Message to Distressed Borrowers: You Have to Help Yourselves
http://yourmortgageoryourlife.wordpress.com/2008/11/13/message-to-distressed-borrowers-you-have-to-help-yourselves/
Message to Distressed Borrowers: You Have to Help Yourselves
By Anthony M. Freed
So you find yourself in tough times - a job loss, health problems, falling property values, or unexpected financial distress. Whichever the circumstances that may have brought you to this point, the facts are you find yourself falling behind on your mortgage payments, and the time to make some tough decisions is upon you.
Unfortunately, once you have reached this stage, the options available to you are few, and each has their own inherent advantages and disadvantages. Depending on your particular situation, one or another of these options may prove to be more advantageous to you down the road - or at least may leave fewer black marks on your credit report.
If you are a borrower under threat of foreclosure, and you are looking for an easy, pain-free resolution, I feel obligated to tell you now that there is no such option available to you. My hope is that the Government will somehow find a way to help distressed homeowners avoid foreclosure by requiring lenders to negotiate in good faith any and every alternative, but so far there seems to be little more than rhetoric available.
As it stands, the banks and financial institutions will be the only ones receiving anything in the way of support during this crisis. Homeowners will be left to the mercy of the lenders, who will decide for themselves whether or not they want to use our tax dollars to stop the tsunami of foreclosures, or whether they just want to sit on our money and pad their pockets with hundreds of millions of dollars in unjustifiable bonuses.
I think it’s safe to say we are all on our own for now.
What are the choices available, and what are the pitfalls? Obviously there is foreclosure, the least appealing of our options. Preferably, we are looking at alternatives to foreclosure, or a troubled loan workout as the industry refers to them.
Of these options we have a few to choose from, listed generally in order of preference to the borrower’s position (although each borrower’s situation is unique and the consultation of a professional long before you are facing foreclosure is highly recommended): the Refinance; the Modification; the Short Sale; and the Deed in Lieu of Foreclosure.
Today we cover the Refinance: Probably the device most understood by borrowers, the refinance entails entering into negotiations with a lender on a completely new mortgage note, with the potential to have a completely different term (the period in which all principle and interest payments must be satisfied), interest rate (the cost of financing the mortgage), points (the cost to secure the rate), closing costs (the fees paid to secure a mortgage, often requiring some out of pocket expenses such as a new appraisal), different monthly payments (principle, interest, taxes, and insurance - PITI), and different Private Mortgage Insurance (PMI) requirements (typically required on any mortgage with a Loan to Value (LTV) greater than 80%).
Refinance is the obvious first choice for everyone involved. The problem is that the vast majority of troubled mortgages were structured in such a way as to make refinance all but impossible. This is, of course, completely contrary to the “expert” advice the borrower probably received from the Broker or Loan Officer - not to put the blame all on their professions, as most were honest people who were pressured by management heavy-weights to perform or hit the road.
It was management at the most senior levels at the banks and mortgage companies who failed to employ proper risk-abatement in their race to be number one in the market by volume: Volume x Fees = tons of money in their pockets by cutting corners.
The loans they pushed were mostly high risk loans from 90% LTV to as much as 105% LTV. These loans were booked at the height of the housing bubble, and because home prices did not continue to rise at a ridiculous pace (which is what the risk-abatement models the lenders were using needed to have happen in order to be worth a damn, hence the mess we are all now in as a nation).
The major obstacle to refinance has resulted from rapidly dropping property values that leave most borrowers “upside-down” or “underwater” in their mortgage - this means that the borrower owes more on their current mortgage than the home is currently worth in the open market.
Most of the opinions I have encountered on this subject are completely unsympathetic to the borrower in general; so, if you put no money down on your home, secured an Adjustable Rate Mortgage (ARM), an Interest Only loan (I/O), or a Pay Option ARM (POA), qualified at the minimum payment to get into a bigger home, and now you find yourself unable to make the full payment for pretty much any reason at all, don’t expect anyone to give you any quarter.
Regardless of the circumstances - even those completely outside of your control - you are now automatically lumped into the same category as greedy house-flipping profiteers who gamed the system with multiple loans that left them leveraged to the hilt.
Sorry to break the news to you, but most everyone seems to agree that even if the lender lied to you about the terms or your mortgage and promised that you could refinance into a Fixed mortgage at anytime in the future, it’s considered to be your fault for being a sucker and not looking out for yourself.
Not in my opinion, as I think the lenders are liable for damages to borrowers for breach of fiduciary duty, but conventional wisdom these days seems to be completely unsympathetic to your situation. I highly recommend you don’t go looking for any, especially on internet web forums.
