|How Those With Underwater Mortgages Can Stay Afloat|
January 10, 2008
THERE'S HARDLY A homeowner out there who doesn't cringe at the thought of how far their home's value has sunk over the past year. But for those who find that they owe their mortgage lender more than their home is actually worth, things can get especially painful.
Folks with these "underwater" mortgages who are already having trouble making their payments may feel as if they have nowhere to turn. Pending mortgage rate resets, mounting debt and eventual foreclosure seems inevitable.
That's largely because despite well-publicized efforts on both the federal1 and, in some cases, state2 level to help homeowners facing mortgage rate resets, no aid is being extended to those whose homes have negative equity.
But while conventional "exit" options -- selling the home or refinancing into an affordable mortgage -- seem difficult or downright impossible when you're "underwater" on your mortgage, many banks are now offering solutions that help homeowners do just that.
The exact number of folks with negative equity is hard to determine, but the figure could easily exceed one million. A study by FirstAmerican CoreLogic, a real estate data analysis firm, estimates that 11% of homes purchased between 2004 and 2006 (not only the peak of the housing market, but also the period during which most no-money-down loans were issued) are currently underwater. Needless to say, that percentage will only grow larger should housing values continue to fall.
The good news is that lenders are becoming increasingly willing to help these homeowners avoid foreclosure. That should continue to be the case, as long as the high number of foreclosures continues to leave banks with a glut of repossessed homes, which is an expensive proposition: Not only do the lenders suffer losses on the loans for these homes, but they have to maintain and market them to potential buyers, as well.
"You'll see more and more lenders helping people stay in their homes over the long run," says Todd Mark, a vice president of education at Consumer Credit Counseling Service of Greater Dallas, a HUD-approved housing counseling organization.
One caveat: Don't expect help if you're current on your mortgage and can afford the payments in the foreseeable future. "[Lenders] want to know the hardship is there," says Brian Tracz, a New York-based real estate attorney who specializes in foreclosures. "They view this almost as a partnership in misery."
For homeowners caught in this predicament, here are two solutions worth considering.
Until recently, housing advocates gave lenders poor marks when it came to doing loan modifications, or changing the terms of loans by lowering the interest rate, switching adjustable-rate loans to fixed, or both. According to a Moody's report published last year, lenders modified less than 1% of the loans that reset during the months of January, April and July 2007.
But as the Bush administration's "teaser freezer" plan brought rate reset troubles into the spotlight, lenders' efforts to help homeowners have increased. "Lately, I've been doing a lot more loan modifications because of all the hype," says Dania Perez, a foreclosure prevention specialist with the Tampa Bay Community Development Corporation, a HUD-approved housing counseling organization. Since the plan's announcement, the organization's successful completion of loan modifications has doubled.
So who is a good candidate for this solution? To start with, you have to want, and be able, to continue living in your home, says Patrick Carey, executive vice president for default and loss mitigation at Wells Fargo. Lenders typically request a letter explaining your financial hardship (the reasons why you fell behind on your loan), along with detailed financial information, including bank statements and a budget, proving that should the bank modify your loan, you'll be able to afford the mortgage payments.
While many lenders still refuse to work with homeowners unless they're already delinquent, some -- including Wells Fargo -- encourage their customers to contact them as soon as they see trouble coming.
What if you can't afford your home -- even at a lower mortgage rate -- or have to move? Then a short sale may be your best bet. A short sale is when your mortgage lender agrees to let you sell your home at a loss with the understanding that it will have to take the financial hit.
Short sales were practically unheard of in the real-estate boom years, when housing values went up so quickly that homeowners were almost certain to sell for a profit -- even if they bought the home with little or no money down. Now that home prices are falling, short sales are becoming increasingly common, at least in neighborhoods or regions that have been overwhelmed with foreclosures.
In an odd way, short sales are somewhat of a win-win situation for the bank and the borrower, since both parties stand to lose a lot more if the home goes into foreclosure, explains Joel Broyles, a real estate broker in the Dallas-Forth Worth area. But that doesn't mean these transactions are easy to accomplish.
To start with, borrowers must be delinquent on payments in order to even be considered for a short sale. Then, there's a heap of documentation to be filed, including a home appraisal and bank statements showing the owner's assets aren't enough to make up the difference between the amount owed and the home's market value. And there's the small matter of finding a buyer -- a feat that's next to impossible in places that have been infiltrated by "For Sale" signs. Since the short sale process can take months to complete, buyers often lose patience or find more attractive offers and withdraw from the process, says Christian Folland, a Miami Beach-based real estate attorney. In these situations it's best to recruit experienced help, including a real estate broker and an attorney who specialize in short sales. (Ask a trusted lawyer or realtor for recommendations.)
The good news: You won't suffer a tax bite. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, the difference between the original mortgage and the amount for which a home sells at a short sale (i.e., the amount of debt forgiven by the bank) is no longer considered taxable income by the IRS.
The bad news: Your credit score3 will be trashed. In fact, it will suffer just as much as it would if your home was foreclosed, explains John Ulzheimer, author of "You're Nothing but a Number," a book on credit scores. "The credit scoring model doesn't evaluate that you tried to do things better with a short sale," he says. The severity of the hit depends on your payment history; if your score is already damaged from late payments, it will drop less than if you had a good payment history.
But time heals all wounds. The impact of a short sale lessens over time (just like it does for those who have been through foreclosure). Also, when reviewing your credit report, future creditors will be able to distinguish between a short sale and a foreclosure, which should help you catch a break.
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