Resources for preventing foreclosure

Is your loan with Countrywide? They announced today that they would be working with borrowers to refinancing or modify their loans so that borrowers aren’t going to get slammed when their ARMs readjust. Their taking the hit because if they don’t and all these borrowers default, Countrywide goes under. What does this mean for someone who foresees their loan readjusting significantly higher in the near future? It’s a way out. It’s an opening.

The gun isn’t up to your head anymore, it’s up to Countrywide’s head (they don’t want to join the 50 other lenders that went under so far this year) and now is your opportunity to refinance and take action. If you have a Countrywide loan, call them. Call them right now before they start calling other people. In the beginning, if I was to hazard a guess, they’re probably going to want to get as many refinances on their books as possible so they can get this whole thing settled. As time goes on, the criteria for who gets to refinance or modify their loan will get tighter and tighter. You need to refinance to avoid foreclosure, you need to call right now.

So far this year, Countrywide has completed about 20,000 loan modifications — a figure that represents less than 5 percent of the more than 500,000 loans the lender reports were behind in payments as of last month.

Act now. Call 1-800-556-9568.

A loan modification is exactly what it sounds like, a modification of a loan. A lender and a borrower come to terms with the fact that the loan stipulations put it at risk and so they come to a happy resolution such that both parties win. In this period of uncertainty, with loan rates being adjusted and borrowers finding themselves in a crunch, lenders are more receptive to a loan modification because it’s much better than having a borrower default on a loan. In a default on a loan without collateral, the lender often just sells it for pennies on the dollar to a debt collector. In the default of a mortgage, the lender has to go through the messy and expensive process of foreclosure in which they’re certain to lose money in the process. So, a loan modification, if terms can be reached, is a winning proposition for both parties.

There are several risks to this on the lender side that I believe a borrower needs to understand so that you are fully prepared for the questions that will come. First, you won’t actually be talking to the lender, you’ll be talking to the servicer of the loan. This means that you’ll be talking to someone who may not have all the facts and may not have all the facts correctly, so you have to make sure that you keep the person you’re working with very well informed about your financial situation, the market climate, and any other pertinent details.

Secondly, there are scamming borrowers as much as there are predatory lenders, just because you’re on one side of the fence doesn’t make you immune to greed. There are borrowers who will want a loan modification because it’s better financially for them, not because they’re in dire straights and need the modification in order to stay in their home. This means that there’s a higher burden of proof on the folks who legitimately need a modification to stay in their house, you must accept the scrutiny and the extra workload if you want to succeed.

Lastly, there is a lot of work involved and so the borrower has to be persistent. Part of the persistence required will weed out some of the scamming borrowers because it’s not really worth it for them. The ones who are forced to persist, because they must in order to save their homes, are the ones who are left and your servicer understand this.

So, the key to a loan modification is to get all your paperwork in order, remain persistent, and be proactive.

The foreclosure numbers for September are in and it appears that they, as a whole, have fallen. September was 8% off its highs in August with “only” 223,538 filings, according to RealtyTrac, but are still twice as many as one year ago.

States in the Sun Belt and the Rust Belt continued to dominate foreclosure filings.

Nevada led the pack in the rate of September filings: one for every 185 households for a total of 5,504. Other hard-hit, Sun Belt states were Florida (one in 248), California (one in 253), Arizona (one in 316), Georgia (one in 316), Colorado (one in 326) and Texas (one in 615).

What does this mean for folks facing a crunch? It only means that lenders are more likely to work with you. If you’re in an ARM that will reset, don’t wait around to see if someone in Washington will lend you a hand (those guys are notoriously slow anyway), call up your bank and see if you can work something out. You might qualify for a refinance, you might not; calling is the only way you’ll find out.

Get everything in writing. You have to make sure that if the lender agrees with a short sale that you are absolved of all debts to them. If they don’t, then there’s a chance they can still come after you for the difference if you don’t have all your t’s crossed and your i’s dotted.

Ensure correct reporting to your credit bureaus. Double check with the lender as to how they will report the satisfaction of the debt. Most of the time they will simply report that the debt was satisfied, but sometimes they report that the debt was settled for less than the full balance. That settled for less than the full balance would hurt but it hurts less than a foreclosure (but more than a satisfied without mention of the deficiency).

Review tax ramifications. The lender could claim the deficiency as income they paid out to you, so it reduces their taxes but increases yours… unless you fit into one of two conditions. The first is if you’re truly insolvent, then you’re okay. The second is if the loan was a non-recourse loan.