Trust me, it will only be salt in your wounds.
But what of those folks who did put 20% down at the peak, who have now seen median prices drop as much as 50%, and who now find themselves upside-down in their mortgage? These folks played by more traditional rules and now find themselves in a pickle, as the lender who holds the note refuses to refinance them out of their current terms and into the nice 30 year Fixed like they said they would.
Unfortunately, there is not much more sympathy for you than those that took the 100% financing. Sorry, but someone has to tell you.
Even more unfortunate is the fact that the rates on a Conforming ARM(less than $417k in most areas, but may be higher in some high-cost markets) are still more attractive than the current 30 year fixed rate, and they still allow homebuyers to borrow more for the purchase of a home than if they were to apply for the Fixed rate.
This is because a lower initial interest rate translates into a lower initial monthly payment, and thus can translate into a larger initial principle balance while maintaining the current Debt-to-Income ratio (DTI). The lenders only look at your ability to make the payment now, and give little regard to your ability to make the payment after the initial terms expire and the interest rate - and therefore the payment - adjusts to a significantly higher monthly payment than what the borrower can afford.
This is a major reason we are in such trouble now - so no matter how attractive those ARM rates are, my suggestion is that you seriously consider your ability to pay the adjusted rate, and not count on variables like rising property values or a future pay raise at work when considering the best mortgage product for your situation.
If you had put 20% down and now find that you owe more on your property than it is worth in the open market, I am sorry to tell you that there are no easy options for you at this point. The most important thing you can do is to take action before you miss any payments. If you are already behind in your payments, it is imperative that you act immediately to protect your interests.
The longer a borrower who is having, or anticipates having, financial problems that will prevent them from satisfying their contractual obligations as outlined in their mortgage waits to seek help, the fewer the options that will be available to them to prevent a foreclosure. Act now to get help before your credit is damaged.
The first step is to contact your Lender or Loan Servicer. The Servicer of your loan may be different than the lender who originated the loan, and also may be different than the current owner of the loan. This is because many lenders originate a loan and take the corresponding fees, then sell the loan to an investor, or to another lender. They may or may not retain the Servicing rights - which only means they act as the billing service for the note holder - and they may have no authority to negotiate a resolution.
You can waste a lot of time and energy barking up the wrong tree, so take the time to determine who the appropriate party to negotiate with is. If your loan was sold, you would have received a fairly non-explanatory letter to that effect, and you might have noticed you are getting billed by someone you have never heard of.
Once you have identified the correct party to negotiate with, you should make attempts to contact multiple parties within the company through multiple channels - regular mail, email, and by phone. If you want to find the person who can help you, you will need to blitz them with requests, because although the lenders and the Government have unveiled multiple programs to help distressed homeowners under threat of foreclosure, that does not mean they are actually doing them to the extent they like to pretend they are in the media.
Be sure to look for departments that have to do with legal, loss-mitigation, or modification. There will also be well-hidden departments who specifically handle the applications for Hope Now, the Hope for Homeowners, and other nearly-nonexistent programs designed to help homeowners avoid foreclosure. Unless you are lucky enough to be under or completely un-employed, you will probably not find enough hours in the day to jump through all of the hoops and do all of the self-educating you will need to do in order to save your home and credit rating.
Seek outside help.
There are multiple for-profit businesses and not-for-profit and organizations that are actively helping borrowers avoid foreclosure. Caution, there are a lot of scammers out there taking advantage of distressed homeowners, too.
Avoid any program that wants you to walk away from your mortgage, any program that encourages you to delay a foreclosure by filing for bankruptcy, and any program that stipulates you sign over interest-in or ownership-of your home to any other party. This includes any lease/buy-back programs that offer to buy your home and lease it back to you until you are able to repurchase the home in the future.
Although there may be valid options among these listed, generally they prove to be more problem than solution. I highly advise seeking the advice of a lawyer or community legal service prior to signing any contracts or obligating yourself any further.
Finally, if anyone offers you a solution to your current mortgage problem that does not involve some financial pain and loss, I would tend to believe that they are not giving you all of the facts. There are solutions beyond Refinance, as listed above, and articles to follow will address them one at a time in detail.
The takeaways from this article should be that there is some hope for help, and the earlier a homeowner can see the trouble coming and begin a dialogue with their lender, the better chance they will achieve a loan workout with the minimum of pain and loss.
(NEXT ARTICLE: Loan Modifications)
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