September 2010 Archives

September 14, 2010

The Government and Banks May Punish "Strategic Defaults"

What Are Strategic Defaults?

A number of articles have recently appeared in leading newspapers and magazines reporting that more and more people are engaging in what they call "strategic defaults," defined as not paying your mortgage when you can afford to do so.

The typical story involves a family with a decent income who bought into the housing market when it was high and who now are upside down on their mortgage payments. Rather than continuing to the keep the mortgage current, this family decides to remain in the home without paying the mortgage and then moving when forced to do so (usually due to foreclosure).

This tactic is similar to the advice I give clients who would benefit from stopping their mortgage payments in order to save money to use when they must leave their homes. The difference is that most of the people I speak to really can't afford their mortgage anyway (so foreclosure is probably inevitable). By stopping their mortgage payments, these folks are just trying to cut losses and save some money which they'll need to find new housing at some point in the future.

Proposed Government Actions to Discourage Strategic Defaults

It is not against any law to stop paying your mortgage, whatever the reason. However, the banking industry is pressuring lawmakers and the government housing entities (Fannie Mae, Freddie Mac, and the Federal Housing Administration) to punish people who have engaged in strategic defaults.

Effective October 1, 2010, Fannie Mae will not purchase any mortgage made to a person who has engaged in a strategic default within the past seven years, and Freddie Mac is expected to follow suit. Since almost all mortgages are purchased Fannie or Freddie for securitization and resale, if this happens to you, you will probably be banned from the home mortgage market for seven years.

And it gets worse. The U.S. House of Representatives has passed a bill [H.R. 5072, FHA Reform Act of 2010] that would deny insurance under the Federal Housing Administration to anyone who has engaged in a strategic default. Since FHA insurance is a requirement for many mortgages, this law (if passed by the Senate) might prevent you from obtaining a new mortgage loan -- forever.

Distinguishing Between Strategic Defaulters and Truly Distressed Homeowners

But how will "strategic default" be defined by the law? The House bill leaves the definition of "strategic default" to the HUD Secretary. But figuring out what is and isn't a strategic default won't be an easy task. What if you obtained a modification "in good faith" but then purposely re-default? Do you need to show proof of unemployment or other hardship? If differentiating between strategic defaulters and truly distressed borrowers were an easy task, laws would be better able to distinguish between the two groups. But it's not an easy task, and the laws are unlikely to do a good job of distinguishing between the two groups. 

Next up: Using the loan modification process to avoid a "strategic default" accusation.

September 7, 2010

How the Modification Process Can Help Even If You Can't Modify Your Loan

The fact that the Making Home Affordable Modification Program might not work for you doesn't mean you can't benefit from it. (To read about some of the reasons the program isn't working, see my previous blog post Why Hasn't the Make Home Affordable Program Worked?)

You Can Save Money by Not Making Mortgage Payments

First of all, while you are engaged in the modification application process, you won't be expected to pay your mortgage. (In fact, if you are paying your mortgage, many banks will refuse to entertain your modification request on the ground that you obviously don't need it. Talk about a Catch 22!) And as long as you do your part in the modification process -- which means completing and sending all requested paperwork -- most lenders will suspend any foreclosure proceedings they have already initiated.

Delays in the Process Means More Time In Your Home, Payment-Free

If you have decided to use delay as a money-saving tactic by living in your house payment-free as long as possible (see The Foreclosure Survival Guide, by Stephen Elias (Nolo), Chapter 9), misplaced paperwork and repetitive requests for certain documentation will contribute to the delay and provide you with an opportunity to save another couple of months (or more) of mortgage payments. While some lenders may decide to push forward with foreclosure even while they are negotiating with you, most won't. If your modification efforts ultimately fail, but the process takes six months (during which you don't make mortgage payments), your net savings may  be greater than if you received the modification in the first place.

Of course, for people who desperately want to keep their homes, money saved during the modification process won't keep you in your home (assuming you ultimately fail to get the modification you need). But if you are resigned to leaving your home sooner or later, a long and messy modification process gives you time to amass a not-insignificant amount of money to find new shelter when it becomes necessary.

Some of you may consider me overly cynical for suggesting that you take advantage of the modification process in this way. However, as I consistently remind people, the home mortgage industry is run for the benefit of the investors and has never been known for its interest in the well-being of its borrowers, so there is no particular reason for you to be concerned about its health and welfare.

Next up:  How home modifications can help homeowners avoid an accusation of strategic default.

September 3, 2010

What HUD-Counselor Shortages Mean for Home Loan Modifications

When the Making Home Affordable Program was launched, the Department of Housing and Urban Development (HUD) had a pretty good network of counselors in place. Not only were these counselors free of charge and highly trained in the ins and outs of mortgage modification procedures, but they would advocate for the homeowner in seeking the best available modification under applicable regulations and policies. Where banks might give modification seekers the cold shoulder, HUD-approved housing counselors had back channel connections that would push the request forward in a reasonable amount of time.

For these reasons, the second edition of The Foreclosure Survival Guide (which I wrote about the same time as the Making Home Affordable Program launched) strongly recommends that you hook up with a HUD-approved housing counselor to help you deal with your bank under its--and the Making Home Affordable--guidelines.

New Landscape: Not Enough HUD-Approved Counselors

Unavoidably, the number of people seeking assistance from HUD-approved housing counselors ballooned with the advent of the Making Home Affordable Program, and from all accounts HUD's housing counselor program has not kept pace. My clients have consistently reported that working with HUD counselors provides little or no advantage over working directly with the bank, and that counselors, like banks, lose paperwork and require redundant submissions over a long period of time without any tangible results.

Old Advice May No Longer Hold True

In short, my previous universal answer to people facing foreclosure ("call 1-888-995 HOPE and hook up with a HUD-approved housing counselor") may no longer be operative in all -- or even most -- cases. On the other hand, you have little or nothing to lose by starting with a HUD-approved counselor, provided you approach the relationship with a tad of skepticism. And my advice in The Foreclosure Survival Guide about not paying for modification help still holds. In most cases it won't help you to hire a lawyer or real estate broker to assist with your modification request. The fact is, too many people are seeking modifications for most banks to respond in any reasonable time frame.