| Foreclosure auctions are becoming commonplace in America today, as are streets littered with "For Sale"- signs placed in the yards of homes that have been on the market for months, with little hope of actually selling. Bankruptcy laws have now been changed to favor the lenders, leaving consumers will little protection when times get tough. With foreclosure rates at their highest in history, it is more important than ever that every homeowner understand their rights. This article will talk specifically about FHA insured home loans. However, the remedies discussed within are typically made available by conventional mortgage lenders as well. If you do not have an FHA loan, it may be possible to refinance in order to obtain one. Consult your current lender or other mortgage lending professional for advice on establishing an FHA loan.
Why would my lender want to help me?
Your mortgage lender has made an investment in you. They have calculated how much you are worth to them. After all, you are making monthly payments for 30 years or more, and you're paying interest.
If the lender forecloses on a property, they lose the 30 years of payments, they lose the 30 years of interest, incur legal fees, and they are required by law to sell the house at auction, a venue that characteristically brings in less than the market value of the property.
When all is said and done, the lender will be lucky to sell the house for what is owed, and be able to cover their legal fees. In many cases, lenders take a substantial loss. The revenue generated by a reliable homeowner far outweighs any benefit of initiating foreclosure proceedings.
Finally, FHA lenders receive financial kickbacks from the FHA for participating in the Loss Mitigation process.
What is 'Loss Mitigation'?
Loss Mitigation is a term that will be used frequently through all proceedings dealing with a delinquent mortgage. Loss Mitigation literally means to reduce loss by finding an alternative to foreclosure.
Loss Mitigation options reduce losses for the lender, who avoids the costs of foreclosure and potentially keeps a performing loan in their portfolio; for the consumer, who avoids foreclosure, can potentially keep the home, or possibly sell it for a profit; and for the FHA, who insures the loans. FHA lenders are required to provide the borrower with a loss mitigation packet. This is a financial and income evaluation. It is important to be as honest as possible. Hiding "under the table"- income, for example, could be a disqualifier. The borrow must complete and return the packet to be eligible for loss mitigation options. Generally, borrowers need to show a verifiable loss of income, and the financial ability to meet retention agreements.
What are my options?
There are two sets of options. Retention Tools, remedies that allow the borrower to maintain homeownership, and Disposition Tools, which allows for borrowers to walk away from the mortgage without incurring the financial and credit damage of foreclosure.
First we will discuss the three Retention Tools. Lenders have to consider retention before disposition. Also, they have to consider the options in the order in which they are presented here.
Special Forbearance (Type I)
To qualify for this option, the borrower must be at least 90 days past due and unpaid. The loan cannot be more than 365 days past due, and may not be in foreclosure. The borrower must also occupy the property as the primary residence, must keep the property maintained, and cannot have filed bankruptcy.
Note: If the mortgage is not yet 90 days past due, and you still cannot bring the mortgage current, put the money aside until loss mitigation options are available. If you can afford to bring the mortgage up to date, do so; the act of bringing the mortgage current is termed 'Reinstatement.'
Under the terms of a Special Forbearance, the borrower must be able to immediate resume regular monthly mortgage payments. The amount past due, referred to as the "-arrears,' will then be divided up over a number of months determined by the lender, and added to the regular mortgage payment.
For example, assume that the Johnsons have a $1000 monthly mortgage payment and their loan is four months past due, creating an arrearage of $4000. If the lender determines that the forbearance period will be eight months.
1. Divide the arrears ($4000) by the amount of months (8 months)
2. Get the result: $500
3. Add the result ($500) to the regular payment ($1000)
4. Get the result: $1500
In this example, the Johnsons will pay $1500 for eight months, at which point they will have satisfied their forbearance agreement and will resume their regular monthly mortgage payments. Due to the nature of the agreement, a Type I Special Forbearance is only a useful tool in overcoming a temporary hardship. This option can be combined with other loss mitigation option to become a "Type II" Special Forbearance. This option will be discussed in detail later on.
Loan Modification
A Loan Modification is a permanent change to the original loan agreement. Due to the nature of loan modification, there are several methods that this can be employed to maximize the benefit to both the borrow and the lender.
To qualify for this option, the borrower must be at least 90 days past due and unpaid. The loan cannot be more than 365 days past due, and may not be in foreclosure. The borrower must also occupy the property as the primary residence, must keep the property maintained, and cannot have filed bankruptcy.
