Options for Homeowners in Distress!  Last updated: 11/25/2009 08:23:19 PM

This real estate market has caused unbearable stress and heartache. Millions, yes millions of homeowners are facing decisions on how to best handle mortgages that have interest rates and payments that are re-adjusting at the same time that property values are declining. Most homeowners are unaware of the options available, other than pay up or move out. Actually, there are more than a dozen options available and although all of these options may not be feasible for every distressed homeowner, there may be more than three or four to be considered.

Reinstatement:

In many cases, the reason the homeowner missed their mortgage payments was temporary. In most cases, they have the right to reinstate the mortgage right up to the foreclosure auction. To reinstate the mortgage, the homeowner must pay all of the missed payments, late fees, and legal fees that are due up to the date that the loan is reinstated. The homeowner requests the reinstatement amount in the form a reinstatement letter. This letter will typically expire after 30 days since the amount owed is time sensitive. A simple reinstatement will require a one-time payment of all delinquent funds in full.

Forbearance or Re-Payment Plan:

If the reason the homeowner missed their mortgage payments was temporary and the homeowner is not able to make a one-time payment, they may be able to negotiate forbearance or a re-payment plan. If the homeowner does not have the means to repay all of the missed payments and legal fees, this is another option that reinstates the mortgage. The lender allows the borrower to pay the missed amount over a period of time or they may add the missed payments on the end of the amortization of the loan. Usually, the homeowner will be given a specific period of time in which to pay the deficiencies. The lender will usually require income documentation from the homeowner showing that they will be able to comply with the terms of the repayment plan. Caution: typically a mortgage is not fully reinstated through a forbearance plan until all the payments are made in full. If a homeowner misses just one payment they can end up in the same stage of the foreclosure process they may have been in previously.

Loan Modification:

In some cases where the homeowners actually do have the means to afford their mortgage payments, or very close to their mortgage payments, their mortgage company may qualify them for a mortgage modification. A loan modification is similar to a lower interest refinance where the lender lowers the interest rate on the existing loan, resulting in lower payments. The homeowner will have to qualify for a modification by submitting proof of income and expenses. If available, this is an excellent option for homeowners to keep their properties.

Refinance:

If the homeowner has sufficient equity and income and their credit has not been badly damaged they may be able to refinance. This is typically a short term solution since the payments on the property will likely go up considerably due to the refinance. Again, if the issue that made the homeowner late in the first place has been resolved then sometimes this option will work. In many cases this is just a foreclosure waiting to happen.

Short Refi:

This is a relatively new option and shows how far some mortgage companies and lenders are willing to go to avoid foreclosing on properties. The process involves refinancing the loan and reducing the principal balance and often the interest rate as well. The borrower must still qualify for this process, both in showing a hardship as well as showing the ability to pay the new mortgage, often through a fully documented qualification process.

Deed-in-Lieu of Foreclosure:

This is sometimes referred to as a ‘friendly foreclosure’ since the homeowners gives the deed back to the bank. The mortgage company agrees to take the deed back in exchange for the property and avoid the lengthy foreclosure process. Sometimes the lender will forego their rights to a deficiency judgment. This option only works where there in only one loan and no other liens (or very small ones) or in rare cases where a first mortgage holder will negotiate with the second mortgage holder. If an owner has equity, this is not a good option since they give up any right to the property and any equity. Always consult an attorney before agreeing to a deed-in-lieu.

Bankruptcy:

A bankruptcy may temporarily stop a foreclosure and allow a homeowner to reorganize their dept. In most cases filing bankruptcy only stalls the foreclosure. If the homeowner is not able to make the mortgage payments after bankruptcy the lender will foreclose anyway.

Redemption:

In some states, the homeowner has the right to buy back the property after the foreclosure auction by paying the buyer the purchase price plus any qualifying expenses the buyer paid for. This option not available in Hawaii.

Servicemembers Civil Relief Act (SCRA):

The SCRA is a bill that was signed into law (Public Law 108-189) on December 19, 2003. The law provides certain protection to military personnel that are in foreclosure in specific situations. As it applies to mortgages the law reads: “MORTGAGES: The SCRA can also provide temporary relief from paying your mortgage. To obtain relief, a military member must show that their mortgage was entered into prior to beginning active duty, that the property was owned prior to entry into military service, that the property is still owned by the military member, and that military service materially affects the member’s ability to pay the mortgage. http://www.uscg.mil/legal/la/topics/sscra/about_the_sscra.htm

Short Sale:

When a homeowner owes more on a property than that property is currently worth and one of the previous solutions do not apply to their situation, there is the option of pursuing a short sale. A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is ‘sold short’. The homeowner must prove a ‘hardship’ and prove that they do not have the resources to repay the mortgage. In many instances, the lender will accept a ‘short payoff’ to allow the home to sell and may not pursue a deficiency judgment. Every situation is different and the outcome is not guaranteed. See the Mortgage Forgiveness Debt Relief Act of 2007. 

Abandoning the home:

Walking away is an option, but not always the best option because it leaves some legal strings untied. In Hawaii, the lender can foreclose and sell the home at auction. The lender may then pursue a deficiency judgment against the homeowner for the difference between what it sold for at auction and the unpaid balance on the mortgages.

Do nothing:

Probably the worst option! If the mortgage company forecloses the homeowner loses their home along with any equity and may face a deficiency judgment. They’ll have a foreclosure on their credit report that may prevent them from qualifying for another mortgage for seven years.

As a Certified Distressed Property Expert and Realtor, I can give you the experience necessary to save your credit, relieve the uncertainty and most of all, help your family.

Call me at 808-371-1484 or email me at Walt@CoastalHawaii.com

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