Mortgage and Foreclosure Law Blog

Finally I'm back! Wow that year end rush kept me from blogging; but hopefully I can get back to this more frequently now. I am getting calls from people who have realized they just can't afford their home and they want out. How do you do this?

Well that isn't a simple answer; but let me go over a few things that need to be considered. First of all you need to consider whether your state allows banks to come after you personally when a foreclosure sale doesn't satisfy the outstanding loan balance for your home. Attorneys in California (which I am not one!) may tell you to just walk away and let them foreclose. CA is generally considered a non-judicial foreclosure state and it is generally accepted that Banks can't go after you personally. What about other states like mine, Colorado?

There are generally three things you have to do in order to walk away. First, you need to not be able to afford your mortgage. You will need to be able to show this by giving your income and expenses to your lender. Second, you will have to put your home up for Sale and hope for a short sale to come through. I assume Short sale since so many people are upside down on their home; but if you have equity then this whole discussion is moot. After your home is on the market for 90 days and hasn't sold you can then generally ask for a Deed-in-Lieu. In both the case of a Short Sale or a Deed-in-lieu the bank will generally agree to not go after you personally for a deficiency. So, if this is your situation you should contact a Real Estate agent who can help with a Short Sale and if that doesn't work out give us a call about helping with a Deed-in-lieu. That's all for now.

So last time we went over the major guidelines to qualifying for the Deed-In-Lieu program from Fanny Mae that allows homeowners to rent their home after "giving it back." I'd like to go over how this process works a little more in case anybody out there is looking for this kind of help.

The first step in the process is for the lender/servicer to determine if a Deed for Lease is a good option for the borrower and whether the borrower is even interested. The servicer will have to prescreen the borrower based on the qualifications outlined in the last post. If the property is tenant occupied, then the servicer should determine whether or not the tenant would like to continue to lease the property. The borrower will have to facilitate contact between the tenant and property manager, including providing the tenant’s contact information and a copy of the lease (if written). There will be a property manager assigned and they will contact the borrower directly to provide additional program details and set up an appointment.

The borrower must communicate with the property manager within five business days of obtaining the referral to set up the appointment; otherwise, the deed for lease opportunity will be cancelled. Generally the borrower or tenant should have about 11 business days for the lease to be signed and approved.

Next, the property manager will collect a non-refundable $75 lease application fee to process the deed for lease application, which includes running the background and credit check on the borrower or tenant. If a lease is approved, Fannie Mae will send an “Approval” e-mail to the servicer indicating lease acceptance and request the estimated deed for lease completion date. Fannie Mae will maintain the copy of the lease.

If a lease was approved, the borrowers execute in favor of Fannie Mae, the servicer, and their agents a general release of all claims arising prior to the acceptance of the DIL which relate in any way to the loan or the property. The servicer will not require that the property be vacant upon acceptance of the deed in lieu.

This is designed to be a much easier process than getting a loan modification. However there are still many hoops to jump through in the qualification process. If you have questions, contact us!

What options are there for people who can't afford their mortgage, can't qualify for a mortgage modification, and can't or won't file Bankruptcy to stay in their home? Are there other options to stay in your home? The answer is yes. In another post I will go over Short Sale options where you can rent from the person who purchases your home. In this series, however, I would like to go over Fannie Mae's Deed-for-Lease Program.

This is a program designed to work in tandem with a Deed-In-Lieu. This is where you would voluntarily transfer the deed to your lender or Fanny Mae and if you qualify, they will rent the home back to you in 12 months lease(s). There are pre-screening qualifications as well as instructions for servicers/lenders and borrowers. Let's first go over the main qualification requirements.

The Program eligibility is as follows:
- The loan has to be a first mortgage in a one to four unit dwelling.
- The loan can't be an FHA, HUD, VA, or Rural Development loan.
- The property must be a primary dwelling for the borrower or their tenant, no vacation homes.
- The loan has to have had at least three payments made on it. You can't get a loan in January and then stop making payments in February and eventually qualify for this program.
- You also can't be more than 12 months late on the loan payments.
- You can't be involved in a Bankruptcy or litigation on the property.
- There can't be any title issues that could result in litigation.
- You must have income, in other words they want to make sure you can pay rent.

No those are the main program requirements. There are of course other sensible requirements such as: Making sure there are no zoning restrictions on renting, making sure the home is habitable, that the rental income will cover ongoing maintenance and management costs.

