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What Homeowners Should Know to Stop Foreclosure- Speaking Your Lenders Language
Financial literacy is the means of empowering consumers to make informed financial decisions through exposure to accurate and timely information. In no other area is the void of accurate information more evident that in the area of foreclosure. The national foreclosure rate is at the highest level since the Great Depression. Families fall behind on the mortgage payments because of illness, job layoffs, business failure, divorce and marital problems, and bad money management decisions. Foreclosure and the loss of the home is the usual result. Foreclosure is financially and psychologically devastating to the stability of the household. This article provides information to expose homeowners to the financial principles of loss mitigation. Loss mitigation is essential to asset protection because it provides the borrower with information necessary to make good decisions. Learning the programs or "tools" available as an alternative to foreclosure is the key to preserving home ownership. For example, If I told you that the mortgage servicing industry reports average loss of $20,000 to $30,000 per foreclosure, then you may be inclined to believe that foreclosure is not an efficient and cost effective means of collections for the lender. According to Vic Draper, President of Universal Default Services, "33% of all mortgage defaults that go to REO never made contact with the borrower!" The lender does not want your home and will work out a financial alternative if you speak their language. LOSS MITIGATION TOOLS A homeowner should know and understand options available during times of crisis. It makes the difference in gaining ground in challenging situations. A point well presented by Gerry Spence, legendary attorney and best selling author of "How to Argue and Win Every Time," a book I first bought as a young attorney and have since read numerous times. Spence stresses that you cannot make the winning argument if you are speaking English and the other person is speaking French. Parlez-vous Francais? The following financial tools act as a safety net that allows for a quicker recovery. The Department of Housing and Urban Development (HUD) has been instrumental in establishing guidelines to assist homeowners experiencing financial hardships. The goal is to offer financial alternatives to foreclosure, while allowing lenders to make determinations based on certain risk criteria. Lenders also benefit from the prevention of losses due to foreclosure sales. Without these programs, millions of people would lose homes each year. FORBEARANCE PLAN Immediately contact the lender to report a temporary loss or reduction in income and signup for a forbearance. A forbearance plan is designed to bring payments current over a period of time by paying a full payment each month, plus a partial payment on the delinquent amount. An initial down payment is required. Most lenders have a forbearance program. However, you must be diligent in requesting forbearance even if it means speaking with a manager with authority to approve the plan. Request that the approval be sent to you in writing. Affordability An important subsection in acceptance of forbearance is the probability of successfully completing the plan. It is easy to agree to any repayment plan when desperately trying to stop foreclosure. You will be happy to stop the process by any means necessary. I have had clients who agreed to ridiculous repayment plans that they obviously did not have the income to cover. In some cases, it appeared that the lender pulled numbers out of the sky without gathering information on the homeowner's ability to repay. This is poor mitigation technique that will normally count against the client as a broken promise to pay and often leads to the decision to sell the property rather than take additional risk with the homeowner. During the early part of 2004, a prospective client contacted Save Your Home two days before his home was scheduled for sale. Despite time limitations, we had a very good relationship with this particular lender and agreed to intervene on the homeowner's behalf. He had $8,000 to use as a down payment to stop the sale but the lender refused to accept it because a forbearance plan had been put in place three months earlier in which our client had paid a $6,500 down payment, but failed to make the subsequent payments under the terms of the agreement. This made him a bad risk for reinstatement and foreclosure seemed the most prudent financial decision for the lender to recover its arrearage. However, the truth of the matter was the homeowner agreed to a plan that he could not afford to pay. It was not a good plan because it was based on a higher monthly income due to miscalculations where a quarterly bonus should have appeared on the financial status report. His monthly income had been overstated by $600 per month. When it was time to make the other payments, he was rich on paper but was cash poor. He did not have the income and as a result violated the repayment plan. We convinced the lender to take another look at the numbers. In the end, the lender accepted a $2,500 down payment and modified the terms of the loan. The client was able to keep his home because he correctly reported his income to the lender. Make sure that you report your income accurately so that you can afford the repayment plan offered to you. LOAN MODIFICATION When the financial loss is due to an illness, death or loss of a spouse, or unexpected increase in expenses, (e.g. tax levy, sick child, or other permanent hardships), talk to the lender about a loan modification. A loan modification changes the terms of the loan to lower the payments. Documentation of the hardship will be necessary. Loan modifications are granted frequently. Still, you must aggressively negotiate with the lender. Refer to examples in case study. REVERSE MORTGAGES This is a type of home equity loan that allows you to convert some of the equity into cash while retaining ownership. If you are 62 or older and are "house-rich and "cash-poor," a reverse mortgage is an option to consider. Consult with your family, attorney, or financial advisor before applying for a reverse mortgage. Knowing your rights and responsibilities as a borrower may help to minimize financial risks and the threat of foreclosure. DEED IN LIEU OF FORECLOSURE If turning over the home is an option, contact the lender to voluntary release the deed to the property with the stipulation that the lender agrees not to start or complete foreclosure proceedings. Many lenders will agree to this arrangement since it gives them possession of the property minus exorbitant legal fees and court costs. Further, request that the lender remove some or all of the missed payment reports to the credit bureau. If not, threaten to file bankruptcy or to fight to keep the home. Get all agreements in writing on company letterhead. PARTIAL CLAIM A partial claim is an interest free loan available on FHA/HUD loans. To qualify, a loan must be at least 4 months delinquent but not more than 12 months. If approved, the partial claim is repaid after the first loan has been paid in full. SHORT REFINANCE The area of loss mitigation is always changing in order to address new challenges within the economy. Because of a tremendous loss of jobs in some areas, property values have steadily declined. A new loss mitigation tool that some innovative lenders are using to address the new economy is called the short refinance. Remember that refinancing out of foreclosure is extremely difficult because of loan to value restrictions that may not be sufficient to pay off the existing mortgage and cover closing costs. If the property value has decreased, certain lenders and investors may be willing to accept less money. You must agree to an in home inspection and provide the normal loss mitigation package for approval. The lender closes a new mortgage loan to pay off the mortgage that is in foreclosure. If you have a second mortgage lien, this lien holder is not included in this deal and will still have the same loan amount. SHORT SALELenders are in the business of lending money not owning houses. The lender will allow you to sell the home to someone and accept far less than what you currently owe on the mortgage. This is also called a short payoff because the lender agrees to cancel the note and mortgage as a lien on the home. The lender may want to perform an in home inspection to determine the property's condition and value. Cooperation with this request by allowing access All of these programs may not be right for everyone so you must evaluate your situation to decide which one will benefit you the most. For more information, visit www.syhuniversity.com for a free copy of the loss mitigation book, How to Save Your Home. Herbert Addison, JD is a former consumer law attorney and is President of Save Your Home, Inc., a nationally acclaimed loss mitigation firm located in Columbia, South Carolina. Mr. Addison and Michael Taylor, Sr. are co-authors of the book, How to Save Your Home, that teaches homeowners how to properly negotiate foreclosure alternatives with mortgage lenders. Mr. Addison has also been published in Service Managment, the leading default management magazine to the mortgag servicing industry. He can be reached at 877-212-1880. His business websites include http://www.syhuniversity.com; http://www.contacttheexpert.com and http://www.saveyourhome.info Email: taddison@saveyourhome.info.
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