Refinance Free Credit

This post is from the Blown Mortgage Hall of Fame.  Originally published in July 2007 (apparently a good month for blogging) it covers 7 alternatives to foreclosure if you’re behind on your mortgage payments. I’m definitely on my way back home at this point - see you soon.

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It is all too often these days that I am talking to people who are in a bind with their mortgage. They usually fall in to one of 3 groups:

• They have taken on too much mortgage debt with a large home or previous cash-out refinance
• They have fell on some hard times, either through a loss of a job, injury or loss of a spouse
• They have recently had their mortgage payment adjust and they can no longer afford the higher payment

The first option that they look for (and that we try to consider) is a refinance out of the existing mortgage and in to one that is more manageable in terms of the monthly payments needed to keep the debt in good standing. While this may not be the “best” option it is the one that people gravitate towards initially. Refinancing was easy over the last few years:

• Sky-rocketing property values ensured that consumers could count on home appreciation to help them pay off debt and pull cash out of their homes
• Interest rates continued to drop or remain low
• Credit guidelines became looser and made qualifying for loans easier than ever

However, today things are much different.

• Home prices are falling
• Interest rates are rising
• Equity is tapped out
• Credit guidelines are tougher

All of this means that refinancing is not always an option for homeowners who suddenly find themselves unable to handle their mortgage payments. If you are in a situation where you have missed-and are likely to miss future-mortgage payments, here are 7 options you need to know about and explore to avoid foreclosure and keep from losing your home.

1. Refinance - If you can. This may be the best chance you have to get a mortgage while rates are still reasonably low and programs are still available. If you are a subprime borrower in a short-term loan that is coming adjustable shortly you need to take advantage of this last window of opportunity. With Wall Street set to devalue billions of dollars in subprime loans you can bet that subprime lenders are going to become more strict in their guidelines and more expensive in terms of interest rate.Take advantage of the rates and programs today - they probably won’t be there tomorrow.

If you can’t refinance and are late on your mortgage here are 6 other options you have to help avoid foreclosure on your home.

2. Reinstatement - You may be able to have your loan reinstated by contacting the loan servicer and agreeing to repay the past due amount of mortgage payments plus any fees and penalties by a certain date.  This will bring your loan current and stop the lender from initiating foreclosure proceedings.  If you are having a hard time making your mortgage payment this option may be impossible for you; however if your inability to pay was based on a temporary situation or one-time expenses this may be viable.

3. Repayment plan - You may be able to stop foreclosure proceedings by establishing a repayment plan with your loan servicer which adds additional money to your currently monthly mortgage obligation to repay the amount of delinquent mortgage payments outstanding on your loan.  Again, this will only work if you have a few mortgage payments delinquent as adding additional dollars to your monthly payment may make meeting these obligations impossible.

4.Forbearance -  Forbearance is where your loan payments are either suspended temporarily or the amount of the monthly payment is drastically reduced for a short period of time.  The length of time is negotiable between you and the loan servicer.  The deferred portion of the payments can either be due upon completion of the forbearance period or they may be added to the outstanding balance of the loan.  This depends on the loan servicer.  Remember, the loan servicer is not going to agree to a forbearance agreement unless you can prove that the situation leading to your inability to pay is a temporary one that can be resolved shortly.  If you can’t afford your home simply because the debt is too expensive there is little chance that the loan servicer will approve a forbearance request.

5.  Loan Modification - A loan modification is a change to the terms of your loan to keep the loan affordable and to help you keep your payments current.  A loan modification may reduce the long term interest rate, adjust the length of the fixed period of the loan, or adjust the loan balance to add missed payments on to the principal balance of the loan.  Typical loan modifications include reducing the interest rate of loans that have recently adjusted out of their teaser rate period.  This makes sense if you are able to remain current on your loan with slightly better terms than you are currently obligated to through the loan documents.

6. Selling Your Home - This may be the best option if none of the above solutions will work for you.  While it may be painful to sell your home; it is far better than losing your home outright via a foreclosure sale.  You may have to sell your home at a loss, called a “short sale,” in which your lender approves a sale amount that is less than the amount of your existing mortgage.  If your lender approves a short sale you will be issued a 1099 for the difference between your mortgage amount and the sale amount.  This amount is taxable as “debt relief” under existing laws.  There is some pending legislation to change that tax that is working its way through Congress.

7. Bankruptcy - Bankruptcy is always a last resort; however, it may be the only thing that will let you keep your house out of foreclosure.  If you are in foreclosure and the lender or servicer will not stop the proceedings for any of the above remedies consider filing bankruptcy.  Once bankruptcy is filed foreclosure proceedings are halted immediately.  While a bankruptcy will have a large negative impact on your credit for a long time to come, so will a foreclosure.  But with a foreclosure you lose your house too.  Talk to a bankruptcy attorney about specific pros and cons to filing bankruptcy if your lender or servicer will not consider any other options.

Remember, while your loan service collections department can be aggressive and downright unfriendly when trying to collect past-due mortgage debt their tune will change quickly if you inform them that you are unable to repay the debt.  If you are late and need to consider one of the above options take the following steps immediately:

1. Talk to a trusted mortgage professional about refinancing options.
2. Talk to your loan servicer’s collections department and ask to be transferred to the “loss mitigation” department
3. Fully disclose to them your current situation and reasons for delinquency
4. Discuss your options to cure your debt and manage future mortgage payments
5. Become more informed about foreclosure prevention options
6. If you have a FHA or VA loan you may have other options - contact those entities directly (www.fha.gov)

For more information on staying out of foreclosure visit the Federal Trade Commission’s Facts for Consumers on the foreclosure process.  Much of the information here is based off this valuable resource.

