October 2008 Archives

October 28, 2008

New California Foreclosure Prevention Legislation: A Summary

Known as SB 1137, the new California foreclosure prevention act became fully effective on September 6, 2008. This legislation only applies to foreclosures on loans made between January 1, 2003 and December 31, 2007. It sunsets December 31, 2013.

The Act's main components are:

  1. The lender must contact the borrower that is in default at least 30 days prior to initiating foreclosure proceedings in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure. The lender must also inform the homeowner that he or she has a right to an additional meeting that must be scheduled within 14 days, upon request. These requirements effectively increase the advance notice period for a California foreclosure sale from 110 days to 154 days.
  2. The lender must provide the borrower with the telephone number of a HUD certified counselor. The Act Authorizes the HUD certified counselor to represent the borrower in subsequent discussions with lenders regarding options to avoid foreclosure.
  3. The lender must maintain a toll-free number providing access to a live representative during business hours.
  4. The lender must provide any renters on the property with either a 60-day notice to quit or a new lease.
  5. An owner of a vacant property acquired through the foreclosure process must maintain the exterior of the property or be subject to a fine (by a local government entity) of up to $1,000 per day.

Probably the most important of these changes from the previous homeowner's perspective is the requirement that the new owner maintain the exterior of vacant properties to avoid blight. This will likely lead either to quicker evictions by the new owner, or an arrangement with the homeowner under which he or she can remain on the property in exchange for maintaining it.

The new notice and contact obligations placed on the lender may also prove important both to homeowners who want to negotiate with lenders and to homeowners who decide to fight the foreclosure in court (since the greater the number of notice-type requirements placed on a foreclosing lender, the greater the chance that mistakes will be made that justify a court derailing the foreclosure itself). For more information on common defenses to foreclosure, check out this article in the Nolopedia.

October 25, 2008

Bankruptcy No Bar to Modification of FHA-Insured Mortgages

In an earlier post I warned that filing bankruptcy might make it more difficult to obtain a mortgage modification from Countrywide or other lenders while you are under the jurisdiction of the bankruptcy court. I suggested that it might be a good idea to hold off on filing bankruptcy if at all possible until you see whether a foreclosure workout with your lender is possible.

On October 17, however, in a letter to all mortgage lenders who hold FHA-insured loans (HUD Mortagee Letter 2008-32), the Department of Housing and Urban Development has made it clear that loss-mitigation efforts should move forward despite the fact that the mortgagor is in bankruptcy.

While the HUD letter doesn't constrain holders of non-FHA insured mortgages such as Bank of America/Countrywide, these and other lenders will often follow HUD policies, making it likely that you won't miss out on a mortgage modification opportunity if you decide that filing bankruptcy is in your best interest.

Of course, it would make sense for you to contact your lender to see whether it will be following this new HUD policy or whether your bankruptcy will take you out of the running for a mortgage modification. It also makes sense for you to check with a HUD-certified housing counselor by calling 1-888-995-HOPE.

To learn more about timing a bankruptcy filing wisely, see Nolo's article Should I File Bankruptcy Now or Wait?.

October 21, 2008

Should You Keep Your House?

If foreclosure looms because you've missed some payments or you think you will soon, it's time to face what's probably the toughest question of the whole process: Does it make economic sense to keep throwing money into your house?

If your mortgage debt is significantly more than the value of your home -- which is becoming the norm rather than the exception -- the main question is whether the property's value will bounce back enough to give you at least a little equity in your house in the not too-distant future.

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If you owe at least 25% more than the value of your house -- whatever you determine it to be -- the wise economic decision, under the present circumstances, would be to extract as much money as you can from the house now by stopping your mortgage payments and staying in the house payment-free for as long as possible, which can be as long as a year in many states.

How do I know what the market will do in the future? I don't. And I always keep in mind the advice that Mark Twain is reputed to have given a young man: "Buy land, they're not making it anymore." Also, no formula exists that can predict how soon a particular real estate bust will be over. But, while the general history of real estate booms and busts might indicate a fairly speedy recovery, history has never seen a combination of such factors as:

The fact is, there is no guarantee your house will ever recover its original value. As the old saw goes, you don't want to throw good money after bad. If the housing market fails to rebound because of these factors (and others sure to come), every economic sacrifice you make now to keep your house could be for naught if you ultimately lose it.

October 16, 2008

Myth Persists that Chapter 7 Bankruptcy Is Harder to File

A reviewer of my new foreclosure book took me to task for underestimating how difficult it had become to file a Chapter 7 bankruptcy under the 2005 bankruptcy legislation. Many people have this misconception. It's true that bankruptcy became more expensive, if you use an attorney -- attorney fees doubled under the new law in many parts of the country. And it's also true that there are a few additional hoops to jump through. However, self-help is a reasonable option for most bankruptcy filers and the new hoops are easily navigated.

Probably the biggest misconception is that many people are barred from Chapter 7 because their income is too high. The new bankruptcy law did make filing more difficult for people whose incomes exceeded the median income for their state, but only between 5% and 10% of would-be filers face this problem. All the others slide easily under the median income bar.

