Alternatives for Homeowners in Foreclosure (Part 1 of 2)

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     If you have a home or investment property in foreclosure, you are probably wondering what your are alternatives are. You may already know some of them but may have questions about the procedures, costs and how they compare. This post is a short primer on the available alternatives typically considered. As always, you should consult with an attorney who can help you determine which alternatives might best fit your particular situation.     

      Workouts – This is the generic term used by lawyers and lenders to describe settlements. It includes reinstatement, loss mitigation, loan modification, and forbearance agreements. In future posts, I will get into more detail about each of these options. Generally, whether this alternative is available to you will depend on your lender’s flexibility and desire to avoid taking back or auctioning real estate (most lenders prefer to be paid), and whether you have any funds available to make at least a partial payment upfront. Your lawyer can assist you in negotiating directly with the bank’s counsel. You may gain some leverage and obtain more favorable terms by having an attorney who can make any credible threat of filing Chapter 13 bankruptcy on your behalf. Under Chapter 13 you can stretch out the payment of arrears over a 3 to 5 year plan which some lenders might prefer to avoid. Your attorney will also review the bank’s charges to determine if they are appropriate and reasonable, as it is sometimes the case that banks overcharge or include fees that they are not really entitled to. While it is possible that you might attempt to speak to the bank directly, it is usually a foolish move. Most homeowners are not real estate experts and even those who have such expertise may be too emotionally involved in this situation to handle it objectively.       Many people forget that once there is a foreclosure action pending, your lender is your enemy, not your friend, no matter how nice the phone representatives may seem. Your lender has only one thing in mind: getting paid. There are different tactics that your lender may take but the main thing to keep in mind is that the clock is ticking and time is not on your side. Every day that passes in foreclosure gets you that much closer to an auction no matter how many times you have had friendly conversations with customer service at the bank. Until there is a written settlement signed by a bank representative or some written understanding with the bank’s attorneys you cannot be assured that your property is safe. With so much at stake, it is usually a risky move to try a workout on your own for the first time. Lawyers’ fees for work out representation or usually very reasonable depending on the complexity of the situation. You may find flat fees ranging from 1/2 to 1/3 of your monthly mortgage payment. It is well worth it to have experienced help tried to save your house. Your lawyer will be able to explain to you the terms of whatever settlement is on the table. I have found many clients simply do not understand workouts or do not have the experience to try to negotiate with a bank attorney. While no lawyer can guarantee a result, it is always worth while to have experienced counsel on your side. The bank has attorneys trying to take away your property while you are talking to their customer service department!

     Refinancing – This is a fancy way of saying that you are getting a new loan to pay off the old one. Although you may like the interest rate that you currently have, your current lender may simply not be flexible enough to work out the loan default and may have no desire to make a new loan to you, even at a higher interest rate. Usually, refinancing means that you are going to find a new lender and, if you are in foreclosure, the reality is that your interest rate will be higher in most cases. However, it is a useful alternative because it helps many people avoid bankruptcy. There are lenders that will still make a loan to you even if you are in foreclosure and have a bad credit score. The typical cut off for credit score his is a FICO 500 or more. Most lenders look to the equity in your property to protect them against risk when they make these kind of loans and they analyze what they call the “loan to value” ratio, known as “LTV.” Your lawyer can assist you in locating lenders or mortgage brokers who specialize in foreclosure bailouts and who are not afraid to make a loan simply because there is a foreclosure pending. It is usually a waste of time to go directly to conventional lenders because they will not approve you. Your lawyer can also help you cut to the chase and avoid wasting time. Unfortunately, they are all our mortgage brokers out there who will tell you that you can get a new loan even before they truly know whether it is realistic or not. Many homeowners find themselves getting the runaround and wasting months by the time they find out that they will not be approved for a new loan or, in some cases, some mortgage brokers do not even returned their calls after a while. One scam that I have seen is where mortgage brokers or lenders initially tell the homeowner that they will be approved for a new loan based on the appraised value of the property but later change their mind. They justify this with something called a “BPO” or brokers price opinion, which basically means that somebody else reviewed the value of your property and determined that the appraisal was too high. There is usually little that can be done about this because appraisers are notorious for disagreeing with each other about property values. The end result is that months pass while interest charges and the banks legal fees accumulate, leaving the property owner that much closer to an auction with no relief in sight. An experienced attorney can help you work with reputable mortgage brokers or lenders who will not waste your time. In some cases, you might be approved for a new loan within days, in other cases, approval may be subject to a new appraisal.

     Now, if you’re asking yourself why you might want to get a new loan which would have a higher interest rate (translation, higher monthly payments) the answer is simple. You do not have to stay in the new higher payment loan forever. It might be any temporary solution to get you out of foreclosure. You can start fresh with a new loan, improve your credit by making the payments on time (some lenders may even hold pre-payments in escrow out of the loan proceeds so that you have no payments to make for 12 months), and, if you desire, you can always tried to refinance again in a year, which should be realistic because at that point you will be more than one year out of a foreclosure situation. It helps to have a lawyer guide you through this process, attend the closing on your new loan, and most people are usually surprised that they can retain a lawyer to help them with no up-front fees. Most lawyers providing this service typically charge a fee equivalent to one month’s mortgage payment and are willing to accept their fee out of the loan proceeds, to be paid at the closing only if the loan is approved.

     In part 2 of this post, I will explore other alternatives such as Chapter 13 bankruptcy, litigating in the foreclosure action (i.e., answering the complaint and asserting defenses or counterclaims), and selling your property.