A few things not to do if you are facing foreclosure (we’ll cover these more in-depth in a future post):

1. Do not sign on with a foreclosure rescue firm
2. Do not add anyone to the title of your property who promises to bring you current or otherwise repay your loan
3. Do not agree to any impossible debt repayments such as borrowing $40,000 with a guarantee to repay $80,000 in 6 months.
4. Do not let anyone charge you an upfront fee for foreclosure advice and assistance (it’s illegal in California).

Feel free to email me if you have any questions or concerns about your existing mortgage.  I am more than happy to help if I can.

Maryland governor Martin O’Malley joined with local elected officials and consumer advocates last week to sign emergency legislation that targets troubled borrowers in the state.

Perhaps the most immediate mortgage industry impact will be felt by just one of the three bills that was passed — the obscenely-long-named Real Property–Recordation of Instruments Securing Mortgage Loans and Foreclosure of Mortgages and Deeds of Trust on Residential Property bill. (Yes, that’s the actual name).

The legislation significantly lengthens the foreclosure process from 15 days to approximately 150 days, by requiring a lender to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action.

It also requires personal service to notify a homeowner of impending foreclosure action, and requires that a sale may not occur for 45 days after service. A lender must also produce “proof of ownership” when filing a foreclosure action, according to a press statement put out by the governor’s office.

“Proof of ownership” has been a hotly contested issue in many courts as the number of borrower defaults have surged. Many judges in jurisdictions across the nation are now requiring the actual mortgage note to be produced during a foreclosure proceeding, when such requirements may not have existed in the past — and even when such a requirement may be contrary to prevailing law, some legal experts have suggested to HW.

Nonetheless, it’s unclear what Maryland’s definition of “proof of ownership” is as it ties to this bill; calls to a few industry sources in the state were not returned by the time this story was published.

Longer foreclosure timelines are being considered in other states as well, as state and local governments grapple with a surge in borrower defaults, sources tell Housing Wire. Such changes can be bad news for investors and insurers, who see so-called carry costs increase beyond whatever expectations had been in place when a deal was originally structured or a particular loan pool was purchased.

For insurers, the new law may mean increased loss severity on borrower default claims in the state, sources said.

If you ever wanted to know just how far the U.S. mortgage mess reaches, look no further than Japan’s second-largest bank, Mizuho Financial Group, Inc (MFG: 7.81, +2.90%). The bank today warned that its securities trading unit lost 400 billion yen ($3.96 billion) in the twelve month period ending March 31; more than 209 billion yen ($2.1 billion) of that loss came since January 1st, the company said.

Mizuho said that the losses were “due to mark downs related to securitization products amid the dislocation in the credit markets stemming from the U.S. subprime loan issues.” Hello, global credit crisis!

The losses in the securities unit, Mizuho Securities Co., Ltd., will likely push the bank well below its original profit forecast of 480 billion yen ($4.7 billion) to 310 billion yen ($3.0 billion) — a 35 percent hit to earnings, thanks almost entirely to U.S. mortgage exposure.

The bank said its securities unit sold or wrote off the equivalent of $3.7 billion in collateralized debt obligations and residential mortgage-backed securities during the first 3 months of 2008.

Via Bloomberg:

“Long term, we must question whether the Mizuho group is properly governing its securities arm,” said Keisuke Moriyama, a Tokyo-based banking analyst at Nomura Holdings Inc.

Mizuho waded into the business of repackaging and selling U.S. debt securities just as the market began showing signs of collapsing, hiring a team of bankers from Calyon, the investment bank of France’s Credit Agricole SA, in December 2006.

A year later, Mizuho suspended trading and creating U.S. collateralized debt obligations containing asset-backed securities or high-yield corporate loans.

During the go-go years of 2006 and part of 2007, Mizuho was among the world’s top 20 issuers of mortgage-bond-backed CDOs. Investors, however, seemed unfazed by the news: the bank’s shares rose 22 cents on the New York Stock Exchange on Friday to close at $7.81.

Disclosure: The author held no positions in MFG when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Fitch Ratings said Friday that it expects the housing contraction to last through 2008 and into 2009, contrasting with expectations of some industry groups — most notably the National Association of Realtors — that expect the back half of this year to represent a rebound in key U.S. housing markets.

“Continued low mortgages rates, some improvement in affordability, proposed government support for beleaguered mortgage holders and the economic stimulus program may signal a possible step in the right direction for U.S. housing,” said managing director and lead homebuilding analyst Bob Curran.

“That said, a modest recession, declining home prices, tighter mortgage standards even for conventional loans, poor buyer psychology and record levels of new and existing homes for sale will continue to define the current environment for housing.”

Fitch said it is expecting very weak operating and financial performance in the upcoming first quarter 2008 earnings season, and noted that credit metrics continued to decline during the first quarter among key home builders.

“Tangible net worth covenants have been and will be challenged,” said Curran.

The rating agency is set to issue a full report on its expectations for builders, as well as a press conference next week. HW will report on the details as they become available.

For more information, visit http://www.fitchratings.com.