Realty Times Feature Article by Benny L. Kass
Question: We bought our house a couple of years ago, when the stock market was high and we thought we were flush with cash. Now, however, I have lost my job, and am a couple of months behind in my mortgage payments. I have started to get "dunning letters" from my mortgage lender, and just do not know what to do -- or where to turn.
There is very little equity in our house, since we did not put down a lot of cash, but instead opted for a high mortgage. In fact, I am not sure that there is any equity at all now. We cannot make the mortgage payments, and recognize that we may have to sell the house and move out. We have heard about a concept called a "deed in lieu", but do not understand what this is. Can you explain? We never thought this would happen to us.
Answer: None of us can appreciate the future. Although we always believe it will never happen to us, once in a while, calamity strikes, and then we have to address these very hard and difficult questions. This now applies, unfortunately, both on the international scene, and personally to a lot of people here in the United States who are facing financial problems.
I know it will not be a consolation to you, but you are not alone. Recently, the Mortgage Bankers Association of America reported that the delinquency rate for loans on one-to-four unit residential properties grew to 4.63 percent in the second quarter of 2001. And in light of September's terrible events, I suspect that this rate will start increasing in the months to come.
Before addressing the deed in lieu issue, let me outline for you a number of steps regarding how to deal with your mortgage lender, if you start to get behind on your mortgage payments.
If you want the lender to cooperate with you, there has to be an equal level of cooperation on your side. As one example, according to the FreddieMac guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief "to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations . . ."
It must be noted that the key word is "cooperative" borrowers must be willing to talk with their lenders immediately when they start having financial problems.
The first possible relief is referred to as "temporary indulgence." Here, the lender, on request, may grant the borrower a short period of time -- usually not more than three months -- in order to cure any delinquency. However, this is merely temporary relief, and by the end of that short period of time, the borrower must be completely current.
Another approach is a repayment plan. Here, the borrower is given a fixed period of time -- usually not to exceed one year -- in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly mortgage payment. It is important to get this repayment plan reduced to a written document, signed by both the lender and the borrower.
Lenders also can enter into what is known as a special forbearance relief agreement, whereby the regular monthly mortgage payments are suspended or reduced for a period of up to eighteen months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed; additionally, a comprehensive plan must be agreed upon for the repayment of the amount that has been suspended.
In this case, the lender will make a determination that the default is curable, and based on the current financial and appraisal data, the lender must be satisfied there is a likelihood that the borrower will be able to comply with the repayment plan. Clearly, the burden is on the borrower to document and justify the plan, so as to satisfy the lender's requirements. Again, your cooperation is mandatory.
If you are in the military, the Soldiers' and Sailors' Civil Relief Act of 1940 provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that Act.
Another avenue that may be available to you is known as a "short sale". Here, the lender will authorize you to sell the property for what it is really worth, and the lender will get all the proceeds.
Let us look at this example.
The house can probably be sold at $150,000, but the mortgage is $175,000. The lender may allow you to sell the property for $150,000.
After a commission to the broker, the lender gets all the remaining sales proceeds; you get nothing from the sale. However, under this "short sale" approach, you will be relieved of your mortgage. In some cases -- depending on your financial situation -- the lender may want you to pay a portion of the mortgage shortfall; this depends on the lender and is clearly negotiable. (Please see a tax professional when considering a "short sale" or any other arrangement with a lender.)
The deed in lieu of foreclosure is another remedy that may be available to you. Under this arrangement, you deed your property to the lender (or to whomever the lender designates) and this is in lieu of (instead of) foreclosure proceedings. This arrangement is an acceptable and customary procedure when, for example, the borrower is deceased and the estate is willing and able to transfer the property, or the borrower has filed Chapter 7 bankruptcy, and the trustee has abandoned interest in the property.
There are a number of requirements in order to accomplish a deed in lieu, and each lender will have their own set of guidelines. Generally speaking, however, the following requirements are usually imposed by a lender that is willing to accept the deed in lieu:
When a lender takes property as a deed in lieu, presumably the borrower's credit history has already been tarnished; after all, the borrower has probably not been making mortgage payments for several months. However, it is my understanding that a deed in lieu will not get reported as a foreclosure on your credit history, and thus if the lender is willing to accept the deed in lieu of foreclosure, at least you may be able to avoid even further negative credit history.
It is strongly suggested that you contact your lender immediately, and have a face to face discussion with them. If your lender is no longer in your home town, send them a letter and then pick up the telephone and make arrangements to talk to the most senior official at that mortgage lending company.
The final option, of course -- which should be used only as a last resort -- is for you to file bankruptcy. When someone files for bankruptcy, there are many protections that automatically apply from the day the bankruptcy petition is filed with the Bankruptcy Court. The most important protection under the bankruptcy law is known as "the automatic stay." If you are in bankruptcy, no legal action can be taken against your house unless the lender requests the Court for permission to "lift the stay." This means that the lender goes before the bankruptcy judge, in open court, and petitions the Court to permit the foreclosure to take place.
Depending on the circumstances, including the amount of equity you have in your house and the possibility of getting back on your feet financially, the Bankruptcy Court may or may not lift that stay.
You cannot ignore the problem, hoping you will win the lottery or find some other immediate source of funds. The level of your cooperation is the most significant aspect that will determine how willing the lender is to similarly cooperate with you.
Pinnacle Real Estate Services, LLC a Mississippi
Corporation