Loan Modification: Capitalization of Delinquent Principal
The simple term for "Capitalization of Delinquent Principal"- is to add the delinquent amount into the mortgage loan. This is similar to the concept of refinancing a mortgage, only that the length of time to pay off the loan does not change.
In our example with the Johnsons, they had a $4000 arrearage and $1000 monthly mortgage payments. Now suppose that their mortgage balance is $100,000 with 15 years left to pay.
With Capitalization of Delinquent Principal, the Johnsons' principal balance will increase from $100,000 to $104,000. Their arrears will be reduced to $0 because the amount is now included in the mortgage.
Note: Capitalization of Delinquent Principal does not cover delinquent interest or insurance payments.
Loan Modification: Re-Amortization
Amortization is a term used to describe how long a loan will take to pay off. For example, a 30 year loan is amortized over 30 years.
Supposed the Johnsons have a $1000 monthly mortgage payment and are $4000 past due. Their total mortgage balance is $100,000. However, they only have 15 years remaining on the loan. They can then re-amortize the loan over a longer period of time to reduce their initial payment, and include the amount in arrears into the loan.
By increasing the amount of time to pay the loan, the monthly principal and interest payments decrease.
Assume that if the Johnsons increase the repayment time from 15 years to 30, thereby re-amortizing the loan, their payment will be reduced to $650. With a payment of $650, the Special Forbearance option can be combined with the loan modification. In our previous example, the forbearance amount was $400. If a $400 forbearance is combined with the $650 regular payment, then the total monthly payment would only be $1050 for amount of time of the forbearance.
This is an example of a Special Forbearance Type II.
Loan Modification: Reduction of Interest
By reducing the interest rate, monthly mortgage payments can be reduced as well. For example, let's assume that the Johnsons' $1000 mortgage payment consists of an $800 payment to principal (principal refers to the balance) and $200 to interest.
With a reduced interest rate, assume that they save $100 a month in interest payments, thereby reducing the Johnsons' monthly mortgage payment to $900 a month.
This option can be included with a Special Forbearance to create a Type II Special Forbearance.
Combining Loan Modifications
Any of the Loan Modification options can be combined. For example, a Capitalization of Delinquent Principal modification can be combined with a Re-Amortization to avoid the need for a Special Forbearance Type II.
A Reduction of Interest modification can be combined with any other type of modification to increase savings.
Note: It is always up to the lender to decide which options to offer. Loan Modification will only be offered if Special Forbearance is ruled out as a workable option. Existing repayment plans and Forbearance agreements may also be converted to a Loan Modification if the borrower's circumstances change. Reduction of Principal In extreme cases where the value of the home and the neighborhood have decreased, and as a result the neighborhood is becoming vacant, HUD will be willing to reduce the principal balance owed in order to match the market value of the home. As an example, let's say that Mrs. Martinez owns a house with a mortgage of $120,000, but the value of the home fell to only $100,000, and at the same time the values of the houses in her area fell as well. HUD can then reduce the loan balance to $100,000 so it is at parity with the appraised value of the home. It should be noted that this is an extremely rare remedy. HUD primarily only employs this option when entire neighborhoods are in jeopardy.
Partial Claim
With a Partial Claim, the lender will advance the borrower the necessary funds to bring the mortgage current; a promissory note is then issued by HUD to the lender. The note will pay the full delinquent principal balance of a loan.
The promissory note is required to be paid back at a future time. The note is not required to be paid until the first mortgage is satisfied, at which time payments are required. The note will be a lien on the property until it is paid. Borrowers can pay as little or as much as they want towards satisfying the note while they are still paying their first mortgage. Finally, the note is a zero interest loan.
To qualify for this option, all other retention tools must first be ruled out as being unworkable. The borrower must have the ability to immediately begin to resume making regular monthly payments. The loan must be at least 120 days past due and unpaid, but no more than 365 days delinquent at the time the partial claim note is executed. The loan may not be in foreclosure when the partial claim note is executed. However, a lender may remove a loan from foreclosure if the borrower's financial situation has improved sufficiently to justify a partial claim.
Due to the fact that Loan Modification must be considered first, Partial Claims are a rarely used tool.
Disposition Tools
All Retention Tools have been discussed at this point. Borrowers who do not qualify for any option that allows for homeownership to continue, will next look at options to dispose of the home by avoiding foreclosure.
Why avoid a foreclosure if I am going to lose my home anyway?
