There may be hope for those facing foreclosure
by Christopher Doyle
AZCPA Magazine ” December 2008
Arizona has seen its share of homeowners facing challenges with their mortgages in the last 18-plus months. Many homeowners owe more on their homes than they are worth, many are falling behind on payments, and many are facing the very real prospect of losing their homes to foreclosure. Some may be unable to make a decision or know what to do to fix the problem. What options does a homeowner have who is faced with the prospect of foreclosure?
Refinance.
One of the tools that has been placed in the hands of mortgage lenders to help distressed homeowners is a Federal Housing Administration mortgage program known as FHA Secure. This program was designed to provide a fixed-rate mortgage option to aid those homeowners holding adjustable rate mortgages who are about to face an interest rate reset or who have already hit their reset. This program will tolerate delinquent mortgage payments, depending upon payment history and the reason for the delinquency prior to the rate reset. The homeowner must be able to demonstrate that their payment delinquency was the direct result of the increase in interest rate or an extenuating circumstance such as a job loss or divorce. Eligible borrowers must reside in the home as their primary residence and must have sufficient income to make the monthly payment on the new mortgage, plus all other recurring obligations. They also have to fit into the maximum FHA loan limits, which vary by county.
HOPE for Homeowners.
The Housing and Economic Recovery Act of 2008, which went into effect on Oct. 1, 2008, includes legislation that will provide up to $300 billion in new 30-year fixed-rate mortgages through HOPE for Homeowners. It enables distressed homeowners to obtain FHA mortgages in cases where the existing lender agrees to write-down the principal balance on the mortgage to 90 percent of the current market value. The program will not allow second liens, so those lenders holding second mortgages would have to agree to partially or completely forgive the debt. It remains unclear whether lenders will be willing to take on this level of debt forgiveness.
Hope Now.
Hope Now is an alliance between counselors, mortgage servicers, lenders and other mortgage market participants. This is a group of voluntary participants, encouraged by the Treasury and HUD, whose goal is to reach out (via direct mail) to distressed homeowners. Their purpose is to get homeowners to contact their lenders in order to work out a solution to their delinquent mortgage, such as a loan modification. This alliance is supposed to standardize the process of offering solutions to distressed homeowners. Hope Now™s phone number is 1-888-995-HOPE.
Loan modification .
In a loan modification, the lender holding the mortgage agrees to rewrite the terms of the existing mortgage. This may be an option in a case where the homeowner wants to keep the home. It may temporarily or permanently reduce the interest rate, and may bring past-due payments current by moving them to the back of the loan. Lenders are likely to restructure the terms only if they feel that the homeowner can reasonably repay the loan. A borrower interested in pursuing a loan modification should contact their lender directly to have their loan reviewed.
Short sale.
Short sales have been around for a long time but have gained considerable momentum in the current real estate environment. Banks are much more agreeable to this solution than they have been in the past. In a short sale, the bank is presented a purchase offer from a buyer and the bank agrees to accept a payoff for less than the amount owed on the mortgage. This is done in cases where the homeowner owes more on the home than it is worth. In many cases, there are two mortgages on the property and both lenders must agree to take a reduced payoff, so the process can get complicated.
It is important to list the home that is to be short saled with a realtor who has a record of successfully closing short sale transactions. Some short sale listings fail to generate an offer acceptable to the bank and the home ultimately goes to foreclosure, so it is imperative that a seller enlists the service of a realtor skilled in properly pricing the home and working with the bank to expedite the transaction.
Deed-in-lieu of foreclosure.
A homeowner may be able to work out a deal with their bank where they simply give up the title to the home and walk away. This option can be complicated by the existence of other liens on the home (i.e., second mortgages) or if the home is upside down. This is still a negative mark on the homeowner™s credit report since he or she did not fulfill his or her obligation under the original terms of the mortgage, but it may result in less of a hit to the credit than a full-blown foreclosure. It may also be a strategy for eliminating the lender™s ability to pursue any forgiven debt.
Foreclosure.
The most painful option that a homeowner and the bank can face is foreclosure. In Arizona, most mortgages are actually Deeds of Trust and they go through Trustee Sale. Typically a bank does not start the foreclosure process until the borrower is three to four months delinquent on the mortgage. At that point, the bank will file a Notice of Trustee™s Sale with the county recorder that notifies the homeowner and the public that the home will be auctioned by the bank after 90 days have elapsed. The homeowner has this time to cure the default (bring delinquent payments current plus reimburse the lender for any expenses that it incurred, including appraisals, broker price opinions, legal fees, etc.). Foreclosures are incredibly expensive for banks. Not only do they incur considerable expense in reclaiming the home; they have to market the home, pay real estate commissions, property taxes, repair damage by vandals, etc. while they hold the property.
After a foreclosure, a homeowner may be eligible for another mortgage after three years have elapsed, under current FHA guidelines. Fannie Mae™s current guidelines allow a borrower who has lost a home to foreclosure to purchase another home after five years, provided they have a 680 credit score and can put down at least 10 percent; otherwise, it is a seven-year wait time. In contrast, Fannie Mae will allow homeowners who sold their home under a short sale agreement to qualify for a new mortgage after only two years.
The worst thing homeowners in trouble can do is stick their head in the sand and do nothing. It is human nature to avoid pain, but homeowners who may be reaching out to you need good guidance. Usually, their first call should be to their lender. Although none of the options discussed in the article are ideal, they are potential solutions to a very real problem.
Christopher Doyle
is a loan officer with American Alliance Mortgage Company in Tempe. He specializes in FHA, VA and conventional loans and writes and speaks often on the mortgage industry. He can be reached at (480) 775-9000 or at chris.doyle@cox.net. View his Web site at www.ChrisDoyleLending.com.
AZCPA ” December 2008
Tags: 
Categories: 
