Oct. 14, 2008
Over the past few months, the USA and much of the Western World has become increasingly embroiled in a financial crisis that has come about for a variety of reasons, mostly related to the housing market.
Many home owners bought their homes with little or no down payment and with “teaser” interest rates, with the expectation that their equity in the home would increase as home prices continued to rise. If they were unable to afford the higher monthly payment when the interest rates re-set, it was suggested that they would be able to re-finance their loan to a more affordable one.
Unfortunately, home prices did not continue to rise. The inevitable result is that people are having to give up their homes as the lenders who were so willing to advance funds are now foreclosing on the loans.
The Foreclosure Process
When a borrower misses the first loan payment, this usually just generates a reminder letter to make a payment with a request to call the lender if there is a problem.
When the second monthly loan payment is missed, the home owner can expect a phone call, as well as a further letter stating that Foreclosure proceedings may be initiated if the account is not brought up to date.
If three monthly payments are missed, the lender will then file a Notice of Default (NOD). This is the first stage in the Foreclosure process and it essentially states that unless the mortgage account is brought current, the home will be sold by auction to the highest bidder.
The homeowner can redress the situation right up to 5 days before the auction by bringing payments up to date.
The Practicality
When the lender puts the home up for sale by auction, there is a starting bid published that is often set unrealistically high so no bids get made. The home then becomes the property of the lender, typically a bank. Now banks do not want to own property so their main objective is to get it sold as quickly as they can. They will ensure a clear title (as otherwise it is not saleable) by settling any liens on the home and they will do anything else that they consider is essential to make the home saleable, sometimes including painting and re-carpeting, before offering it for sale. Often, the list price will be below market value in order to achieve a quick sale and such properties can be very good deals, particularly for buyers who don’t mind carrying out some improvements.
The Effects of Foreclosure
Losing your home to foreclosure may not seem a terrible thing for some people. This is particularly true when a home was bought with little no money down. The negative effect on a home owners credit is significant though - most likely 2-300 off his FICO score and a Foreclosure noted on his credit report where it will stay for up to 10 years. The result is that it is unlikely that he will be able to get a mortgage again for 7 years or so. A Foreclosure on your credit record can also affect your chances of obtaining future employment in some cases.
Alternatives To Foreclosure
If you see no way you can continue making agreed loan payments, it is essential that you respond to the situation promptly.
The first step should be to call your lender and discuss the problem. Lenders do not want to foreclose and many will restructure your loan if this is possible.
Failing that, there are a number of provisions in the Housing and Economic Recovery Act of 2008 (HR3221) that may help. You can find details on the FHA web site at www.fha.gov.
Finally, listing your home for sale as a “Short Sale” is a very viable option for many people. In this case, you list their home for sale in the normal way, but with a notation that it is a “Short Sale, Subject To Lender Approval”. When an acceptable offer is received, your agent submits it to the lender with supporting documentation on your behalf and a request that the lender accept the purchase price offered in full settlement and forgive the shortfall. A major benefit of a Short Sale as opposed to a Foreclosure is that it should be possible for you to get a mortgage again in just 2-3 years.
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