains valuable lessons on how exactly to do that. Kitty I know you’re already commenting in his thread, I just mention this for others who might be reading here.
Anthony,
Great post. As a kid, my father never let me use the “F” word…..Fault.
He taught me that fault doesn’t matter. How or why you got screwed doesn’t matter. It won’t fix anything. If anyone thinks that they were a victim of predatory lending, then sue. And, be prepared to lose.
In the big picture, your current equity position in your house is nominal. If you learn to work hard, save more, and spend less, you will be all right.
If you did all those things, and still got screwed in the current melt down, then consider yourself lucky that you don’t have “learn” how to succeed. Just keep plugging away.
This too, shall pass.
I let myself get talked into an ARM two years ago, after being only in fixed loans for past 16 years.
I TRUSTED MY BROKER.
DOWNEY SAVINGS told me that I do not have a prayer in saving our house. We can be late every month, if we WISH, as long as we pay the late fees. Other than that, their words were”YOU ARE OBLIGATED UNDER YOUR CONTRACT, WE CAN NOT HELP YOU, WE DO NOT HAVE A SOLUTION TO YOUR PROBLEM, WE DO NOT DO MODIFICATION.”
For the first time, in the past 17 years, we will be making a late payment. But, I still say that we are more fortunate than those people outhere who already lost their homes.
I am relying on my Faith, and will continue THE TALK with the NEW DOWNEY SAVINGS.
To those who are still trying to save their homes; I say, KEEP ON KEEPING.
Marie,
When you talk to them, try to do it by email, or at least keep detailed notes with the name of who you talked to, date, time, what they said in detail. That might be enough because they are probably on a recorded line and the evidence could be subpoenaed if it came to that. But much better and easier if you can somehow use email instead. They might refuse to give you an email address but try.
It’s not what you said but what you can prove that matters. And they know that and it can affect their behavior.
That is, if you want to keep the house. If you are underwater why do that, it does not make sense to me. You didn’t commit to pay this mortgage. You just committed to give the house back after eviction if you don’t. There is no obligation, legal or (in my opinion) moral, beyond that.
Please do not pay them late fees! That truly is sending scarce money down a rat hole! It won’t allow you a longer time to squat in the house, it’s just reducing what cushion in time and money you have left.
David
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