Finally, there are specific occupant eligibility requirements. For instance the magic 31% of gross income. In other words, rental payments are set based on certain criteria and those payments can't be more than 31% of the occupant's gross income or the lease won't be offered. The occupant would also have to agree to maintain the property, get pet insurance if appropriate, get a credit check, and generally be a good tenant.

Next time I want to go over how the entire process works a little better. Stay Tuned and thanks for reading!

OK, so you didn't pay your second mortgage for at least 6 months, you are upside down in your house, and your second mortgage has charged off to become unsecured. What now? Now, the lender on your second has to decide if and how they want to collect on their loan. They generally have four options: 1) Sell the debt to a junk debt buyer; 2) collect on the debt like a credit card; 3) settle the debt for pennies on the dollar; or 4) do nothing.

Selling the debt to a junk debt buyer is rare in my experience, at least for a second mortgage. If they do decide to do this, they would usually sell your loan and many others at the same time to the same place. Then it is up to the junk debt buyer to try and collect on your loan. It is usually harder to judicially enforce a loan that you are not the lender on. The reason is that many times you don't have the original contracts and other evidence that is needed to win a judicial decision.

More likely than any other option is that the lender will collect on the loan like it is a credit card or other unsecured debt. Usually this means hiring a debt collector first. That is when the real harassing phone calls take place. Generally a debt collector gets paid something like 20% - 25% of what they collect. That obviously gives them an incentive to get money from you. That is why they are often so aggressive.

After a while if they are unsuccessful with the Debt Collectors, they may have a law firm try to collect from you. Things get dangerous at this point. Law Firms generally get 33% to 40% of what they collect. They much less incentive to settle the debt with you because they figure they will just sue you, get a judgment, and collect the whole thing including attorneys fees and court costs. If you get a letter from an attorney's office get help immediately.

The best situation you can get in is to be in a position where you can settle your loan debt. Now, most people get in this situation because they are really tight on money. However, I've seen cases where people were offered to settle their second mortgage for 3 cents on the dollar! Now that is unusual; but 20% or less isn't. It would be in your interest to borrow the money from anywhere to get rid of 80% or more of your debt. Call us if you think you may be in this situation.

I didn't call "doing nothing" by your lender the best situation b/c it is rare they will just give up on it. If they do, it is likely because you are what is considered judgment proof. That means that even if they sued you and won, they couldn't collect any money from you. This is the case if you have no assets, no job, and/or your income is exempt. Exempt income is usually stuff like retirement, social security income, child support, etc.

I've found that this whole subject brings up more questions than answers, so please call me if you are in this situation and need some advice.

Hi Folks. So I want to revisit second mortgages with you. I wrote an entry on this a while back that seems to been very popular. Thus, I feel that it may be time to go over issue with not paying a second mortgage again. Specifically I'd like to go over secured v. unsecured, charging off, collection activity, and even settlement.

What does it mean to have a secured mortgage? In simple terms, it means that your lender can foreclose on your house, sell it, and take the proceeds to pay the debt/mortgage. In other words, your debt is secured by the home. Well that is all good when your home has some equity in it; but what about days like this where home values are depressed?

Lots of folks have purchased homes in the last several years with no money down and a 1st mortgage for 80% of the value of the home and a second mortgage for 20% of the value of the home. I'm running into many folks who have the situation above AND are in some kind of interest only loan. Finally these same people have lost significant value in their home and often owe more on their first mortgage than the home is worth. So are you in a similar situation? At least one where you owe more than your home is worth? That is a situation where a second mortgage can become unsecured.

If you have value in your home the Holder of your second mortgage has to buy out the first mortgage, then foreclose on the property, then sell it before they get their money. They aren't going to do that if the transaction leaves them little to no chance to get money out of the deal.

Let's say you owe $80,000 on your first, $20,000 on your second and your home is worth $75,000. Why would the holder of your second mortgage pay $80,000 to get $75,000 back and still not get their original $20,000? Does that make sense? Of course I am skipping all kinds of other transaction costs in that scenario; but hopefully you get the idea.

When you owe money to a company, they put that amount on the Asset side of their accounting books. This works well when you are paying; but what happens if you can't pay? Well accounting principles say that that business has to put that amount on the liability side of their accounting books. Their other option is to foreclose, and as seen above that doesn't make sense. So when your lender decides to write of the debt v. collecting on it through foreclosure; it becomes unsecured. That is when they will collect on the debt, much like they would a credit card. Next time I'm going to go over what to expect with collection activity on your charged off second mortgage.

Hi Everybody. Today I want to talk about Forensic Mortgage Audits; what are they, how they are supposed to work, and do they work. Many people out there today are having trouble with their mortgage. Clearly. There is a ton of misinformation out there regarding help as well. This firm used to do Forensic Mortgage Audits so we speak from experience. Let's talk about it.

