My previous blog posting dealt with the basic statistics and information about mortgage foreclosures. Below are things that you and the Lender must consider in regard to how to handle a potential foreclosure situation.
5. CONSIDERATIONS AND OPTIONS OF LENDERS AND BORROWERS
When I have a borrower who is in default or it is imminent, I look at the following:
a. Who signed the note and guarantee?
The Lender can only get a deficiency judgment against the people who signed the note and guarantee. If the judgment is against an individual spouse, it creates problems in collecting a deficiency judgment.
b. What assets do the borrowers and guarantors own / how are they titled?
If a potential deficiency judgment is against both spouses or an unmarried individual, the judgment holder can levy on non-exempt assets. “Exempt” assets include homestead property of the judgment debtor(s) (even if purchased after the foreclosure of their previous homestead property), 401(K), IRA, Pensions, cash value of life insurance, social security and many other items. If the judgment is against an individual spouse, any property held by the parties as husband and wife is also exempt. In addition, you cannot garnish the wages of the “head of household” who provides more than 50% of support for a spouse or minor children. So even without filing bankruptcy, judgment debtors can avoid paying a judgment in many cases.
c. What credit requirements do the borrowers/guarantors have in the future.
In deciding whether to default on a loan (“strategic defaults”), you must consider the impact on your credit.
6. OPTIONS WHEN YOU CANNOT OR DO NOT WANT TO CONTINUE PAYING
a. Refinance through government programs. The most recent program, HARP 2.0, would allow anyone who is current on their mortgage and has no late payments of 30 days or more for the last 12 months to refinance at today’s low rates. This can apply to anyone with a home loan owned by Fannie Mae or Freddie Mac, not matter what lender is servicing their home, provided the home was purchased and the loan was transferred to Fannie or Freddie before June 1, 2009. HARP 2.0 removed the loan-to-value cap of 125% that was placed on the original program, allowing a refinance with any lender who is participating in the program, no matter how under the borrower may be. HARP 2.0 also allows someone with mortgage insurance still in place to refinance also. The program is currently set to expire at the end of this year, but could be extended or modified by Congress.
b. Offer Lender a “deed in lieu of foreclosure.” This occurs when the Lender accepts Deed from in instead of going through the cost of a foreclosure proceeding in return for releasing you from a deficiency claim. This is difficult if you have multiple mortgages with different Lenders on the property. This will impact your credit about 125-150 points and you will get a 1099 for a forgiven debt that is taxable to you if it is not your homestead property.
c. “Short sale” in which the Lender accepts a contract for sale of an amount less than the amount due on the mortgage in return for releasing the borrower from a deficiency claim. This has the same impact on your credit and taxes as the “deed in lieu.” Both the deed in lieu and short sale are at th option of the Lender.
d. Allow foreclosure to occur. If you cannot come to an agreement with the Lender for a deed in lieu or short sale, you can allow the foreclosure to occur. This risks the threat of a deficiency and impact your credit by about 250 points. A deficiency judgment will last for 20 years. You do have defenses in foreclosure cases that can substantially slow the process to buy you time to save money.
e. Bankruptcy. This will generally do away with the threat of a deficiency, but will impact your credit 200 points.
When Lenders are determining whether to allow a deed in lieu or short sale, they are looking at your finances to see if your collectible, the cost of pursuing the matter v. accepting such a deal and the threat to the security.