Additional options exist for homeowners who are facing financial difficulties and are, or believe, they will be unable to meet mortgage payment(s).  Gone are the days when the person who defaults on a mortgage is considered a “deadbeat”.  Most people today know a hard working person who has defaulted because the challenge of one situation causing financial hardship, was one too many.

    The hardship can be as simple as a relocation to keep a job.  When a person owns a home and is relocated and then must carry two properties;  a home in the old location, and a rental property in the new destination, the additional cost can be enough cause financial hardship.  Yet the person had to move to keep his/her job.   Properties may not be selling in the old location for the price of the loan amount.  A short sale may be the only option. Prior to the move, the anticipated hardship may be sufficient grounds for the lender to permit a short sale.

    Members of our Military face hardship when they are redeployed for longer periods of time than originally anticipated.  The Service Members Civil Relief Act (SMCRA) provides protections and caps all interest for active duty military personnel, incurred prior to their active status, at six per cent.  This includes credit card debt, automobile debt, and mortgage interest debt.  Proof of active duty must be provided.  All active duty military personnel should review all of their debt obligations and invoke SMCRA for any debt carrying more than a six per cent interest rate.

    If the value of the property is greater than the loan amount, the property can be sold at a realistic price. In areas which continue to face depressed pricing, this is a viable option.  The price offered on a property a year ago (often which sellers turned down), seem ridiculously high in today’s market in many areas.  Pricing must be ahead of the curve.

     A controversial solution, and one not advocated by Realtors is “Strategic Default”.   Homeowners begin thinking about strategic default when their property has decreased in value 20 to 25% .  Homeowners are able and  continue to make mortgage payments, but feel they are paying for something which garners no value.  In many areas of the country, property values have decreased 30% or more.  Residents do not see values coming back for ten years or more.  Homeowners   “Walking away” is a deliberate personal business oriented move. 

     Moral and ethical considerations of strategic default are debated, against the dilemma faced by people who can afford their mortgages, but see people who have been irresponsible in their money management, get cash for keys (a program where the lender pays up to $1500 to the homeowner to vacate after foreclosure). 

    Regardless of the path chosen by the homeowner, credit will be impacted.  Foreclosure will cause the most damage.   It is imperative that people who believe they will face a financial hardship contact a Realtor to discuss options, or seek the advice of a credit counselor who will not charge any upfront fees. 

    I am happy to provide additional information:  e mail me at terry@terrybishop.com and put BLOG in the subject area.  If you need to find a qualified Realtor to help you, I can help.

Resources:

Service Members Civil Relief Act:     http://www.military.com/benefits/legal-matters/scra/overview

 Strategic Default:  http://en.wikipedia.org/wiki/Strategic_default

 Department of Housing and Urban Development:  http://portal.hud.gov/portal/page/portal/HUD/topics/avoiding_foreclosure

Note:  Hud.com is a commercial site and is not the Department of Housing and Urban Development…make sure you go to HUD.GOV

    Short sales?  Many people mistakenly believe they must be delinquent on the mortgage payment prior to doing a short sale.  However, a short sale can be initiated by the homeowner if a hardship exists. 

     If hours or salary is cut, a medical expense, an extraordinary expenditure, a death, an incarceration, a job loss,  any number of life’s problems—these situations should spur the homeowner to request that the lender agree to a short sale if the homeowner believes there will be a problem making the mortgage payment(s).

   The fact that the property is no longer worth what it was when originally bought is not grounds for a  short sale. 

    Being proactive is the key to a successful short sale.  The credit rating will suffer, but not as much as with a foreclosure.  Contacting the lender(s) immediately to inform the lender(s) of the situation is paramount. 

    Working with a Realtor who understands short sales and foreclosures such as a CDPE (Certified Distressed Property Expert) or an SFR, the new National Association of Realtors designation for Short Sale and Foreclosure Resource, can help the homeowner immensely.  The Realtor should first try and do a loan modification for which there is generally no compensation.  Only after knowing this is not possible should the Realtor embark upon a short sale.

    Under no circumstances should a homeowner pay someone for a loan modification or sign up for a “rescue program”.  Scams abound, and many are illegal.  Often a homeowner is worse off, having spent precious funds on a bogus solution.

    Realtors trained in short sales know how to document and talk with lender negotiators, and in many instances, cut through the red tape by preparation and understanding of lender systems.   

     The lender(s) does not want to take back the property;  Lenders are not in the business of owning property and a successful short sale is beneficial to all parties involved.  Pricing properties accurately for a short sale is paramount.  The lender is looking for a fair market value, not a deal and a half for a buyer. 

     Sellers must be prepared to document their hardship, provide pay stubs, income tax returns, copies of savings and retirement accounts, as well as details of assets and liabilities.

    Tomorrow:  Options other than Short Sale

    Terry Bishop, a Realtor with RE/MAX Excalibur in Tucson, Arizona has earned her CDPE and her SFRas well as other designations.  She can be contacted at terry@terrybishop.com for further information.

