April 6, 2008
credXperts
Foreclosure: Is Walking Away an Option
Kathryn D'Imperio

Buying a home is one of life's most exciting events. You've scoured the listings, visited many properties, or perhaps only a few, and found the perfect home to suit your lifestyle. You've made it through negotiations, home inspections, moving out of the old place and into the new place. Now comes the tricky part - keeping up with your mortgage.

Foreclosure has taken many of our cities by storm, turning homeowners' worlds upside-down and destroying their faith in the housing industry. Many people buy the homes of their dreams, only to find out soon after that they cannot afford the mortgage payments, utilities, and other expenses of daily life. Sometimes homeowners close their eyes and turn their heads from these problems.

Foreclosure is an unfortunate and common result of missed mortgage payments. Being informed about foreclosure is the first step to surviving it. Homeowners should make it a point to learn what foreclosure is, how it happens, what happens during foreclosure, and the viable options for resolving it to give themselves a fighting chance.

What is foreclosure?

"Foreclosure is the last resort that a mortgage lender will take to recoup its money under a defaulted mortgage note," says Ethan Ewing, national mortgage expert and president of Bills.com in San Mateo, California. "It is a legal proceeding, generally resulting from the borrower's failure to make timely payments on the mortgage, in which the borrower loses his right to pay for the property, and thus redeem the legal title."

Ewing explains that lenders usually save foreclosure as a last resort because of its complexity and the expenses involved with foreclosing a home. When a home is foreclosed, the lender takes full title to the property, and the borrower relinquishes most rights to the property.

"I have seen many homeowner's well overextended," notes Jade Attar, a realtor with Brazen Real Estate in Bellevue, Washington. "Many home buyers that took that ride on the booming real estate market; many who were young, undereducated, and overconfident.

"After purchasing either one home or multiple, the downturn of the market (albeit cyclical and therefore temporary) has left them in a position of owing more than the property is now worth. Perhaps they cannot get their property rented and have a negative on top of a negative, 100% financing with high interest rates, high adjustments, etc. The alternative for most is to go into foreclosure."

Foreclosure is not a pretty thing. It usually starts out with letters from your lender or an institution and escalates to phone calls and written notices of the delinquent loan, among other intimidating communications. Those who ignore and avoid these notices often end up losing their homes in the end. That is why it is imperative to take a proactive approach to making timely mortgage payments and to communicating with your lender when the going gets tough.

What happens if I miss a payment... or two... or three?

Everybody has a tough month now and then. The incoming cash flow may be delayed or unexpected home repairs or car maintenance may suck up every last dime. It is so important to keep a slush fund available for times like these so that you don't have to put your mortgage money into other expenses. When all else fails, prioritize your expenses and delay paying those with the least impact.

"Not paying is not recommended," says GreenPath Counseling Manager, Candy Wright. "Whether you rent or own, your housing payment is the most important payment you have. GreenPath counselors and debt managers always recommend paying housing and utility payments first for that very reason. If you prioritize differently, you put your home at risk. Not making the mortgage payment puts you in 'default' on your loan obligations."

When you miss a payment, your lender will begin to notify you of the missed payment, and inquire as to when you expect to make up the payment. Wright specifies that the first month may hold a simple notice about the missed payment, with the second month including a phone call seeking the past-due amount. Once you reach three months without paying, you may receive formal written notice of the delinquent loan (sometimes called a "Demand Letter" or "Notice to Accelerate") and a 30-day window to bring it current to steer clear of foreclosure.

Wright says lenders may be less willing to accept anything other than the full amount due to bring the account current, in addition to the applicable late fees.

"It is still worthy trying, though," she says. "Don't give up."

Once the four month mark rolls around, most of the sand has already slipped through the hourglass. When the Notice to Accelerate expires without your payments or other arrangements being made, the lender's attorneys will likely begin foreclosure proceedings. Any legal fees incurred during this time also add to the delinquency, Wright says.

Individual state laws determine many of the details surrounding the foreclosure proceedings, and it's all downhill from there. The next steps may involve a hearing, or setting a date for the redemption and/or Sheriff Sale.

Can I negotiate with the lender?

As with many of life's problems - a hole in your clothing, a medical problem, a problem with your vehicle - a stitch in time saves nine. In other words, the sooner you take ownership and address the problem, the better off you will be, and the better your chances for resolving the solution and avoiding foreclosure. Remember that communication is the key to success in many fields, including this one.

"Now, there seem to be more options with grace periods, waiver of late fees and penalties, longer redemption periods," says Jade Attar of Brazen Real Estate. "There are banks that are offering to change terms of the note (interest rates) and adjustments on ARM's (adjustable rate mortgages).

"There are many banks and servicers that are in earnest of contacting and arranging terms with the borrower, that are far more realistic in an effort to keep them in the home and continuing to pay a more reasonable payment. For a borrower that would like to find a way to maintain a decent credit rating or simply keep themselves in their home and avoid foreclosure, this is a great time to renegotiate the terms of their home loan."

To begin renegotiating the loan, Attar suggests contacting the loan servicer and being honest about the difficulties you are facing under the current terms and conditions. Express your interest in putting your mortgage back on track in a way that allows you to confidently and comfortably make your payments.

What options do I have once I am facing foreclosure?

When the bank is knocking at your door, there are still a few things you can do to avoid foreclosure. First and foremost, handle the situation with as much grace and maturity as you can muster. Try to keep an optimistic attitude as you take the necessary steps to resolve the situation.

"Consumers should also be aware of how foreclosure will have an impact on their credit report," says Paul Lueken, president of The Illinois Association of Mortgage Professionals (IAMP) and the IAMP Educational Foundation. "Foreclosure is a hard mark to erase from your credit history and there are steps you can take to avoid the loss of your home instead. Communication with your mortgage broker or lender will help you navigate through the troubled waters of foreclosure before and after you find yourself facing such a situation."