A Forensic Mortgage Audit is basically an attempt to uncover mistakes or legal violations in you loan or loan documents. A company will tell you that they will audit your loan, find mistakes and then use them as leverage to force your lender to modify your loan. Sometimes they promise more like compensation or even getting your home for free. They are looking for several things in an audit: 1) RESPA Law violations; 2) TILA law violations;3) Accounting errors; and 4) other general irregularities or legal violations. So let's say they find some of these, what next?

The idea is that you can put legal pressure on your lender to modify your loan and put you in a position where you can pay your mortgage. These auditors assume that this can't be done without this kind of work. Sometimes they are right, it can't be done without this kind of pressure. For an explanation look at my series on how the Making Home Affordable Plan works, especially the income and expense piece. So let's say they've uncovered violations in your loan and you are in a situation where you otherwise wouldn't qualify for a loan modification. What does your bank/lender do when confronted with these problems?

They say, "go fly a kite". They don't care. They are FAR too busy with modifying loans for people who are going through normal channels to deal with extortion. Have you ever heard the phrase "you catch more flies with honey than with vinegar"? You are running into a situation where you are trying to force the banks to do something. How do you force the bank to do something they don't want to do? You have to sue them! Do you have at least $70,000 to front for a lawsuit? You can expect to spend at least that much. This is the fatal flaw in hiring a forensic mortgage auditor. You will pay far more money for one of two things: 1) The same result you would get trying to modify through regular channels or 2) No result because you don't qualify for a modification anyways. If you are considering hiring a forensic mortgage auditor you better think hard and check references carefully. This firm stopped doing it when we realized how far we got with honey.

The MHA, as discussed above, helps borrowers avoid foreclosure by modifying mortgage payments. However, there are just many situations where a borrower, who otherwise qualifies for the program, still doesn't qualify for a modification. To address this situation, the program also has incentives for borrowers, servicers and investors to encourage short sales and deeds-in-lieu. Both allow families and servicers to avoid the costly foreclosure process, and to minimize the negative impact of foreclosures on borrowers, financial institutions and communities.

First we should explain what a Short Sale or a Deed-in-Lieu is. In a short sale, the servicer allows the borrower to sell the house at its current fair market value, even if that amount won't cover the amount owed on the mortgage. In a depreciated market such as our current housing market, this is a common occurrence. If the sale is approved, the borrower is relieved of the difference owed and the sale price. For instance if you owe $500,000 on your house and the house's current fair market value is appraised at $400,000; you would conduct the short sale offering $400,000. If sold, the bank would accept the $400,000 to pay off the entire $500,000 loan balance. Of course this is a simplified example that doesn't even include sales costs and such. This works because the bank realizes that a foreclosure is expensive and that even in an ideal foreclosure situation the result would be an auction sale of fair market value. This would still result in the same loss of $100,000 not including all the foreclosure costs. Thus time, effort, and money can be saved this way.

If the borrower actively markets the property but is unable to sell it within the agreed upon time period, a servicer may consider a Deed-in-Lieu (DIL). With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear.

Historically Short Sales and DILs have not been pursued, rather the servicers have gone after foreclosures. The reason is that these transactions are complex and involve careful coordination of servicers, appraisers, borrowers, purchasers, real estate brokers, title agencies and often mortgage insurance companies and junior lien holders.

The MHA Foreclosure Alternatives Program simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance time frames and standard documentation. To compliment a standardized approach, Treasury provides incentives to borrowers, servicers and investors to pursue short sales and DILs. Our next post will begin to flesh these incentives out.

OK, our last entry went over the more basic/fundamental requirements needed to qualify for the MHA program. We explained the hardship briefly and explained the 31% rule briefly. Now I'd like to go over the general application process and some of the major underwriting requirements for qualification. In most cases, these requirements are the same for the MHA as for regular modification programs each servicer may have, sometimes referred to as Business As Usual Modifications.

The MHA is designed to help people afford their monthly payment. Therefore the main concern in qualifying is the borrower's monthly income and expenses. The process is similar to what is needed when originally qualifying for a loan in the first place. The bank will ask for several pieces of information in order to determine what a borrower's monthly income is. These may include some or all of the following; Pay Stubs, Bank Statements, Filed Taxes, Profit and Loss Statements, Rental Agreements, various other proofs of income.