The new bankruptcy law did make it more difficult to get rid of some types of debts -- private commercial loans, recent credit card charges, and debts incurred in a divorce or separation decree -- but the vast majority of debts that could be discharged under the old law can continue to be discharged under the new law, including credit card and medical debt, deficiencies from foreclosures and repossessions, and bank loans.

Under the new law, filers have to undergo two mandatory counseling sessions -- one before and one after filing -- but these have not proven to be a barrier to filing, at least after an initial confusion due to ignorance of the new law. Also, the new law requires some additional documentation, such as tax returns, wage stubs, or bank records, but once again, virtually all filers can handle these items.

There are many things to consider when deciding whether to file bankruptcy, but you should not be misled into believing that it is no longer feasible. For almost all filers, the new bankruptcy is very much like the old bankruptcy -- an essentially administrative process in which you disclose information, appear for one brief meeting with the trustee, and wait for your discharge papers to arrive in the mail 60 days later.

October 11, 2008

Hold Off on Chapter 7 Bankruptcy If You Might Qualify for a Mortgage Modification

On October 6, it was announced that Countrywide Financial has agreed to the largest program ever to modify (reduce) the principal and interest of home loans as part of a lawsuit settlement with officials in 11 states. This was followed several days later by the passage of the federal bailout bill, which contains language likely to also result in widespread loan modifications. In other words, if you have defaulted on your mortgage, or are likely to default in the near future, help may be on the way.

This raises an interesting question for homeowners who are contemplating filing bankruptcy: What effect will bankruptcy have on a homeowner's ability to participate in a lender's home loan modification program? While only time will tell for sure, here are two important points to consider.

First, when you file a Chapter 7 bankruptcy (the most common kind), the title to your home technically passes to your bankruptcy estate and is "owned" by the bankruptcy trustee -- the official appointed to handle your case. Countrywide is telling its homeowners that it won't consider them eligible for a modification while a Chapter 7 bankruptcy case is pending. So filing bankruptcy might take you out of the action just at the wrong time.

Even more problematic, a Chapter 7 bankruptcy typically cancels the promissory note portion of your mortgage along with your other debt. However, even if you don't owe anything on the mortgage itself, the lender will still have a lien on the property in the amount of the mortgage, and will be entitled to foreclose on that lien. In other words, even though you don't owe anything on the mortgage after bankruptcy, you'll still have to pay on it if you want to keep your house. Confusing? You betcha.

So, what's my point? If you don't owe anything on your house after your mortgage, you won't have a mortgage to modify, and it's unlikely that the new programs will offer modifications for liens remaining after bankruptcy. The only way to avoid this result is to offer to reaffirm the mortgage as part of your bankruptcy case (that is, agree to a new mortgage) and hope the lender agrees. As part of this process you can attempt to negotiate different terms for the new mortgage that would be similar to what you would otherwise get outside of the bankruptcy process.

Bankruptcy used to be a really good remedy for people facing foreclosure. However, in the brave new world of mass mortgage modifications, bankruptcy may foreclose your ability to partake of the manna from heaven pouring forth from our nation's mortgage lenders. For this reason, if you think you might qualify to have your mortgage modified, either by Countrywide or by your lender, strongly consider holding off on your Chapter 7 bankruptcy until you know which way the mortgage modification winds are blowing. For more information on whether you might qualify to have your mortgage modified, find a non-profit HUD-certified housing counselor by calling 1 888 995-HOPE.

October 8, 2008

Will the HOPE for Homeowners Act Save Your Home?

Effective October 1, 2008, the federal HOPE for Homeowners Act was created to help homeowners avoid foreclosure. Homeowners who qualify may be able to refinance their currently unaffordable variable rate mortgages into affordable 30-year fixed rate mortgages insured by the Federal Housing Administration (FHA), provided their lenders agree to accept the terms of this new program.

For the program to work, lenders must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home. For instance, if an appraisal shows that your home is worth $200,000, your lender would have to agree to cash you out at $180,000, regardless of what you owe on the mortgage.

Not only the primary lenders, but also the holders of second or third mortgages, will have to sign off on the deal -- and there's nothing forcing them to do so. In truth, people with second and third mortgages will have trouble qualifying for a new mortgage under this program.

If you eventually hope to make some money off your home, this program is probably not for you. Homeowners who receive refinancing under the HOPE for Homeowners program will be required to share a portion of any future appreciation in home value with the federal government. In other words, if you sell or refinance your home, you may have to send some of the profits to the feds. The amount will range from 100% to 50%, depending on when the property is sold or refinanced. And if there was an additional mortgage holder in the business, he or she may also be entitled to a share of the appreciation.

Not everyone will qualify for refinancing under this program. Basically, you must be at risk of foreclosure under regulations being developed by a new regulatory agency. You will have to document your income, and it must be adequate to make the new loan affordable under standards set out in the National Housing Act. You have to be living in the house you are seeking to refinance and you can't own any other real estate. Finally, you must certify that you haven't intentionally defaulted on your mortgage or any other debt, and that you didn't furnish false information when you obtained the mortgage you seek to refinance.