GreenPath Counseling Manager Candy Wright reports that homeowners have several work-out options to consider when faced with foreclosure. She outlines the following options available to those in this troublesome financial situation: Temporary indulgence - Consumers following through with a temporary indulgence have a 30-day grace period to repay all past due amounts in a single payment. Repayment plan - Consumers and the lender agree on special payment arrangements to bring the account current. Wright reminds, "Always ask for this in writing." Interest-only payments accepted during a certain period of time may serve as another option.

Special Forbearance - The loan servicer agrees in writing to decrease or postpone the homeowner's monthly payments for a set amount of time.

Loss Mitigation Alternatives - Long-term hardships may prompt loss mitigation alternatives, such as:

Modification - A modification is a permanent alteration of the original terms to help the consumer to bring a defaulted loan current. Assumption - A qualified applicant takes over both the title to the property and the mortgage obligation from the homeowner who is currently delinquent. Pre-foreclosure Sale - Available from Fannie Mae only, this is a sale of the property with an agreement between the servicer and the homeowner that the proceeds of the sale satisfy the defaulted mortgage, even if it works out to be less than the amount owed on the home. This option runs as a last resort to avoid foreclosing on the property. Deed in Lieu - Another Fannie Mae last resort option, the homeowner voluntarily conveys clear property title to the lender in exchange for a discharge of the debt.

"Please understand that the lender does not want your house and will try to work with you," adds Paul Lueken, president of IAMP and IAMPEF. "The first thing you need to do after you have received a foreclosure notice, or a Lis Pendens, in writing, is to respond immediately. Consumers usually have 20 to 30 calendar days to respond. These 20 to 30 calendar days begin from the date you were served the Lis Pendens notice."

How can I avoid foreclosure? What are some good tips?

Real estate professionals agree: the best thing to do when you are on the brink of foreclosure is to contact your lender as soon as possible. Being proactive rather than reactive may be the difference between keeping your home and selling it or losing it to the bank.

"The worst thing you can do is avoid the phone calls, letters and/or visits from your lender," says Deede Wockenfuss of Buyers & Sellers Best Choice, Gilbert, Arizona. "There are many options. You can market your home as a short sale; get a mortgage modification agreement or even a deed in lieu of foreclosure. The sure way to go into foreclosure is to not talk with your lender. A realtor who specializes in this kind of situation will be well worth the call. You don't need to go it alone -you don't need to make those difficult calls to your lender yourself."

Erin Johnston of Assist-2-Sell Buyers & Sellers Realty in Springfield, Oregon suggests, "Call your lender immediately and tell them your situation. Most homeowners wait way too long before telling someone they need help. The bank doesn't want the house back, so lenders are often willing to work something out with a seller before they get months behind on payments and the outstanding balance gets too large.

"Once you have a large amount of outstanding debt and your house hits the public foreclosure list, the chance of getting a good price for your house or the bank working out options for you is almost completely gone. Call your lender immediately before it's too late."

Susan Jacobs of Assist-2-Sell Jacobs Team Buyers & Sellers Realty in Manassas, Virginia recommends that homeowners open all the mail from their mortgage companies promptly. She also urges consumers to contact their lender as soon as possible when it looks like they will miss a payment.

"Don't put your head in a hole and hope the problem will go away," she says. "This is the time to be proactive. Your mortgage company wants to help you! Depending on how far behind you are, they may be willing to work out a payment plan until you get back on track.

"Do not hand over your keys, and stay away from companies who promise to help. Most are scams. They take what little money you have and run. Or worse yet, they take your home. Many will tell you to file for bankruptcy, but this may just delay the process, and depending on your financial situation, you may end up with more debt than you started with."

Where or how can I get help?

GreenPath Debt Solutions, based in Michigan, is a nonprofit organization that offers free financial counseling and education to those who are facing financial troubles. GreenPath Debt Solutions boasts more than 400 counselors and runs 37 offices in seven states and provides services to the whole country through telephone and Internet services. Since 1961, GreenPath has delivered debt management and client hardship programs, in addition to the Federal Government's Hope Now Housing programs. Visit GreenPath online at www.greenpath.com.

The U.S. Department of Housing and Urban Development (HUD) works to increase homeownership and access to housing while also supporting community development without discrimination. Visit HUD online at www.hud.gov/foreclosure.

SIDEBAR: Tips on avoiding foreclosure from Paul Lueken, president of IAMP and IAMPEF

Paul Lueken, president of the non-profit Illinois Association of Mortgage Professionals (IAMP) and the IAMP Educational Foundation offers these tips:

Before You Miss a Payment:

Take out a loan product that makes sense for your individual financial circumstances. (Many specialists in the industry warn potential homeowners to be wary of interest-only and adjustable rate mortgages.)

Know how much you can afford for a house payment and don't be talked into more. Make sure that after you make your mortgage payment each month, there is enough money to cover your other expenses, as well as put money into a reserve emergency account. Use the equity in your house in a careful and a sensible manner; for example, don't use money from a line of credit to go on vacation.

After You Miss a Payment:

As soon as you are going to miss your first mortgage payment, contact your lender.

If you obtained your loan through a mortgage broker, ask your broker for guidance on the situation. Cut out any unnecessary expenses and try to trim your budget where you can. Don't make any large purchases. Be aware of "rescue" offers; if it sounds too good to be true it probably is. Don't sign any documents before thoroughly reading and reviewing. Work with your lender to determine if selling your house is an option or if there are any other options to assist in your circumstances. Talk to as many people at the lending institution until you find someone that will help you. Write down names and departments and keep a file of important information and highlights from conversations.