- The Washington Times - Friday, February 29, 2008

As interest-only and adjustable-rate mortgages reset to higher rates, more families each day face the real danger of losing their home due to their inability to pay their mortgage.

Foreclosures are rising steeply. Countrywide Financial Corp., one of the nation’s largest residential mortgage lenders, reported that the foreclosure rate among the more than 9 million mortgages it services doubled in January, from 0.77 percent in January 2007 to 1.48 percent last month. The company said a third of its subprime mortgages were delinquent at the close of 2007, leading to a loss of $422,000,000 in the fourth quarter.

Recent foreclosures and delinquencies can be attributed generally to dropping home values and rising loan payments, although these factors are driven by a failure in confidence among investors in mortgage-backed financial securities.

For the homeowner in crisis, however, the causes and investor losses are secondary considerations. Each homeowner has unique reasons for his financial straits and varying solutions to his problems, but in each case consumers need to take some crucial steps to resolve the predicament.

First, homeowners need to seriously consider whether they want to keep their home if they can. In some cases, this may be impossible. In others, borrowers may be able to develop a financial strategy that allows them to continue living in their home.

The question for this second group of borrowers is whether this is best for their long-term financial health. For many consumers, it may be best to give up a too-expensive home or one that has lost significant value despite the short-term cost of such a move.

In either scenario, borrowers who are behind in their loan payments or just recognize that they will not be able to pay their mortgage in the coming months need to face the reality of their situation and contact their lender.

While many consumers are frightened and embarrassed by their lack of funds, they need to recognize that lenders, particularly in this volatile real estate market, are willing to work with their borrowers to resolve problems.

Homeowners do not want to lose their homes to foreclosure, and financial institutions also want to avoid the burden of owning a property they cannot sell and that often loses value while it sits vacant and unmaintained.

“One of the biggest problems is people not contacting their financial institutions, ignoring late notices and phone calls,” says Glen Lazovick, director of mortgage lending for Mid-Atlantic Federal Credit Union in Germantown. “Typically, after you have been 30 days late with a mortgage payment, your loan servicer will send a ‘demand letter’ with the name and phone number of someone to contact to discuss your loan. But consumers can also start by contacting the customer service number on their bill, explaining the situation and asking for help.”

Mr. Lazovick says, typically, a lender won’t work with people until they have fallen behind in their payments, but he still recommends that consumers be proactive.

“The reality is, lenders are faced with unprecedented delinquencies right now, and they don’t want the property back,” says Mr. Lazovick. “Unfortunately, lenders cannot accept a partial payment for a loan because that alters the contract. But consumers can ask for forbearance, which allows them to delay payments or to reduce their payments and tack on the rest to the end of the loan.”

Mr. Lazovick says homeowners with equity in their homes typically have more means to negotiate with their lender. He warns against third-party groups that offer to assist people in financial trouble, unless they are free credit counseling groups.

“If you are asked to pay a fee to get help with your mortgage problems, that’s definitely a company to stay away from,” he says.

Refinancing is occasionally an acceptable solution to financial difficulties, but in today’s local market, this is frequently impossible.

Buyers who purchased homes between 2004 and 2006 often have little or no equity in their home, particularly if they opted to finance the purchase with 95 or 100 percent financing and chose an interest-only loan. In those cases, the borrowers often owe significantly more than the property is worth.

Michael Hollman, a real estate attorney with Village Settlements in Gaithersburg, says homeowners with less than 20 percent equity in their homes may find it difficult to refinance due to tightened lending practices.

Matt Martin, president of Matt Martin Real Estate LLC in McLean, says consumers essentially have four options in our current real estate market if they cannot make their loan payments: a loan modification, foreclosure, bankruptcy or a short sale, which is a negotiated agreement in which the lender agrees to accept a reduced payoff for the loan if the house is sold.

Loan modifications include reducing the interest rate on the loan, renegotiating the length of the loan and/or adding late fees and payments to the total owed on mortgage.

Homeowners behind on their payments but able to continue making them in future months may be able to develop a plan with their lenders to make partial payments for a few months on the delinquent amount owed until it is paid in full.

Modifications require a demonstrated ability on the part of the borrowers to make future loan payments, which may not be possible depending on individual circumstances.

For borrowers unable to arrange a loan modification, Mr. Hollman says a foreclosure, bankruptcy or short sale will each hurt the homeowners’ credit scores, but with varying impact.

“A foreclosure usually brings down a credit score by about 300 points, a bankruptcy by 200 points and a short sale by 100 points,” Mr. Hollman says. “A short sale will often appear on the credit report as ‘mortgage satisfied for less than the amount owed.’ ”

Mr. Martin says that the biggest problem with a foreclosure is that it is labeled as a “deficiency judgment,” which will stay on the credit report for 10 years.

“Usually, a judicial foreclosure will be on the first trust, but if borrowers have a second mortgage, that will be wiped away,” Mr. Martin says. “That second lender can file another judgment against you even a few years later and garnish your wages or take other action to get their money.”