The three Disposition Tools which we will discuss save both the borrower and lender a great deal of money.
Let's assume that the Murphy's have a $200,000 mortgage and their home is worth $275,000.
If the lender forecloses they can spend anywhere from $2000 to $7000 in legal fees, followed by between $500 and $1000 in auction fees.
Imagine the following scenario:
1. The mortgage company forecloses on the Murphy's home and incurs $5,000 in legal fees.
2. The lender then pays $700 in auction fees.
3. The home sells for $185,000 at auction, a $5000 loss on the loan.
4. Add the loss on the loan ($5000) to the legal fees ($5,000) plus the auction fees ($700).
5. The result is $20,700. This is the amount that the mortgage company will attempt to collect from the Murphy's.
By losing their house through foreclosure proceedings, the Murphy's now owe the lender $10,700. This amount may contain an interest rate. The lender may sue and garnish the wages of the Murphy family.
Pre-Foreclosure Sale
Often referred to as a "PFS,"- in a Pre-Foreclosure Sale agreement, the lender allows additional time for the borrower to sell the home on the market to satisfy the mortgage before continuing bankruptcy proceedings. The allotted time frame is four to six months.
In a PFS, the home is generally sold below at market value to speed up the process. It is strongly recommended to use a real-estate Agent who specializes in Pre-Foreclosure Sales.
Using the previous example with the Murphy's, suppose that they sold their home for $225,000 in a PFS. They incurred fees from their real-estate agent of $1000. Also assume that they were $8000 in arrears. 1. $225,000 - the sale amount
2. Subtract the loan amount ($200,000) and the arrears ($8,000) and any fees ($1000)
3. The result is $16,000
In this scenario, the Murphy's keep $16,000 in profit. This money can be used for moving and housing expenses.
To qualify, in addition to the lender's loss mitigation packet, borrowers must also complete a HUD Application to Participate and submit it to HUD.
A PFS may be initiated prior to the home going into default. At the time of the sale, the mortgage must be at least 30 days past due.
The lender will be responsible for an appraisal and title search. The home must have a marketable title.
Short Sale
A short sale is another type of PFS, only in a short sale the lender agrees to allow the borrower to sell the home for less than the amount owed. Under the terms of a Short Sale, the borrower may not sell the home for less than 82% of the home's "as is"- appraised value.
The advantage that a Short Sale has over foreclosure is that typically less money will be owed to the lender as a result of the short sale and the lender has the option to wave or to write-off the remaining balance owed. In addition, credit damage is also mitigated by avoiding foreclosure proceedings. This will be beneficial when seeking new housing.
The lender is also authorized to pay the borrower up to $1000, which can be used to satisfy other liens or loans against the property, as well as help to secure new housing accommodations. Deed in Lieu of Foreclosure
"In Lieu"- is a term that means "instead of"- or "in place of."- So, what Deed in Lieu of Foreclosure (DIL) means, is that the borrower sacrifices the deed to HUD in order to prevent foreclosure.
Like a Short Sale, DIL is also preferable to a foreclosure. At end of the process, the borrow owes no money on the FHA loan, however, any other loans against the home will still be outstanding.
HUD also offers a $500 stipend to encourage a timely evacuation of the property.
To qualify, the property must be at least 30 days delinquent, and all other disposition options must be disqualified, and the borrower's financial disparity must be incurable and irreversible.
Options, Options, Options... With so many options available, foreclosure should never be an option for anyone. Lack of communication with the lender is the primary cause of borrowers failing to avoid foreclosure proceedings. When faced with defaulting mortgage payments, always contact the lender first to discuss loss mitigation options.
The remedies discussed in this article are specifically available options on all FHA loans. For conventional loan holders, your mortgage company likely has similar solutions. Use the knowledge that you have gained to work with your lender and strong inquire about what is available to you. VA loan holders, please contact the US Department of Veteran Affairs before proceeding. As a resource, homeowners can contact HUD and the FHA by visiting their websites. The "rules"- that lenders have to follow are issued by HUD in what is referred to as "Mortgage Letters."- All of these letters are available on a special website called www.HUDCLIPS.org. With knowledge comes power. It may be true that not everyone has the power to hang on to their home during times of financial upheaval increasing unemployment, but the blows can be softened, the damage can be mitigated, and the future can be brighter. OEN ad partner website:: Continue researching FHA Loans with FHAMC's free FHA article bank.
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