Where What When

Foreclosure and You

There is a dirty little secret these days. Many people have fallen behind on their home mortgage and are in danger of losing their home. If this is happening to you, you are not alone. If this is not happening to you, then you probably know someone who is affected, even though he or she may not be shouting it from the rooftops.

These are trying economic times, and a home mortgage is yet another large expense on top of day school tuition, health insurance, and many other expenses. Perhaps you were a credit risk and were only able to get a "sub-prime," or high-risk, loan. Or perhaps you had good credit when you were approved for a loan and have since had a change in circumstances, such as job loss or decrease in hours and/or pay. This article will look at the foreclosure process from beginning to end. It will also review alternatives to foreclosure and give tips for current and prospective home owners.

What Happens in a Foreclosure?

A mortgage lender's first step in beginning the foreclosure process in Maryland is to send the borrower a Notice of Intent to Foreclose. Changes to the law, under the Making Home Affordable plan, specify that a mortgage lender cannot begin the foreclosure process until you are at least three months behind on your mortgage. (Of course, once your mortgage, or any other debt, is 30, 60, and then 90 days late, it gets reported to the credit reporting bureaus, which can negatively impact on your credit. A foreclosure will reflect negatively on your credit even more.) The new law is an attempt to decrease the number of foreclosures and to encourage home ownership among both current and potential homeowners.

The Notice of Intent to Foreclose letter must state, among other things, how many days you are behind on your mortgage and the total amount of money needed to bring the mortgage current. I will note here that by this time many borrowers, overwhelmed by the mounting bills, will have already stopped opening the mail. My advice would be to take the opposite approach. As you will see further on in this article, lenders are sometimes willing to work with you in order to prevent foreclosure. (Even if the lender does not work with you, you may as well read your mail and be informed of the status of the case at each step along the way.)

The Notice of Intent to Foreclose contains contact information for the lender's Loss Mitigation Department. I would recommend contacting them. Sometimes, the Loss Mitigation Department can work out a repayment plan with you, the borrower, despite a serious delinquency. Another thing they can do is put the amount in arrears on the back end of the loan. This means you don't have to repay the arrears until the end of the loan repayment term or until the house is sold, whichever comes sooner. This would be a suitable option if you fell into hard times financially but have recently gotten back on your feet.

No sooner than 45 days after mailing a Notice of Intent to Foreclose, the lender can initiate actual court proceedings. These proceedings take place in the Circuit Court in the county in which the property is located. The lender (or its representatives, called "Substitute Trustees") must file, among other things, a copy of the earlier Notice of Intent to Foreclose. The lender must also file the original copy of the deed and mortgage documents. If the mortgage has been sold to another company, this fact must be disclosed. The lender must then serve you, the borrower, with these papers.

I'd like to interject a warning here. My advice is to not evade service of lawsuit papers. If the lender's lawyers try to have you served twice and are unsuccessful, they can try to obtain alternate service, which can mean they will show up at a friend's or relative's house or even at your place of employment. All the while, you may be unintentionally driving up the lender's attorney's fees, for which you will ultimately be liable.

Can You Fight a Foreclosure?

Although there are defenses that can be raised in a foreclosure action, they are rarely successful. One such defense is that of "unclean hands." In essence, it says that if the homeowner defaults on his mortgage, he should not be liable because the lender is not entirely innocent in whatever caused the owner to default. Let me give an example: Let's say a lender files a foreclosure suit against a borrower. Let's also say the borrower had applied for and received a $500,000 loan. The borrower and spouse made $75,000 per year, before taxes, and put no money down towards the principal balance of the loan. The lender should have known that, in a situation like this, the borrower would default on the loan. The monthly payments on a $500,000 loan with no money down would be very high for this couple as compared with their monthly gross income.

Another defense to a foreclosure action is lack of receipt of a Notice of Intent to Foreclose, but in that situation, the lender can simply dismiss the case and re-file after they have sent the notice and waited the 45-day period.

Another defense I have seen homeowners successfully use is that the Plaintiff, that is, the party bringing the foreclosure action or its representatives, is not the actual owner of the mortgage. Believe it or not, lenders who have sold a mortgage sue homeowners to foreclose on homes. If you, the homeowner, never answer the lawsuit, the foreclosure can proceed anyway, and the mistake may never be discovered. Or the facts will come to light after the time for appeal has already passed. So, facing the problem head on is only to your benefit.

