Your Lender Doesn’t Want Your Home

If you’re in danger of falling behind on your mortgage, or if you’re already late, you may be skeptical about your lender’s willingness to help.

And if you take the advice I typically offer — call the lender as soon as possible and ask for help — you could find yourself stymied by the lender’s bureaucracy or even told to come back when you are really behind in your payments.

I’ve heard from several borrowers who were blown off by their lenders in this way.

The homeowners got a response of, ‘Don’t bother us. Come back when you’re two months behind “.

Other borrowers can’t even find someone to talk to them.

It can be intimidating and frustrating, you may be trying to reach a company in a different time zone (with limited phone hours), or you may wind up in the collections side of the process . . . where all you’ll hear is “pay up, pay up.”

It’s no wonder many people become convinced their lenders are more interested in taking back their homes than in helping borrowers to keep them.

So I’m here to tell you, with the help of experts who know the mortgage-lending business, that your skepticism is almost certainly unfounded.

To put it succinctly, The last thing the lender wants is your house.

Furthermore, if you can get to the right people, you have a lot more options for saving your house than you did a decade ago.

Lenders tend to look at loan modifications in a much more friendly way than they did 10 years ago. The lenders don’t want these homes back in foreclosure.

Why lenders don’t like foreclosure
To understand why these things are true, it helps to know a bit about the lending process, as well as what happens in foreclosure:

Most loans are made — then sold. The majority of residential mortgages are quickly packaged into securities and sold to investors. The company that accepts your payments is what’s known as the servicer. The servicer takes a slice of your payments as compensation, then forwards the rest into a pool of cash that’s used to pay dividends to the investors.

As you might guess, the servicer’s primary interest is in making sure your payments keep coming. If you default and wind up in foreclosure, any proceeds from the home sale go to the investors, and the servicer has lost its income stream from your loan. (Still, predatory servicers do exist. See “When mortgage firms don’t play fair.”)

Even if the loan isn’t sold and is still held by the original lender, foreclosure remains a bad outcome.

Lenders are going to lose money holding that house, they have to; maintain it, insure it, market it . . . until it sells.

Meanwhile, they’re not getting payments for the loan. Whatever equity remains after the home is sold and all the costs are paid is typically returned to the borrower.

More homeowners are in trouble
Often, though, there isn’t any equity. If there had been, it’s likely the homeowner would have refinanced the house or sold it before foreclosure became necessary. So the lender winds up losing money on the deal. Which leads us to important fact No. 2:

The number of “underwater” homeowners has increased. Programs to increase the percentage of families that own homes means more homebuyers have small or nonexistent down payments. Many have signed up for interest-only loans that don’t build equity, or so-called option mortgages, which allow them to pay so little that their mortgages actually increase in size over time.

Those factors were among the reasons that nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005.

Recent borrowers were even worse off, according to the study by First American Real Estate Solutions, with 29% of those who bought or refinanced in 2005 having zero or negative equity. And 15% were underwater by 10% or more.

And that was back when the real estate market was still booming in most areas. The percentage of folks who can’t sell their homes for what they owe has doubtless increased as home prices have stalled or fallen in many markets. That just increases the foreclosure risks for lenders.

Lenders getting pressured to help
Finally, important fact No. 3:

The pressure is on to fix rather than foreclose. Several years ago, the two agencies that buy most home loans — Fannie Mae and Freddie Mac — and the Federal Housing Administration started leaning on lenders to come up with programs that would help troubled borrowers keep their homes.

That pressure has turned the tide. Whereas the majority of seriously delinquent home loans wound up in foreclosure in the mid-1990s, today more than half of troubled loans avoid foreclosure thanks to these “loss mitigation” programs.

And “loss mitigation” is the phrase you need to remember if you want help from your lender. Too often, borrowers who call their mortgage company’s customer-service line to report payment problems get shunted to the firm’s collections department.

The collections side of the process is more likely to say, “I don’t want to hear it — just pay”. Loss-mitigation departments are where it gets warm and fuzzy. They’re not just saying, “Pay up.” They have options.

Among the most common loss-mitigation techniques:

• Forbearance. The lender allows you to skip a few payments until you’re back on your feet. The skipped payments are typically either tacked onto the principal or you make larger payments for a while to catch up.
• Reduced payments. The lender may allow you to make smaller payments for a time. The options for repayment are usually the same as with forbearance.
• Loan modification. The lender may change the terms of your loan by, for example, stretching the loan term out for a few more years. If you’re several years into a 30-year mortgage, for example, the lender may give you the option of paying the rest of your balance over a new 30- or even 40-year period.

With all these options, and with the success of loan-mitigation departments, why don’t all lenders send troubled borrowers to the right place on the first call? It could be as simple as poor training.

Then again, there may be a darker agenda at work, as it seems some lenders aren’t willing to work with homeowners until the borrowers run out of good alternatives.

A borrower who has equity in the home and good credit, usually can refinance the loan with another lender, taking business away from the existing lender or servicer. Another option is a home equity line of credit — homeowners can borrow against the credit line to pay the primary mortgage at least for a while, a tactic that reduces and perhaps eliminates any remaining equity in the home. That, in turn, makes foreclosure a riskier proposition for the primary lender.

Once the borrower has skipped two payments, though, his or her credit is trashed, and few, if any, other lenders will be willing to help, which is why some collection departments may be handing out the “come back after you’ve missed two payments” line.