To find out more about this program and whether you qualify for it, you should seek assistance from a free, HUD-certified nonprofit housing counselor. For a list of these counselors, see HUD's website at www.hud.gov (click on "Avoid Foreclosure", under the "Homes" column) or call 1-800-569-4287. You can also call 1-888-995 HOPE.

To learn more about the HOPE for Homeowners Act, see Nolo's article Mortgage Refinancing to Avoid Foreclosure: The HOPE for Homeowners Act.

October 7, 2008

The Five Biggest Foreclosure Myths

Below, you'll find the five biggest foreclosure myths. See the article "How Foreclosure Works" to learn more.

Myth #1: Foreclosure should be avoided at all costs.

The truth: In fact, foreclosure can be your friend and a better option than those frequently urged on stressed homeowners, such as short sales and deeds in lieu of. False. See the entry, "How to Walk Away From Your Home With Money in Your Pocket" for more on foreclosure without fear.

Myth #2:You should move as soon as possible once foreclosure proceedings start. Otherwise the sheriff will forcibly throw you out on the street.

The truth: Foreclosure proceedings typically take several months from the time you first receive notice of your default and the time your home is put up for sale at a public auction. Then, the new owner must follow state legal procedures to evict you, which requires at least some notice (anywhere from 3 to 30 days) and a court order.

Myth #3: When facing foreclosure, your best option is to conduct a short sale.

The truth: A short sale occurs when you convince your lender to let you sell the property for less than you owe on it. The problem is that you have to move out upon the close of escrow, and you therefore give up the opportunity to live in the house for many more months, payment free. See the Nolopedia article "Short Sales and Deeds in Lieu of Foreclosure" for more.

Myth #4: If your home is being foreclosed anyway, there is no good reason to file for bankruptcy.

The truth: If your plan is to stay in your home payment-free as long as possible, bankruptcy can delay the foreclosure auction -- and thus your ultimate move-out date -- by a number of months.

Myth #5: Your home won't be sold in foreclosure while you are negotiating with the bank.

The truth: Once foreclosure proceedings have begun, negotiations with your lender must be successful prior to the date set for the foreclosure sale. Lenders often state right up until the date of a scheduled foreclosure sale that the negotiations are on track, and then pull out at the last moment. This isn't necessarily a deliberate tactic. Rather, it may be a sign of disorganization -- the left hand not knowing what the right hand is doing.

October 2, 2008

The Bailout Legislation Provides More Help For Struggling Homeowners Than Many Commentators Think

Earlier this week, the House of Representatives shot down the Emergency Economic Stabilization Act of 2008, popularly known as "The Bailout". The Senate picked it up, passed easily after adding $100 billion and change in pork to buy some more votes from House Republicans, and the House is now expected to vote on it tomorrow (October 3). Meanwhile, despite predictions of doom and gloom by the folks pushing this bill, life and the stock market go on.

There is much to be said about this legislation from various perspectives -- political, economic, and financial -- but here I want to contradict an oft-expressed opinion: that homeowners facing foreclosure are not being helped by the bailout legislation.

The basic idea afloat out there is that absent a provision in the bill that would authorize Chapter 13 bankruptcy judges to modify residential mortgages and interest rates, the homeowners are being left high and dry. Not true. While such a bankruptcy provision would benefit a portion of the population in mortgage trouble, many more folks facing foreclosure either don't have sufficient income to propose a viable Chapter 13 plan, or just can't afford the legal fees.

While Chapter 13 can also be useful in scheduling missed payments over the course of the repayment plan, many -- if not most -- homeowners can afford to both keep their mortgage current and pay an extra amount into a repayment plan every month to pay off the arrears. Further, if missed payments are the only problem, many lenders are now amenable -- outside of bankruptcy -- to extending the loan period and tacking the missed payments on at the end.

Simply put, Chapter 13 is a relatively narrow remedy in the larger foreclosure context. The language in the failed legislation, on the other hand, would provide much broader relief to homeowners facing foreclosure. Here's why.

Under the bailout legislation, in a large number of foreclosure situations, the federal government will be involved in one way or another. That alone will be somewhat of monkey wrench in the foreclosure gears. But that's not all: All the government agency players will have to have a plan under which they will seek to keep homeowners in their home. This plan will provide a legal basis for advocates and housing counselors to push for meaningful modifications and relief from foreclosure.

While the federal agencies (and mortgage servicers, in cases where the mortgages continue to be privately owned) will have to take the impact on taxpayers into account when negotiating a mortgage workout, they will likely be willing to modify the mortgages down to the market value of the property, or even below, since the legislation prefers that mortgage workouts take place within the context of the HOPE for Homeowners Act as amended by section 124 of the Emergency Economic Stabilization Act. Further, the Government will, where appropriate, facilitate conversion of the old loan into a 30 year fixed-rate FHA insured mortgage as provided for in the HOPE for Homeowners Act.

In short, because of increased government involvement with foreclosures under a mandatory plan that encourages retention of home ownership, many more homeowners will be able to keep their homes than previously, and for those who don't qualify for help, the foreclosure machine is likely to be gummed up beyond all imagination. From my standpoint, this is a very good thing.