New Options for Homeowners Facing Foreclosure
Homeowners unable to meet their current mortgage payments may have a new remedy. Many lenders are showing a new willingness to reduce the principal owed on the property by lowering or “writing-down” the amount. The reduction brings the mortgage loan in line with current property values and borrower incomes. As foreclosures rise so, it seems, does lenders’ flexibility in offering this option: Principal write-down was used in 30 percent of private loan modifications in 2011, as opposed to only 2 percent in 2009.
Foreclosures Will Rise in 2012
Some real estate markets may look like they’re turning a corner, but 2012 foreclosure statistics may not look that different from the numbers in 2011. RealtyTrac reports that there are 1.5 million homes in foreclosure, and 3.5 million delinquent mortgage accounts. The big question is what will happen with the 10 million properties with “underwater” or “upside down” mortgages, where loan balances exceed property value.
We’ve previously reported on the holding pattern in foreclosure cases in which homeowners get a lawyer and respond to foreclosure with a defense. It’s important to remember, though, that the problem doesn’t go away. A foreclosure case will get back on track at some point, with the lender selling or taking back a home, or working with a distressed owner to find a solution.
A Nonprofit Takes the Lead in Cutting Losses
A Massachusetts non-profit, Boston Community Capital, is trying to bring banks and borrowers to the table, keeping owners in their homes, and limiting lenders’ losses when compared to an end game of foreclosure. Many owners could never afford their mortgages in the first place, and property values have fallen. Lenders may work with a borrower, or investors such as Boston Community Capital may buy homes at market prices and resell them at prices buyers can afford.
Bank of America started a program with Boston Community Capital, allowing distressed owners to sell their homes and buy them back through the non-profit. There is real hardship among owners, and strategic defaults are relatively rare.
Foreclosure, Bankruptcy, and Keeping Options Open
Foreclosure is expensive for all involved, and lenders are increasingly working with borrowers even if the last drastic step of a foreclosure or a related bankruptcy is underway. Wendy Mara, a Florida attorney whose firm represents clients in bankruptcy and foreclosure cases, sees owners finding foreclosure alternatives. Mortgage workouts are possible because even if there’s a pending foreclosure case, chances are the last thing the bank wants is to end up owning yet another home.
Mara says owners have to work to make foreclosure alternatives a reality, however. An owner isn’t making loan payments once a lender files a foreclosure case. Mara explains, “Owners should take the money they would be using for mortgage payments and put it aside.” Mara says having those funds can make a real difference in lender negotiations, and she notes that an owner’s stash can add up quickly.
Lenders may also be more open to private loan modifications because they may fare better on their own terms than if the owner ends up filing for bankruptcy. Loan modifications are also done within bankruptcy cases, and the bankruptcy courts mean business. Mara explained, “The success rate for mediation in bankruptcy is higher than in state foreclosure cases.” For example, in a bankruptcy case, a borrower may be able to strip off a second mortgage, meaning the lender gets nothing. There’s motivation to find acceptable terms before the bankruptcy court steps in.
Finally, remember to stay cool and take control when faced with a financial crisis, and act sooner, rather than later, in seeking your lawyer’s help. There’s no single answer, and each person’s case is different. The right lawyer can help you sort out the options and decide on the solution that is right for you and your finances. It may even mean keeping your home.