The bank will have an underwriter who takes this information and specializes in determining a person's monthly income. The process is to varied and specific to fully explain the nuances here. One reason people benefit from our services is the fact that we understand how this process works and what is needed to ensure that the numbers we present to the bank are the same numbers the bank will use.

The next piece of information is critical. The bank will ask for the borrower's monthly expenses.
The reason almost all loan modification requests get denied when borrower's submit a request by themselves is due to a lack of understanding in how the monthly income and expenses work together. The bank understands that people who are requesting a modification are tight on money. Most of the time people are already behind on their mortgage and facing impending foreclosure. However, the bank doesn't want to spend time and money granting a modification, only to find the borrower in the same situation in a couple months, and end up foreclosing on the property anyway.

Therefore the main goal of presenting the finances properly is to determine the following:
1) Does the Income Exceed the Expenses every month? If so, does it exceed it enough the the borrower should be able to afford the mortgage? If not, then they should modify.
2) Do the Expenses exceed the Income every month? If so, by how much? Depending on that answer they may or may not qualify for modification. Let's use some simple numbers to illustrate.

For Simplicity, let's say your monthly GROSS/NET income is $10,000. Your currently Monthly mortgage payment is $4000. From our prior post we know that the program goal is to get you down to $3100 a month. That is a savings of $900 a month. Now, let's say that your monthly expenses, including your current mortgage payment of $4000 is $11,000 a month. That means you are spending $1000 a month more than you are making. Therefore, even if you lower your payment by by $900 a month through a modification, you will still be short $100 every month. The bank will not qualify you.

This is a high level view and an oversimplification of the process. There are many way to make lifestyle changes to change your income and expenses. There are certain expenses some banks use and others don't in the above calculations. The number of nuances that goes into the whole process is the reason we have an extremely high success rate with our modifications and that people who try it by themselves rarely get approved. We love to hear about people who are able to obtain positive results on their own; but we are here to help when the bank denies you without telling you why. Give us a call if this is your situation.

Buenos Dias Readers! I'd like to take the next few updates to explain and the Government's Making Home Affordable Program (MHA). This is the program many of you have heard about in the news, that was designed to save homeowners from foreclosure. Over the next few updates we will explain the program, how to qualify, and what to do if you don't qualify.

Back on February 18th of this year, the Obama Administration announced the MHA program. It was expected that it could offer assistance to as many as 7 to 9 million homeowners by reducing monthly mortgage payments and avoiding foreclosure. On March 4th of this year details began getting published about the program. On April 28th, more guidelines were announced and the program was strengthened. By now most lenders have implemented the program and roughly 75% of all loans in the country are covered by the program (although that doesn't mean 75% of them are eligible).

The main goal of this program is to assist lenders and homeowners in modifying or refinancing homeowners mortgage payments to levels that are considered affordable. For this program that means that homeowners are expected to be able to afford a payment that is between 31% and 38% of their Gross Income. For instance if your salary is $120,000 and you make $10,000 a month, you can expect your mortgage to be modified to a payment (including taxes, insurance, HOA) of $3,100 a month.

There is a step process to get this payment down. First the interest rate is dropped to a floor of 2%. If that doesn't lower the payment enough, the loan term is extended up to 40 years. If that still doesn't get the payment down, they do what is called a principle balance forbearance. This means that they will take the difference between the unpaid loan balance and the fair market market value of the home and tack some or all of that amount on the end of the loan, at zero percent interest, due in a balloon payment when the house is refinanced, sold, or the loan becomes due.

The Lender is responsible for any loss for doing the modification up to the 38%. The government will split any loss that results from the above process in lowering the payment from 38% to 31%. This is the basics of the program. Next time we will discuss qualifying for the program.

Hi Readers! So last time we were going over Bankruptcy and how it can help with foreclosure. I was going over the Automatic Stay that is put in place upon filing and how that stops collection activity. Of course foreclosure is collection activity. The banks don't just sit there and take it so to speak. They have options too. The most common is the Motion to Lift the Stay, which if granted allows the foreclosure to continue.

Now, what if the bank has already filed a foreclosure notice? Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months’ notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

Many of you know that consumers generally have two options for Bankruptcy, either a Chapter 13 or a Chapter 7. I say generally because there are other options; but they rarely apply. Just a side note, they are named after the Chapter they reside in, in the Bankruptcy Code. So let's start with how a Chapter 13 works to help.

Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re behind on your mortgage payments with no feasible way to get current, one way to keep your home is to file a Chapter 13 bankruptcy.

How Chapter 13 works...in general. Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose—five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.