What actions you can take
Clearly, you want to avoid that predicament if at all possible. Here’s your game plan:

• Arm yourself. Read “Facing foreclosure? 9 options” so you know all your choices. Also think about how you will present your problem to your lender or servicer in the best possible light. Telling a lender you’re about to miss a payment because you overspent on Christmas presents or credit cards isn’t likely to elicit much sympathy. You’re more likely to get the lender on board if your trouble was caused by a lost job, reduced hours, a divorce, an illness or some other serious setback, and if you have a plan for getting back on your feet.

• Contact your lender as soon as possible. You want the company to know you’re serious about trying to save your house. Insist on talking to the loss-mitigation department, then follow up with a letter sent certified mail, return receipt requested, summarizing the predicament you’re in and when you expect your fortunes to improve (if you do).

• Get help from a housing counselor. A counselor can help you review your options, work out a budget and deal with your lender. You can get a referral to one by calling the federal Housing and Urban Development Department at 1-800-569-4287. If you have a Veterans Affairs Department loan, you can call 1-800-827-1000 to get a referral. Legitimate credit-counseling services, such as those associated with the National Foundation for Credit Counseling, also typically have housing counselors.

• Consult a bankruptcy attorney. If you can’t get the lender’s attention — some are swamped right now, given the spike in defaults — talk to a bankruptcy attorney to see if a Chapter 13 filing might help. A bankruptcy can stop a foreclosure, at least temporarily, and give you time to work out a repayment plan with the lender.

Avoiding Foreclosure

 

The number of borrowers whose mortgages are at some point in the foreclosure process has hit the highest level in five years and in response, the mortgage industry, which ultimately is uninterested in owning properties, is reaching out to troubled borrowers, trying to help them head off delinquencies.

Bank of America Corp. is allowing some borrowers with ARMs to refinance into a different loan at no cost. Citigroup Inc.’s CitiMortgage unit is contacting delinquent borrowers within days after a missed payment, if it doesn’t fit their normal bill-paying habits. National City is one of a dozen major lenders behind a national advertising campaign that will, beginning this spring, promote a toll-free number (888/995-HOPE) that borrowers can call for homeownership counseling and referrals.

Some lenders may allow a house to be sold at a loss and forgive the remaining debt in a process known as a short sale. A short sale is a sale in which the proceeds fall short of what you owe. It can be a win-win situation for you, the lenders and the buyer (often an investor) of your house. But since you’re asking lenders to accept less money than you promised to pay them, there’s no guarantee that they’ll go along with such a sale.

For a lender, a short sale can be appealing because the process can be shorter and less costly than foreclosing, especially in a declining market. Lenders can avoid the costs of property maintenance, utilities and homeowners’ association fees. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There’s also the chance that the property could be vandalized.

For borrowers, a short sale is a way to avoid having a foreclosure on their credit report. A short sale can be less of a black mark than a foreclosure on a borrower’s credit record because it indicates that the borrower was working with the lender.

These sales require significant work on everyone’s part and start with the homeowner proving to the lender that they can not afford to pay their bills and meet their financial obligations. This process varies between banks however, typical submission packages will include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. In addition, homeowners should submit a “hardship letter,” explaining the circumstances that make it impossible for them to pay the full amount of the loan.

Tip: In preparing the package, be careful about discrepancies between your income and the income used to obtain the loan, as a big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.

The bank will also need comps or a broker’s price opinion letters showing an estimate of your home’s value. Most lenders will want to get a broker’s price opinion or even an appraisal to see what the property is worth before a list price is set. One way to help ensure that the bank’s estimate of value is realistic is to offer comps of recent sales

If you and your real estate agent don’t already have a buyer lined up for your home, this will be your next step. Once a buyer is located an offer is written this will need to be submitted to the bank for review and acceptance. Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer.

Tip: Homeowners must understand that the purchase contract on a short-sale property is a legally binding agreement once the earnest money has been deposited. Without language in the contract stating that the lenders must approve the offer and release all liens on the property, the seller may face a legal problem for failing to execute the contract if the short sale is not approved.

Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as a REO. Other factors that can influence a bank’s decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorneys’ fees, and the additional reserves it will need if REOs rise in the bank’s portfolio.

Tip: A buyer that is willing to close in 30 days and who can make a substantial down payment may make the deal more attractive than a buyer who wants 95 percent financing, however, to avoid unnecessary costs, buyers should wait on having a home inspection and an appraisal for the loan until after the bank has accepted the short sale proposition

Short sales are not easy transaction and there are a variety of reasons a bank might reject a short sale — from too low a price to too many files on the loss mitigator’s desk. If your transaction is denied you can look for another buyer or even try resubmitting the same contract. Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work. But you should be prepared for the possibility of foreclosure if a short sale fails.

One often overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.

Tip: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The NATIONAL ASSOCIATION OF REALTORS® has been working to support this bill. Furthermore, some people in this predicament are fighting the IRS — and winning. Even those borrowers who still have to pay can negotiate lower payments with the IRS.

The first step is to get knowledgeable legal and tax help. This is not the time to file your taxes on your own. In some cases, an experienced tax attorney may able to show that the original loan process was so flawed that the borrower is not liable for taxes at all. Or if a borrower can demonstrate that he or she is insolvent they also may be able to escape the tax.

What are the options besides a short sale?

Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist subprime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner.

Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works.

Benefits of a Bank Short Sale

Preserve your credit standing and avoid a foreclosure.

Eliminates negative cash flow.

Release of mortgage obligations.

Allow you to sell your home with no out-of-pocket expense.

Avoid potential foreclosure

Avoid possible bankruptcy.

Relieves financial and emotional stress.