Housing “relief” programs could have little impact
Two new foreclosure prevention programs may do little to help many homeowners because housing values have fallen too far.
Foreclosure counseling experts expressed disappointment Wednesday about limits placed on the federal refinancing and loan modification programs.
Here's the main problem: Since peaking in 2005, home values have plunged as much as 64 percent or more in many counties in the nation.
As a result, many homeowners owe substantially more on their mortgages than their homes are worth.
The new federal refinancing deal, unfortunately, is only being offered to home-owners whose first mortgage only slightly exceeds their home's value.
Specifically, these programs will help people whose loans do not exceed 105% of their current home value. For example, if your home loan is for $315,000 and your current home value is $300,000, you would qualify for these programs. However, if your home loan is higher than that and your home value is the same, these programs will not help you.
Unfortunately most people find themselves with loans way higher than their current home value.
A typical scenario is that the loan is for $500,000 while the current home value is $350,000.
What can a person who finds him /her self in the above situation do?
The first step is to talk to your lender and try to work something out to negotiate a reduction on your loan. Should you have difficulty dealing directly with the lender, there are many companies that offer “loan modification” services. Make sure that you select a reputable company and, in either case, address the fact that your primary target is principal reduction, not reduction on the interest rate.
The second step is a short sale. You list your property with a local broker and you accept offers subject to your lender’s approval if the offer is less than your loan amount. In many cases the lenders approve the offer, the house is sold, and you walk away with your credit intact.
The third option (and it is an option) if none of the two options above worked is to stop making your loan payments. About the second missing payment, your lender will start sending you letters stating its intention to foreclose on your loan. Take this opportunity to negotiate with your lender. Submit any hardship you are experiencing (loss of a job or income, sickness, etc) in writing. Be truthful as the lender will verify your statements. Even during this period you have a good chance to work out something with your lender. If all fails, then you have approximately five months of free rent until you have to vacate the property. This is the average time it takes in most states from the day a Notice of Default is filed to the day the property is taken back by the lender and is auctioned to the public for sale. Most of the properties will not actually be sold at the auction. The reason for this is that the minimum bid asked includes the full amount of the loan plus the expense of the foreclosure, the combination of which is way above the current market value. When the property does not sell at the auction, the lender has to “warehouse” it until it lists the property with a local broker at the current market price in order to sell it. That can give you some additional time to stay in the property payment rent free. In many cases that can be a savings of $10,000 or more to you.
Now, of course the foreclosure will affect your credit rate adversely. However, you can always re establish credit and when the economy starts moving again your credit will be fully restored.
During similar periods in the 80s and 90s, most people were able to restore their credit and, when asked by an institution during a loan application about the foreclosure in their report, were able to honestly state in writing the prevailing circumstances of the time. In my experience, nine people out of ten of these individuals successfully got their loans.