    One of the provisions of the Housing and Economic Recovery Act of 2008 is to provide funding for programs approved by the Department of Housing and Urban Development (HUD) to increase the financial knowledge and decision making capabilities of prospective homebuyers.

   The programs will be designed to help people learn to establish monthly budgets, build personal savings for major purchases, reduce debt, implement financial stability and teach people to set and reach financial goals. 

   Additionally these programs will be designed to help people understand their credit scores and the relationship between credit history and credit scores.  Building savings for long term and/or short term goals is also an objective.

   Grants will be distributed for approved programs.  Documented behavioral changes in savings and spending patterns must be evident.  Additionally, five pilot programs will be authorized and tracked for effectiveness.

   The legislation also provides for some people working within HUD to transfer to the Federal Housing Finance Agency without loss of pay, status or tenure.  All benefits are to be equivalent between the two agencies.

    The Director will establish the amount of critical capital necessary for the Home Loan Banks.  Capital requirements will be established by the Director for adequately capitalized banks, undercapitalized banks, significantly undercapitalized banks and critically undercapitalized banks.  The capital reserves of the banks will be monitored and remedies established for those banks failing to meet the requirements.  Supervisory actions are spelled out including conservatorship and ultimately receivership for critically undercapitalized banks.

    Provisions for claims, disposition of assets, notification of potential claimants, and the legal procedures to be followed are delineated in the legislation. 

     Title II concerns the Federal Home Loan Banks whose job is to provide liquidity to member banks, encourage affordable housing and community development, and provide a capital structure.  Semi annual reporting to Congress by the Director regarding these objectives is mandated.

     The legislation abolishes the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development and tranfers many of these objectives to the Federal Housing Fianance Agency.   As with other areas of HUD where employees will be transferred, status, pay, and benefits will not be impacted.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h3221eas2.pdf

Next- HOPE for Homeowners, S.A.F.E. Mortgage Licensing Act, and Foreclosure Prevention

Related Stories Today:

Fannie Mae and Freddie Mac In the News

http://www.investors.com/editorial/IBDArticles.asp?artsec=5&issue=20080806

http://www.investors.com/breakingnews.asp?journalid=78208990&brk=1

    During July 2008, nearly 800 Notices of Sale were filed with the Pima County Recorder’s Office.   This is about 35 filings a day.  Many of these Notices of Sale will be cured prior to being sold on the steps of the Pima County Courthouse.

   What is a Notice of Sale and what is a Short Sale?

   A Notice of Sale is filed with the Recorder’s office when a holder of a deed of trust or mortgage files the paperwork indicating the mortgagor or trustor (borrower) is in default.   The lender can be an institution such as a bank or a private party who is holding paper with the property held as collateral.

    When a person is late on the payment (default), the mortgagee or beneficiary, (the lender) can file a Notice of Sale.   If an individual, the time frame is according to the debt instrument signed by both parties.   

    Usually a lending institution will wait three months before filing the Notice of Sale.  During this period of time, the mortgagor or trustor (the person who owes the money) should aggresssively begin to find a way to cure the default and pay what is owed so he/she does not loose the property to foreclosure. 

   It is imperative that contact be made with the lender as soon as possible to try and work out or solve the problem.  A person in default should never stick his/her head in the sand and pretend the problem does not exist, nor should he/she think some miracle will occur which will stop the downward spiral.

    During this period of time, the homeowner can contact a Realtor and begin to aggressively market the home.  The Realtor will work with the bank and try do accomplish a “short sale” or possibly a deed in lieu of foreclosure where the deed to the property is given to the lender in lieu of the payments owed.

     A short sale is the sale of a property whereby the lender and the second lienholder (second mortgage holder) agree to take less for the property than what is owed if the property is sold.   The homeowner walks away without a foreclosure or bankruptcy on his/her credit record.  However, credit is damaged.  Short sales stave off the Trustee’s sale.  Lenders do not want to be property owners and would prefer to have the property sold at a loss rather than own the property and the attendant costs.

   The borrower can cure the default by making all back payments plus costs and penalties at any time prior to the Trustee’s Sale.

   The Trustee – the third party  who has the power to sell the property – must wait 90 days to sell the property after the Notice of Sale.  This gives the homeowner an extra three months to try and cure the default.  So from the time of the first missed payment, there is approximately six months before the property will be sold at auction.

    The homeowner will be given notice of the Trustee’s Sale which is also published in the Territorial News legals in Pima County.  At the appointed day and time, the property will be offered for auction to the highest bidder on the east steps of the Pima County Courthouse at 11 am.   All bidders must registered prior to the public sale and present  a certified check for $10,000 to the auctioneer if they are successful.

http://hoganschool.com/index.php

 http://www.azbiz.com/daily_territorial/