Keeping Your House

The Making Home Affordable plan provides relief for some homeowners who want to stay in their homes. If your loan is or was at one time owned by Fannie Mae or Freddie Mac, and you are current on your monthly mortgage payments, you can refinance your existing mortgage through the Home Affordable Refinance program. If you are unsure of who owns your loan, your lender can provide you with that information. This program allows borrowers with higher or variable rate mortgages to switch to lower, fixed-rate, 30-year mortgages. Note: this government program ends in June 2010.

If you want to keep your home but cannot afford the current monthly payments, a loan modification, under the Home Affordable Modification plan, may be your solution. Previously, in order to qualify for a loan modification, you had to be behind on your monthly payments or have a government-backed loan through Fannie Mae or Freddie Mac. The only option for those current on their monthly payments but seeking better loan terms was to refinance the loan. Now mortgage lenders will allow you to modify your home mortgage loan even if you are current on your monthly payments.

A loan modification entails at least one of the following changes to your original loan terms: reduction of the principal balance left on the loan; switch from a variable to a fixed interest rate; lowering of interest rate; recalculation of loan term for up to another 40 years; and if you are in arrears, allowing the borrower to repay the arrears at the conclusion of the loan term instead of immediately.

A mortgage lender usually does not have to consent to a loan modification; rather, the lender may choose to foreclose. If you are seeking a loan modification, your lender will require you to show some sort of financial hardship - loss of job, decrease in income, and/or death or long-term illness of an income-earning spouse. You will also be asked to provide financial documentation, such as the last several months' bank statements and pay stubs. Under the Home Affordable Modification program, the modified loan payment cannot exceed 31 percent of a borrower's gross monthly income.

It may take up to several months for your loan modification application to be processed, due to the high volume of applications. If you have applied for a loan modification, I highly recommend making contact with your lender often, lest your application slip through the cracks.

The whole premise behind a loan modification is that the borrower could not afford the original monthly loan payments, either because they were too high from the start, or because a change in financial circumstances made an originally affordable mortgage payment suddenly unaffordable. A word of caution: Be realistic with yourself (and with your spouse) about the maximum amount you can afford per month under a modified mortgage. People tend to inflate their financials on their modification application so as to appear able to afford a reduced monthly mortgage payment. These homeowners are understandably fearful of losing their home to foreclosure. What can wind up happening is that, if the borrower is not realistic in his revised financial picture, he can wind up losing his house to foreclosure in the end, despite his best efforts.

You can only modify your home mortgage one time under the Home Affordable Modification program. The program is set to end December 31, 2012.

Something to Avoid at All Costs

In today's economic market it is very common for a homeowner to owe more on his mortgage than the amount at which he purchased the home initially. This is called being "upside down" on the mortgage (or, as a client I spoke with recently called it, being "under water"). The difference between the price a home at foreclosure sale commands and what the borrower owes on the mortgage (plus court costs, attorney fees and interest) is called the "deficiency." After a foreclosure on a home, the lender can obtain a judgment for the amount of the deficiency, called a "deficiency judgment." As a homeowner, you want to avoid this at all costs. This is because a deficiency judgment is enforceable like other judgments. That is, it gives the lender the power to garnish your wages and/or bank accounts. The lender can also levy on your car or other personal property of value. A deficiency judgment can also be recorded as a lien against other real property (land or a house) that a borrower owns.

As a homeowner you absolutely must try to get something from the lender in writing stating the lender agrees not to pursue the deficiency on your loan.

Short Sales

Sometimes, it becomes apparent to homeowners that they will no longer be able to afford to own a home. Or perhaps they do not want to keep the home and desire to move in with their children or parents or rent an apartment. If you are upside down on your mortgage but are trying to avoid foreclosure, you can try to do what is called a "short sale." In a short sale, the lender agrees to allow the borrower to sell the house on the open market - that is, not at a foreclosure sale. It is called a short sale because the lender agrees to accept a lower payoff at closing than the remaining balance left on the loan. In a short sale transaction, the borrower/seller, buyer, or both parties can be represented by a real estate agent.

