Resources for preventing foreclosure

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.

So someone called you or sent you a letter offering their skills as a mortgage negotiator and you want to know if they are legit. Well… that depends (unfortunately). There is no recognized certification for mortgage negotiators and often you can negotiate with a lender by yourself, but sometimes you need the bring in a professional, someone who knows the system, to give you a hand. Since there is no certification and no regulation of these negotiators, some of them might be scammers or frauds so you have to be very very careful when dealing with these people.

My advice is to reach out to your lender first and trying to work out a solution with them yourself. If the lender’s terms seem too difficult or you can’t make any headway, try answering some of the inquiries by these mortgage negotiators. Do some research on them and try to figure out if they are legitimate or just vultures looking for a cheap payday.

Courtesy of the Consumerist, looks like the Fed has a page that lists federal agencies, federally-affiliated organizations, and other reputable organizations that can help you overcome foreclosure. In addition to the agencies, it has links to tips as well that may be of some use as well. Information is power so get some!

The following story about Jennifer Falke and her family is one that you should be knowledgeable of if you are looking towards a third party to help you negotiate a positive resolution to your foreclosure woes. Falke contacted Foreclosure Assistance Solutions (FAS) and paid them money for them to negotiate with her lender. FAS took her money, did nothing, and now she’s not only poorer but she’s in a tougher spot with her lender because nothing happened in the time that passed. FAS took $1,200 and put her in increasingly more difficult positions, when she had money they told her that the fees would be more and more – essentially ripping her off and making it nearly impossible for her to get back on track.

She was told not to call her lender because it would only make it worse and eventually, since FAS stopped answering her calls, she did and found out FAS was lying to her in the first place and inflating the cost of catching up. Here are some tactics they try to use to rope you in:

* Saturation marketing: They learn of mortgage delinquencies through published reports and proceed to bombard the owners with phone calls, flyers and posters.
* Exploiting trust: Scammers build trust by acting sympathetic and solicitous; many owners can’t believe they would lie to their faces.
* Isolating owners: Scammers assure victims that they’ll handle everything. They tell them not to call their lenders nor seek legal advice.
* Outright fraud: Scammers have homeowners sign blank papers and fill them in afterward or they sneak the paperwork through without telling victims what they’re signing.
* Affinity marketing: Especially among minorities and sometimes evangelical church congregations, a scammer builds trust based on a common ethnicity or religion.

The article recommends that you talk to your lender directly as soon as possible, that’s absolutely your best bet.

Source: Money.com