The IRS is very picky when it comes to income taxes and in most cases, except for those outlined below and reiterated in a recent release, a cancellation of debt is considered income for the debtor. Let’s say you owed $10,000 to a bank, the bank cancels it, essentially the bank gave you $10,000 for nothing right? That’s considered income unless it’s one of the conditions below:

Bankruptcy: If you go through bankruptcy and the debt is canceled then it’s not considered taxable income.

Insolvency: If you are insolvent, if your total debts are more than the fair market value of your total assets, then it’s not taxable. This is hard to prove and very complicated so you’ll need a tax professional to help you prove this.

Certain farm debts: I won’t go into this one since it doesn’t apply, search for it if it does.

Non-recourse loans: According to the IRS, this is “a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.”

The IRS release contains more information and is definitely worth reading.

Dr. Housing Bubble Blog has an interesting anecdotal story about the whole foreclosure process about a couple in California that recently had their home seized. It sounds like a story of a family that lived the high life (they had $25k in credit card debt and two car loans for two new luxury cars) and it came to a crashing halt when one of them lost their job.

The real story is the fact that they were over-extended, caught up in enjoying life, and didn’t have a backup plan when their rate reset and the husband lost his job. Could they have sustained their lifestyle without the hike? Probably not.

Anyway, it’s an interesting read and a bit of an eye-opener.

A short sale is when the lender agrees to let you sell your soon-to-be-foreclosed home at a price less than what your mortgage balance is (thus selling it as a loss) and then forgiving you the difference. In the case of a short sale, you lose your home but you aren’t on the hook for the difference between the selling price and how much you owe. It’s not an idea situation but sometimes there’s nothing you can do except try to get out from under a loan that could bankrupt you.

Why would you want to do this? If there is no saving your home, you might as well rid yourself of the mortgage (and the house) by trying to get your lender to agree to this. A foreclosure will cause significant harm to your credit so this is a scenario that lets you leave free and clear, albeit without a home. Again, it’s not ideal but it’s better than foreclosure.

Private financiers come in two flavors - lenders and buyers. With both, make sure they pass the smell test and be sure to ask for advice from professionals because you might be signing something you don’t fully understand. Make sure you double check everything before agreeing to anything or signing on any dotted lines.

Lender Private Financier
These are folks with money and want to make more money by arranging a new home loan for you, even if you’ve failed to secure yourself a refinance. They do this because they want to make money and will likely charge you a high level of interest or have less than favorable loan terms.

Buyer Financier
In this case, financier is a fancy title for buyer because that’s what they’re trying to do… buy the house from you. It’s really not in your interest to talk to these people unless you can get a resolution that will make you happy. In some cases they will buy and rent the house back to you so you can stick around but it’s no longer your house.

Answer them!

The current mortgage crisis climate is probably one of the friendliest a delinquent borrower is every going to see. With all the pressure and nervousness surrounding the whole subprime industry, lenders are looking for amicable ways to solve their problems because foreclosure is a lose-lose for everyone.

So, when the mortgage holder does call, you should answer them because they’re reaching out to you to try to help. If they weren’t, they’d just go through the foreclosure process and the next time you’d hear from anyone with your interests in mind, at least a little bit, will be their lawyers.

Talking directly with your lender is the #1 absolute best way to deal with being late on a payment because they’re the ones with the most power in settling something reasonable. When other parties come into play, they will want a piece for their own time and so the number of hands reaching into your pocket will increase until you can’t possibly get back on track. Don’t think of it like you’re in trouble and they’ll be scolding you, they aren’t; think of it like you’re going to get back on track, make amends, and they’ll work with you.

In the current economic environment, after the first of the subprime issues are resolving themselves, lenders recognize that ARMs are resetting and some folks will not be able to pay. Rather than foreclosing, lenders are going to want to work with these borrowers, such as yourself, to reach an amicable solution because foreclosure generally results in a loss for them, especially given the recent drop in home prices.

“Servicers are beginning to understand that they’re better off renegotiating,” said Bruce Dorpalen, director of housing development for the Association of Community Organizations for Reform (ACORN), a non-profit community development group. Their average loss on a foreclosure for a lender is now $58,000, he said. (source)

$58k loss is average, meaning some are more! Banks don’t roll the dice, they analyze the numbers and they’d rather talk to someone, lose a few thousand but get back on track (especially if they can earn hundreds of thousands in interest over the life of a loan) than take that $58k hit.

If you’re in trouble, your first phone call should be to your lender.