Mr. Martin says that declaring bankruptcy can forestall a foreclosure by five or six months but that the usual outcome is a foreclosure anyway.

“People need to understand that if they let their home go to foreclosure, it will be one of the worst things to have on their credit report,” Mr. Lazovick says.

A short sale, if it can be accomplished, offers a better scenario for homeowners. In order to begin a short sale, consumers will have to obtain a short-sale application from their lender. Mr. Lazovick recommends working with a real estate attorney rather than attempting to negotiate a short sale directly with a lender.

Mr. Martin, contrary to most advice, recommends that consumers call a professional real estate attorney or Realtor with short-sale experience first if they intend to sell their home rather than attempt to renegotiate their mortgage.

“People need to understand that when you call the lender, you are talking to people who are trained primarily as collectors,” Mr. Martin says. “They will record what you say and keep all that information in your file. It is better to have a professional with experience in short sales contact your lender to begin negotiating on your behalf.”

Mr. Hollman says that borrowers should contact their lender when they are in financial trouble, but he acknowledges that the lender cannot do much to help consumers if they are not in default on their loan.

“The lenders’ attitude is that if the borrower has been able to make payments so far, they will find a way to keep doing it,” Mr. Hollman says.

Homeowners struggling to make payments and knowing they are unlikely to be able to continue paying their loan in the near future need to determine whether to stop making payments immediately in order to begin negotiations with their lender.

If the property cannot be sold for a price that will pay off the loan in full, a short sale may be the solution, but lenders will typically not consider negotiating a short sale until the borrowers are in default, Mr. Hollman says.

“If someone is in default, they need to realize that many lenders have now agreed to a foreclosure moratorium which allows consumers more time to find another solution to their problems,” Mr. Hollman says.

“There is also a new IRS amendment which removes the tax liability from the forgiveness of a debt so that consumers won’t face a huge tax bill for the difference between their loan amount and the amount that actually is paid through a short sale or foreclosure,” he says.

A typical short sale application is similar to a mortgage application, with the borrowers providing two years of tax returns and W-2 forms and full financial disclosures including two months of bank statements.

The financial institution needs a full understanding of the borrowers’ financial situation before considering accepting less than full payment for their loan. The short sale application also needs to include a listing agreement with a real estate agent and a hardship letter explaining the circumstances behind the loan default, says Mr. Hollman.

“A hardship letter should state the reason for the borrowers getting behind on their payments, such as job loss, illness or divorce,” Mr. Hollman says. “Nowadays, many consumers claim they did not understand their loan terms or claim they are the victim of a predatory lender.”

Mr. Martin says that consumers interested in a short sale should ask a real estate attorney or a Realtor for proof of their experience with short sales, such as settlement sheets from recent transactions. Most important, he says, consumers should have these professionals contact the lender rather than making the call themselves.

While a short sale may seem to be the miracle solution for homeowners facing financial trouble, the reality is less rosy.

“The real problem with short sales is that once the full application is sent to the lender, the homeowners often wait for 45 to 60 days for an acceptance or denial of the agreement,” Mr. Hollman says. “After that, if a buyer makes an offer, the lender will again often wait 45 to 60 days to approve the contract. Sometimes, even after all the negotiations have taken place, the lender will say no to a contract.”

“People always owe more than they thought because they have neglected to include the mounting late fees and attorney’s fees,” Mr. Hollman says. “Before submitting any application, the homeowners should know what is really owed.”

A more complex problem, particularly common in the Washington area, is the existence of a first and second mortgage on a property. Many home buyers in recent years opted to avoid paying private mortgage insurance (PMI) and needing a large down payment by financing their homes with two mortgages.

“Short sales work best if there is just one loan to pay off,” Mr. Hollman says. “If there are two loans with the same lender, then that can often be worked out, too. The problem is when there are two different lenders and the short sale will only generate enough money to pay off the first loan.”

In such cases, an agreement may have to be negotiated between the first and second lenders. If enough money can be generated to pay off the first loan in full through the sale of the home, homeowners may want to negotiate a short-sale agreement only with the second lender.

The complexity of these agreements demands the professional support of experienced real estate attorneys and real estate agents.

Foreclosure information online

National Association of Realtors: www.realtor.org

Federal Home Loan Mortgage Corp. (Freddie Mac): www.freddiemac.com

Fannie Mae: www.fanniemae.com

U.S. Department of Housing and Urban Development: www.hud.gov/foreclosure

HUD list of approved counseling agencies: www.hud.gov/counseling

Federal Housing Administration: https://www.fha.com/hud-fha-19.cfm

Virginia Housing Development Authority: www.vhda.com

American Bankers Association: www.aba.com

Mortgage Bankers Association: www.homeloanlearningcenter.com

Homeownership Preservation Foundation: www.995hope.org

Internal Revenue Service, information about tax liability in foreclosure and short sales: www.irs.gov

By phone

Hope Now Alliance, a mortgage industry group trying to coordinate a response to the mortgage crisis, can be reached toll free at 888/995-HOPE.

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