Nolo’s Bankruptcy & Foreclosure Blog

[This blog posting contains important updates to The Foreclosure Survival Guide. The updates are presented chapter by chapter. Please email me at selias2 (at) aol (dot) com if you know of any other parts of the book that have fallen behind in this rapidly changing world of housing and finance. -- Steve Elias]
 
Chapter 1: Foreclosure: The Big Picture. The Hope for Homeowners Act: Effective October 1, 2008, the Hope for Homeowners Act implemented a new program designed to help people convert their current loans into FHA-insured, 30-year fixed-interest-rate loans. As of December 15th, this program has not yet gotten off the ground. According to a report by the National Association of Consumer Bankruptcy Attorneys, not even one mortgage has been modified under this program and only several hundred modification applications have been submitted. For more details on the program, see the article on this subject in the Nolopedia, Mortgage Refinancing to Avoid Foreclosure.

Chapter 1: Foreclosure: The Big Picture. The bailout bill: On October 2, the Emergency Stabilization Act of 2008 (the bailout bill) became law. This law allocated over $800 billion to the Secretary of the Treasury to deal with the economy and the housing crisis. Under the Act, the federal government will be pressuring banks and mortgage lenders to participate in the Home for Homeowner's Act by agreeing to replace current high-cost mortgages with FHA-insured 30-year fixed-interest-rate mortgages. To assist in this effort, the new Act modifies the Hope for Homeowners Act by eliminating that Act's requirement that the new FHA-insured mortgages be for no more than 90% of the current appraised value. Now, the current lender can be offered any percentage of the current appraised value that the federal government decides is appropriate (even if it is more than the appraised value).

Chapter 3: Can You Keep Your House? Should You? Options under the Hope for Homeowners Act: Under this new law (effective October 1, 2008), you may qualify to have your current mortgage replaced with a new FHA-insured, 30-year fixed-rate mortgage for the current appraised value of your home (a little more or less depending on federal policies still in development). See Mortgage Refinancing to Avoid Foreclosure in the Nolopedia for details.
 
If you are way upside down on your mortgage, this would mean a dramatically lower payment. However, there is a catch: Your ability to take out a second mortgage on the house will be greatly restricted. Also, if you acquire some equity in your home later on and want to refinance or sell the house, the federal government will be entitled to a share of the proceeds. If you sell the house within a year after issuance of the mortgage, the federal government will get 100% of the proceeds. This federal share will decrease to 50% over a five-year period and will remain at 50% after that. If your main goal in keeping your house is to build equity, this might not be such a good deal since you'll have the federal government as an equal "partner" (at best). On the other hand, if you are not concerned about building equity but rather want to keep the house as a good place to live for you and your family, the Hope for Homeowner's Act can help you realize that goal.
 

Continue reading "Important Updates to The Foreclosure Survival Guide" »

Earlier this week, the IRS announced a new policy designed to help homeowners refinance or sell their homes.

Under this policy, homeowners whose homes are burdened with an IRS lien for unpaid taxes can apply to have this lien made secondary to liens by a lending institution that is refinancing or restructuring a loan. The policy would also allow the IRS to reduce or remove the lien in cases where a short sale is being proposed. These policies would make it easier to obtain loans since the lender's liens would be first in line.

Undoubtedly, this policy will help some homeowners in some situations and that's good, but it should be looked at as just another Band-Aid. Only if a truly systemic program is implemented to address the root causes of the foreclosure morass will the crisis be solved.

It may be that we have a case of Humpty Dumpty here -- everything was fine as long as the real estate bubble continued to expand, but once housing fell off the proverbial wall, nothing can put it back together again.

In the last several months of 2008, the federal government and various private lenders have offered a variety of voluntary mortgage modification programs. The main ones are:

• the HopeNow program (created in 2007 by a consortium of private lenders)
• the Hope for Homeowners program (created by Congress as part of the Housing and Economic Recovery Act of 2008)
• a program recently crafted by the U.S. Treasury Department which is only available to homeowners with mortgages owned or insured by Freddie Mac or Fannie Mae (which greatly resembles the HopeNow program), and
• lender-specific modification programs offered by such entities as IndyMac, Bank of America, Citibank, and Wells Fargo.

