There are Alternatives to Foreclosure

Many homeowners are struggling to pay the mortgage, or see a problem looming with a substantial increase in their mortgage payment as it re-sets. They may have borrowed unwisely, or just been unlucky with reduced income through losing a job or other reasons.

These homeowners may be quite prepared to sell their home to solve the problem, but can't do so because the value of their home is less than the amount they owe. They are "upside down" on their mortgage.

But most of them think that foreclosure is inevitable, and the only possible outcome.
Not so . . .

There are several reasons why you should try to avoid foreclosure if at all possible . . . not only does a foreclosure do long term and substantial damage to your credit, but a foreclosure on your credit history can affect present and future employment, and security clearances even at lower levels.

If you are in this position and facing foreclosure, don't assume that there is no alternative. The sooner you act, the greater the chance of working out a way forward. There are two main options to pursue, but note that they both require that you are genuinely suffering hardship and do not have the means to rectify the situation from your own resources.

Mortgage Modification. Approach your mortgage lender to see if they are able to modify your mortgage terms, by refinancing at lower interest rates or providing other temporary or longer-term relief. Don't assume they won't listen - lenders are increasingly aware of the benefits of helping to prevent foreclosure if they see the opportunity. Of course, the proposal must be viable. The government also announced a scheme a few weeks ago which, in certain cases, will compel lenders to modify mortgages, and in doing so provided a framework which others may wish to work with.

Short Sale. A short sale is the sale of a home where the net sale proceeds are insufficient to clear the mortgage(s), and the owner is unable to make up the shortfall from his own resources. The mortgage lender therefore cooperates with the sale and writes off the shortfall. Mortgage lenders are becoming very cooperative towards short sales, because if the only alternative is foreclosure, there are several reasons why they will lose less and benefit more from an agreed short sale. While a short sale will affect your credit, the impact is significantly less and for a shorter period than a foreclosure, and should not affect employment or security clearance issues.

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I have recently undertaken specialized training in the issues surrounding distressed property ownership, and have achieved the CDPE designation (Certified Distressed Property Expert). This leaves me very well placed to advise you and help you through these difficult times, and I encourage you to contact me to let me help you.

If you live in or around Warren County, VA, and would like to talk it through, please give me a call on (540) 671-1367 or send me an email with some contact points.

Government Assistance for Homeowners

The government yesterday announced their long-anticipated initiative called the Homeowner Affordability and Stability Plan. If you are interested, click the link to read the White House Fact Sheet. The plan aims to:
a) stem the flow of foreclosures with a loan modification plan
b) help those who owe more than their home is worth, to refinance
c) ensure low mortgage rates for the foreseeable future

The two main problems with the initiative are that it only addresses “conforming” mortgages, and while it will no doubt help many deserving families, it will also reward many others who have in the past borrowed unwisely or beyond their means. It is already causing a lot of resentment from among the majority of homeowners who bought wisely and within their means, and pay their mortgage every month.

As always, the devil will be in the detail, and we will learn much more when formal Guidelines to Lenders are issued March 4. Meantime, here are the main features of the initiative:

Mortgage Modification Plan (expected to cover 3 to 4 million borrowers)
- owner-occupiers only
- conforming loans only, where repayments are more than 31% of gross income
- mortgage may be up to date, or in arrears
- overall, repayments will be reduced to 31% of gross income by reducing interest rate (partially subsidized by the government)
- interest rate reduction for 5 years, after which it will be phased back to “regular rate”
- incentive to the borrower of $1,000 reduction in principal for each year that repayments are made on time, for up to 5 years
- also incentives to loan servicers
- debt counseling a condition, if current total debt servicing is 55% or more of monthly income
- participation by lenders is voluntary, but compulsory for those who receive TARP money
- lenders may also achieve the repayment reductions by reducing the amount owed, but this seems less likely to be done

Refinance Assistance (expected to cover 4 to 5 million borrowers)
- owner-occupiers only, with conforming loans
- first mortgage cannot exceed 105% of current value of the home
- there can be an existing second mortgage, but that lender will need to agree to remain “second in line”
- must have satisfactory payment record, and payments must be current for the 3 months prior to entering the scheme
- new mortgage must be a fixed rate over 15 or 30 years, with no prepayment penalties or balloon repayment
- the portion of the new mortgage in excess of the home’s current value must remain unsecured

Additional Support for Freddie Mac and Fannie Mae
- government doubling its stake from $200bn to $400bn
- designed to increase confidence and promote stability and liquidity
- should ensure sustained low mortgage rates for the foreseeable future

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There are a lot of questions unanswered, and I am sure the pundits will be picking everything apart over the coming days. But here are my initial thoughts:

- the concept that this "rewards bad behavior" has to be balanced with the overall benefits to be gained by reducing foreclosures - if that is achieved. Foreclosures devalue all homes in a neighborhood, so this will hopefully provide some benefits to everyone.

- a "conforming loan" was by definiton no more than 80% of the value of the home when it was bought (or when refinanced). The limitation that the loan must now be no more than 105% of the current value would work if house prices had only dropped by some 25%. But in Warren County, Virginia, we have seen sharper declines than that. There will be a lot of people who bought at the peak, who will not meet these criteria.

- we have seen a lot of inconsistency between lenders in how they handle short sales or potential foreclosures. Some won't talk until the mortgage is 3 months in arrears (encouraging owners to not pay!), others won't talk until the home has been on the market for at least 3 months. My hope is that the "Guidelines to Lenders" will provide a standard set of procedures which may encourage all lenders to behave more consistently even with loans that fall outside those guidelines. We'll see . . .