Nolo’s Bankruptcy & Foreclosure Blog

If you're one of the more than 1.5 million U.S. families that may face foreclosure this year, you need information you can trust and use -- now. That's why Nolo has built a website where you can read and browse the entirety of my book, The Foreclosure Survival Guide, for free.

Don't waste time or money on dead-end solutions to your pending foreclosure. Take a look: http://www.nololawlibrary.com/foreclosure.

Nothing gets my blood boiling faster than when I see struggling homeowners pay thousands of dollars to hire someone to represent them in a mortgage modification negotiation. My advice is always the same: attempt to hook up with a non-profit HUD-approved housing counselor and dump the commercial service. I also suggest they demand their money back and consider reporting the service to their state's attorney general and the Federal Trade Commission since these services are increasingly illegal.

From the time the foreclosure rates started skyrocketing, self-styled foreclosure-rescue operations landed on at-risk homeowners like locusts on wheat fields. When people still had equity in their homes, the operators of these scams would find ways to separate the mark from his or her home ownership -- supposedly as a temporary means of dealing with the foreclosure. It didn't take long for the home's equity to end up with the scammers and the homeowners to end up on the street.

As home values continued to plummet and homeowners were increasingly underwater on their mortgages, the foreclosure rescue operations turned to charging an up-front fee -- typically in the low thousands -- to replace their previous equity-stripping practices. When modification results were not forthcoming in the face of looming foreclosures, homeowners were told to be patient and that everything was on course. At some point, the homes would be sold in foreclosure and calls to the "rescue" company would go unanswered. 

Quick to respond to these obvious scams, many states have passed new legislation that, among other things, prohibited the collection of "foreclosure rescue" fees prior to the delivery of the service. In addition the Fair Trade Commission recently announced lawsuits in 23 states against perpetrators of these scams. Unfortunately, as is generally true with consumer protection legislation, lawyers have for the most part been exempted from their provisions -- and law firm ads on radio, cable TV and the Internet exhorting people to hire them to handle their modification activities have mushroomed.

Although I have no proof, the timeline of these developments tells me that at least some of these attorneys are simply fronting for the same companies that were scamming homeowners all along. But even if the attorneys are not fronting for foreclosure rescue scams, they might as well be -- as I point out below.

Continue reading "Beware of Commercial Mortgage Modification Services" »

Sometime this week, the House is expected to vote on H.R. 1106, the bill that would allow Chapter 13 bankruptcy judges to modify residential mortgages. Right now, judges cannot modify mortgages attached to the bankruptcy filer's principal residence.

Without question, an enormous number of homeowners facing foreclosure would be able to keep their homes now and in the future if the principal owed on their mortgage could be crammed down to the home's current market value in a Chapter 13 bankruptcy (and the interest rate reduced to the bare minimum). Not only would foreclosures be avoided, but Chapter 13 itself would become much more available as a remedy, since many Chapter 13 plans fail because of the non-affordability of the filer's mortgage payments.

Previously, I've argued that Chapter 7 judges should also be allowed to modify mortgages, since so many more people file Chapter 7 than Chapter 13. However, half a loaf is better than none, and allowing Chapter 13 judges to bring mortgages into line with the value of the home would not only benefit the filer but would also provide a powerful brake on the deterioration of the residential real estate market.

You can lobby your representative by calling 1-877-354-4958 between 9AM and 6PM Eastern Standard Time only. You will be given specific suggestions for the substance of your phone conversation and prompted to enter your zip code, but the basic idea is that you favor passage of the bill.

Depending on your Congressional district, your call will be routed to the office of your Senator, your House Rep, or the White House.

In earlier blog posts, I've tried to keep up with the various foreclosure prevention programs offered by major mortgage lenders. Every major mortgage lender has some sort of policy in place to handle requests for mortgage modifications. Some polices require that you be at least three months behind on your mortgage -- Fannie Mae and Freddie Mac among them. Other lenders -- Bank of America and Indy Bank among them -- don't require that you be delinquent. Some lenders will work with you if you are in bankruptcy (FHA-insured mortgage holders among them) while others won't. Unfortunately, there is no standard, across-the-board modification policy.

As statistics mount regarding the lasting effect of modifications, it's clear that many people simply cannot afford their house, even at the level of payment provided for by the modification. In fact, according to information published by the National Association of Consumer Bankruptcy Attorneys in December 2008, payments actually increase under many modification arrangements and, overall, voluntary mortgage modification programs just don't work for a variety of reasons. A recent article in BusinessWeek makes a persuasive case that the banking industry has made the foreclosure situation worse through its lobbying efforts to stall for time in the hope that home values would recover on their own.

Many consumer-oriented commentators, including NACBA, make the case that Chapter 13 bankruptcy judges should be allowed to modify mortgages on a case-by-case basis. The Heritage Foundation, on the other hand, makes a strong argument against bankruptcy-originated mortgage modifications. While I reject much of the reasoning in the Heritage Foundation article, for reasons stated in a previous post, I don't think Chapter 13 cram-downs alone will provide much of a solution; I do think that allowing cram-downs in Chapter 7 bankruptcy would go far to prevent foreclosures.