What if you have 2nd and 3rd mortgage payments? Chapter 13 may also help you eliminate the payments on your second or third mortgage. That’s because, if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value like so many these days), you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt —which, under Chapter 13, takes last priority and often does not have to be paid back at all. For more information on what happens with a stripped off mortgage see my earlier post. We'll continue with Chapter 7 next time.

Good Day Readers! More Good News regarding some much needed tax relief. Recently there have been two new changes to the mortgage tax laws that could save new homeowners and those facing foreclosure thousands in taxes. The new changes affect Private Mortgage Insurance (PMI) for new borrowers and tax "penalties" for those already suffering through foreclosure.

First of all, let me explain what PMI is and when it is needed. PMI is required by most lenders when a homeowner borrows more than 80% of a home's value. In other words, if you put down less than 20% for a down payment the lender will require you to pay PMI. The reason is to protect the lender, not you. It protects the lender in the all too common event that the borrower can't pay his/her mortgage. If you were to put down 20% or more, and then couldn't pay your mortgage, the lender is generally protected from loss as they can foreclose and sell them home using the 20% of equity to protect their loss. Now, the rules of PMI haven't really changed; but now borrowers can deduct PMI payments from their taxes, reducing the after tax cost of buying a home!

The second change benefits those who have been unable to keep up with their mortgage payments and have faced losing their home to a foreclosure or short sale. It use to be that, if a lender could not sell the property to satisfy the full debt of the mortgage owed on the property the homeowner in default would be liable for taxes on the unpaid balance. This tax law change now waives any tax penalties from January 2007 until December 2009 on any primary residences that enter into foreclosure or short sale.

Hi Readers! By now I assume that anyone who has made it to this website knows something about the sub-prime mortgage meltdown. There has been constant news coverage, "government action", and of course most people have felt the whole economy downturn in its wake. However, did you know that there is going to be another wave of foreclosures that could rival or even exceed the ones related to the sub-rime meltdown?

The mortgages I am talking about are called option ARM mortgages. They represent over $230 Billion in mortgage dollars and roughly 564,000 in mortgages held. The main attribute of these ARMs is that borrowers can opt to pay less than their monthly balance due and the difference is tacked on to the outstanding loan balance. However, these ARMs have triggers that reset to a new interest rate based on either a set time frame, or when debt exceeds some cap above the loan's value. When rates go up, and they will (see earlier blog "Mortgage Interest Rate to Skyrocket soon.."), these triggers will activate and we are going to see another wave of foreclosures.

The difference here is that these ARMs will be unfolding over a longer period of time compared to the sub-prime ARMs. In other words, these is still time to do something about it! Call for a free consultation to see what options might be best for you. Believe me, we can't help everybody who calls; but we usually can point you in the right direction at least. C U next time!

Buenos Dias Web Surfers! Today I'd like to tell you about some good news from the IRS. I know it sounds like an oxy-moron; but once in a while we taxpayers are "given a break". This is what happened with The Mortgage Forgiveness Debt Relief Act of 2007.

First of all let's talk about something ridiculous the IRS does; Cancellation of Indebtedness Income (COD). What is COD Income? Let's say you owe me $10,000 and I tell you, "you know what, just give me $1,000 and we'll call it even." So I just let you off the hook for $9,000. Guess what? The IRS is going to tell you that you just had $9,000 of income and you need to pay taxes on that $9,000. Sure they have good reasons for this; but I hate it. The problem we were facing as we did mortgage modifications was that people were getting 1099s from their lenders for COD income they "received" when they started paying less for their mortgages or when their delinquencies were forgiven.

Well obviously this was a huge problem. Here we had thousands and thousands of people who were struggling financially and couldn't pay their mortgage, and just when they get help, the IRS was going to swoop in and tax them on money that was never in their hands. Enter The Mortgage Forgiveness Debt Relief Act of 2007.

This act "forgives" taxpaye'rs COD Income where debt is reduced either through a mortgage modification/restructuring or debt forgiven through a foreclosure. The amount allowed is $1 Million for a single filer and $2 Million for Married Couples Filing together. Yea! There is one downside though. The amount forgiven reduces the taxpayer's cost basis in the property.

Quickly I'll explain cost basis. If you buy a house for $100,000, your cost basis is $100,000. If you sell the house for $200,000 the IRS uses your cost basis to determine how much you gained. In this case, you would have gained $100,000 and the IRS would tax you on that $100,000. If you had $50,000 of COD income your cost basis in the example here would be reduced to $50,000. Now if you sold the house for $200,000 you would be taxed on a gain of $150,000. See the IRS always gets you in the end; but at least this way you actually have money in hand to be taxed on. That's it for today!