If you possibly can, try to get your lender to agree not to pursue the difference post-sale (this is the "deficiency" discussed earlier). If you are able to negotiate this with your lender, carefully review the short sale agreement the lender will send you to ensure that it clearly states that the lender agrees not to pursue the deficiency after closing.

A word of warning: there will likely be tax consequences any time a lender forgives part of your mortgage debt. The lender can, but will not necessarily, report the forgiven amount to the IRS. If this happens, you will have to pay income taxes on the forgiven amount. As with all tax issues, consult your local certified public accountant for more information.

Lenders prefer the short sale option over foreclosure because they don't have to go through the hassle of conducting a foreclosure sale. Also, a short sale is more likely than a foreclosure sale to get a higher price for your home. The benefit to the borrower is that your credit does not denote a foreclosure sale, and it may be possible to avoid a deficiency judgment. Another benefit is that no foreclosure notice is posted on the property or published in the newspaper.

Another form of relief for a borrower who is unable to remain in his home is a "deed in lieu of foreclosure." Here, the bank agrees to take the deed to the house in exchange for complete forgiveness of the mortgage note. In practice, I do not see this as much as I see short sales. With deeds in lieu of foreclosure, the bank becomes the new owner of the property and must still go through the process of selling it.

Borrower Beware

Unfortunately, there are many unscrupulous companies out there who are capitalizing on the mortgage crisis in a big way by taking advantage of homeowners who might be heading towards foreclosure. One common situation is a company "guarantees" they can get your home loan modified if you first pay a hefty fee up front. I have seen $1,500 to $5,000 charged. There are several problems with this, namely, 1) no one can guarantee a loan modification will be completed. As I stated earlier, lenders have great latitude in deciding which loan modifications to approve; 2) in order to assist Maryland consumers in this way, the company must almost always first be registered as a credit services business with the Maryland Department of Labor Licensing and Regulation's Office of Financial Regulation; and 3) the Protection of Homeowners in Foreclosure Act (PHIFA) and the Maryland Credit Services Business Act (MCSBA) prohibit companies from taking a homeowner's money before providing mortgage or foreclosure prevention counseling. Yet these companies will often take the homeowner's money and either do sub-par work or nothing at all to help the homeowner. Such a company is overly aggressive in trying to get the homeowner's business only to make itself scarce when the owner wants an update on negotiations with the lender. Ultimately, this fraudulent company is never heard from again.

Stay away from any company promising to "save" your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to anyone unless you are working directly through your mortgage lender, or through an attorney. And never submit your mortgage payments to anyone other than your mortgage lender without your mortgage lender's prior approval.

Help for the Homeowner

A homeowner can get his home mortgage modified on his own; however some people want the added security of having someone walking them through each step. The Maryland HOPE (Homeowners Preserving Equity) Initiative, among other nonprofit groups, provides free foreclosure prevention counseling to Maryland homeowners. Call the HOPE hotline at 1-877-462-7555 or visit www.mdhope.org for more information. Through HOPE you can meet with a nonprofit housing counselor. They are a tremendous resource for homeowners at risk of losing their homes. Some other nonprofits involved in directly assisting homeowners are St. Ambrose Housing Aid Center (www.stambrose.org and 410-366-8550) and Neighborhood Assistance Corporation of America (find information about their "Home Save" program at www.naca.com).

In sum, foreclosure may be preventable and should be avoided if at all possible because of the risk of the lender obtaining a deficiency judgment. Alternatives like short sales and deeds in lieu of foreclosure are suitable where the homeowner, for whatever reason, cannot afford or does not desire to keep the house. If you must give up your home and owe more on the mortgage than what the house sells for, make sure you first get something in writing from the lender saying the lender agrees to forgive that amount. Loan modification, on the other hand, is for homeowners who wish to keep their home but under more favorable repayment conditions. Do not be taken in by foreclosure rescue scams. In most situations, you, along with the non-profit resources mentioned above, can achieve one of these alternative outcomes.

Natalie L. Grossman is a local attorney in general practice who advises clients on consumer law, among other things. She may be reached at nataliegrossman@verizon.net

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Article List - February 2010