In an article published in the New York Times on Friday February 13, Alan Zibel reports that the major mortgage owners have put a hold on foreclosure evictions, pending the much-anticipated announcement of the federal foreclosure mitigation policies. According to Zibel, Fannie Mae and Freddie Mac, JPMorgan Chase & Co., Morgan Stanley, and Bank of America Corp. have all extended non-eviction policies originally put in place shortly before Christmas until sometime in early or mid-March. Or, for some lenders, at least until President Obama announces the new federal policy -- currently expected to take place on Wednesday, February 18th.

Details of the new policy have been hard to come by in advance, except that the program is expected to cost up to 50 billion dollars and will not require that eligible homeowners be behind on their mortgages. One leak has it that the program will involve direct payments by the federal government to effect reduction of mortgage payments to 31% of the homeowners' income. The answers to the big questions -- who will be eligible for these payments and how eligibility will be determined -- are still wrapped in mystery, except that the program is expected to only apply to homeowners who have acted in good faith when acquiring their troubled mortgage. Good luck on that one. Any policy that attempts to discriminate between the deserving and the undeserving is bound to create immense resentment among those who are left out. And, at least in some cases, the resentment will be well-founded.

[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" »

Yesterday a client asked me whether he should start defaulting on his mortgage payment. He got word from his lender that his payments might be substantially reduced in the future, but only if he was at least three months behind when he applied for the modification program. More than anything, the idea that you have to miss payments to get help with your mortgage defines the trouble we are in.

On November 11, Secretary of the Treasury Henry Paulson announced just such a plan for mortgages owned by federal housing agencies Freddie Mac and Fannie Mae. Unfortunately, these entities own only a small percentage of the outstanding sub-prime mortgages -- the type that give rise to most of the foreclosures. According to Sheila Bair, head of the Federal Deposit Insurance Corporation (the regulator of most of the nation's banks), this policy only addresses the tip of the foreclosure iceberg. The FDIC is pushing its own program that may prove to be the centerpiece of the Obama plan.

According to the Treasury announcement, your Freddie or Fannie mortgage payments will be reduced to 38% of your pre-tax income by lowering your interest rate and extending the term of your mortgage. Oddly, this 38% figure is nearly 10% higher than the standard ratio previously used by lenders to determine affordability. In other words, your modified Fannie or Freddie mortgage will be technically unaffordable by a large margin. Huh!

In tandem with this new Fannie and Freddie mortgage program, the federal government continues to offer (under the HOPE for Homeowners Act) 30-year fixed rate FHA-insured mortgages for homeowners at risk of foreclosure. While you don't have to be behind on your payments to participate in this program, it does require your mortgage owner to voluntarily cash out the current loan at something short of your home's current appraised market value (just how short will likely range between 3% and 10%, due to amendments included in the bailout bill). So far, very few lenders have stepped up to the plate. And homeowners aren't all that thrilled either since they would have to share at least 50% of any future equity they develop with the federal government.

It's important to keep in mind that federal foreclosure mitigation policies are being fashioned by a few individuals who likely will not be around on January 20, 2009. Also, the Democrats' majorities in the House and Senate will be enhanced. As the economy continues to deteriorate and a new government takes hold, radical -- and unpredictable -- changes in the federal government's approach to the foreclosure epidemic are virtually guaranteed.

If you want to know about what modification opportunities are available for your mortgage right now, whether under the federal programs or under other programs operated by private mortgage owners, you'll need to find out who's calling the shots and what type of plan they offer. Consider using a free HUD-certified housing counselor to help you get this information. You can find a counselor in your area by calling 1-888-995-HOPE.

While the federal government mulls its approach to reducing foreclosures, California's governor is moving forward with new legislation designed to encourage lenders to aggressively modify mortgages, according to Carolyn Said, staff business reporter for the San Francisco Chronicle. The new law would apply to owner-occupied homes and would, in effect, mandate an additional 90-day delay to an already lengthy foreclosure process -- unless the lender seeking the foreclosure has an "aggressive modification policy" in place.

Among other things, such a policy apparently would require modifications downward so that the borrower would not have to pay more than 38% of his or her income, and would offer options such as extending the loan period to 40 years and deferring some of the principal balance until the home is sold or refinanced. The basic idea here is that increasing the foreclosure process by 90 days would be so financially detrimental to foreclosing lenders that they would choose the modification route.

Other states are taking similar actions. For example, both New York and Massachusetts have recently enacted laws requiring 90 days advance notice before foreclosure proceedings can be commenced. As with the proposed California legislation, these 90-day advance periods make foreclosure more expensive (because the lenders typically receive no payments during these periods) and may encourage them to also adopt "aggressive" modification polices.

There is no question that the modification landscape is shifting radically under new state laws, but the big changes are yet to come. Under the federal bailout bill, the Treasury Department and government housing agencies must have plans in place by December 2 designed to keep people in their homes. These agencies will undoubtedly be conferring with the Obama transition team on these plans, and the plans that emerge can be expected to have the Obama stamp of approval.

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.

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.

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.

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 federal government takeover of the two major government housing loan entities
• the implosion of the finance industry
• a complete collapse of the residential loan market
• continued high numbers of foreclosures 
• the inability to accurately determine residential real estate values
• super-tight credit markets
• the likelihood of a deep recession, and
• tapped-out consumers who can't make good on any of their debts, mortgages included.

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.