Statistics released in a report by the National Association of Consumer Bankruptcy Attorneys show that these modification programs are themselves little more than a scam. Few modifications have occurred under these programs, and those that have are insufficient in terms or reductions to stem the tide of foreclosures other than on a very temporary basis. 

According to the NACBA report, many are the reasons why these programs have failed. Some of them are so insufficiently staffed that they're not much help while others offer the lenders insufficient incentives for them to agree to the modifications. Still another reason for failure is that many mortgages are owned by a variety of investors and it's impossible to bring the various investors collectively on board for any particular modification.  

Based in part on the failures documented in its report, the NACBA is pushing hard for a modification of the bankruptcy laws by Congress to allow Chapter 13 bankruptcy judges to reduce mortgages on principal residences to the value of the residence. Other sources indicate that such legislation will likely be introduced early in the Obama administration's term and will likely be successful.

While Chapter 13 bankruptcy is the obvious program to accomplish these modifications, many homeowners are unable to complete a Chapter 13 bankruptcy, which requires compliance with a repayment plan for a three to five year period. And, in many cases, homeowners won't qualify for Chapter 13 for a variety of reasons.

In my opinion, the bankruptcy legislation that is sure to be introduced in the next Congress should also include a program under which a mortgage can be modified in Chapter 7 bankruptcy. There is no inherent reason why Chapter 7 couldn't accomodate mortgage modifications -- as it stands, Chapter 7 already offers a procedure where the court determines the value of cars and other personal property for the purpose of deciding on a redemption price. This same procedure could be used to determine real estate values for the purpose of modifying mortgages. Allowing Chapter 7 bankruptcy judges to modify mortgages would greatly increase the number of homeowners who would be helped in bankruptcy court.  

After years of consumer complaints, congressional hearings, and newspaper accounts of unfair (but not illegal) practices by the credit card industry, federal regulators today (finally!) adopted new rules to protect consumers from such practices. Read about it here, here, and here.

Here are the highlights of what will be illegal as of June 1, 2010:

1. No interest rate hikes on existing balances. Your interest rate is is locked in at the moment of purchase, and must remain so as long as you keep current on your payments (see below). Once you're 30 days late with a payment, you lose this protection. The interest rate on future purchases, of course, can be whatever rate the bank wants.
2. No more "Universal Default". This is a biggie. This is where the credit card company raises your rate when you're late paying some other bill (for example, your car payment), and that late payment shows up in your credit report, so they raise your rate based on the so-called "universal default" clause. If your card does this, it can continue to do so for another year and a half and then no more, thanks to the rules passed today.
3. More time required to pay between the statement date and the due date. In their quest to make payments late, some cards give you as little as 15 days from the statement date to the due date and then you're late. The new rules would require 21 days.
4. No "Double Cycle" billing. Banks like to use your current and previous monthly balances in computing the finance charge. Under the new rule, banks can't count paid-off balances from prior months in assessing finance charges for the current month.
5. Payments must be applied fairly. Banks can no longer apply your payments only to the lowest interest rate balances while higher rate balances, like those for cash advances, go unpaid.

All of this may seem like common sense and simple fairness. And it is. But remember, it won't be the law until July 1, 2010.

The litany of things listed here will still be legal until then... so, for banks it's woo hoo! pillage away! git while the gittin' is good and try to hijack the last of poor people's savings to cover the bank's own sorry balance sheets, the product of its own regrettable debt-fueled binges!

Fortunately, there are sites like billshrink.com that let you see which card companies already comply with these fairer practices.

The fact that these regulations are only now being put in place indicates the indifference that federal regulators have felt up to this point in protecting consumers. By giving billions to bankers, we know they care about them. Now they've thrown consumers a bone, too.

But we don't get it for another year and a half.