What To Do If You Are In Foreclosure? Some Advice For Homeowners And Investors That Really Works
BATTLECALL GUEST EXPERT: Robert J. Abalos, Esq., InvestingInLand.com
Foreclosure rates are on the rise and I suspect they will rise dramatically over the next few years. Mortgage lending standards have deteriorated a great deal recently with the following results:
- More people than ever before have mortgage loans, often on second or vacation homes
While more people own real estate than ever before, they own less equity per property than ever before.
- According to the National Association of Realtors, 25% of all mortgages written in 2004 were nothing down to the mortgagor, or with LTV ratios of 100% or more.
- People who would have been denied mortgage loans on the basis of poor credit or inadequate down payments in the past are now getting loans, meaning that the so-called "subprime loan market" has gone mainstream. These candidates are at a high risk for default.
Foreclosure often happens to many people even with great credit histories, super jobs, and lots of money in the bank. The loss of a job, a medical illness, a disability, poor retirement income planning, and a host of tragedies can force virtually anyone into a mortgage default situation.
Unfortunately a host of scam artists and criminals have entered into this business, offering their "services" to mortgage holders in default. Books and courses from creative real estate authors teaching so-called "subject-to" or "Get The Deed" buying merely add to the criminal aspects here.
The National Consumer Law Center, a Boston-based organization which protects the financial rights of low income consumers, issued a report in June 2005 called "DREAMS FORECLOSED: The Rampant Theft of Americans' Homes Through Equity Stripping Foreclosure Rescue Scams" which explains how widespread and common the abuse of people in mortgage foreclosure situations has become. The report, which can you read by clicking here, calls the situation "pandemic" and "explosive" and I completely agree.
Advice For People In Foreclosure
This article will offer advice on what to do if you find yourself in default on a mortgage loan and how you can avoid foreclosure and the loss of your property.
Please let me offer four important pieces of advice.
First, stay calm and treat the situation like a professional.
When your mortgage loan goes into default and is scheduled for a foreclosure auction, this information becomes public knowledge. In other words, everyone in the general public can find out that you have failed to make your mortgage payments and you are going to lose your property unless the sale is prevented.
It's very embarrassing to have your name in the newspaper this way for all your friends, relatives, neighbors, and coworkers to read. Plus there is the stress of potentially losing your home and having to move your family. There are important Internal Revenue Service tax implications of losing a home in foreclosure. Many people not only lose their property but then get hit with a tax bill from the IRS. The imminent threat of foreclosure is like having a sword hanging above your head 24/7 with only a thread as thin as a human hair holding it aloft. It is very stressful, something the scam artists and con men depend upon.
It is a twisted irony that those people who lose their homes in foreclosure the most are the least able to afford the loss. While rich executives and famous movie and rock stars occasionally lose their homes in forced sales, it is overwhelmingly the working poor and the middle class who lose their homes due to both eviction for the non-payment of rent and to foreclosure proceedings. This makes complete sense since rich people have the financial muscle to avoid foreclosure but individuals and families living paycheck-to-paycheck or stressed beyond economic means by the income burdens of owning a home and paying on its debt clearly do not have the means to pay accumulated monthly amortizations, late fees, interest, attorney costs, and more. Rich people who lose their homes can often easily find another. Poor people have no such easy options.
Foreclosure is almost always event driven, caused by some external problem to a family's finances. Common examples include unemployment and underemployment, illness of a spouse and the resulting medical bills that cannot be paid, the failure of a former spouse to pay child support, drug and alcohol problems, divorce, and all the other disasters that can befall a household. This point should not be overlooked because lenders understand this simple fact. They know that foreclosures usually happen because something unforeseen or unpredictable happened and when that is "cured" and a return to the way things were before the event is possible, foreclosure can almost always be avoided. It is just a matter of buying time and working the problem through so make things whole again.
Please remember these simple facts:
- Your bank or lender does not want to foreclose on you.
- They absolutely need you to be honest with them and explain your circumstance and why you can't currently make your mortgage payments.
- Lenders will work with you if you are honest with them. They have tremendous powers to restructure your debt, give you a moratorium on payments, let you tack missed payments onto the end of your debt, allow you to pay less than your monthly payments for a short time, and other choices that can help you completely avoid foreclosure with your lender showing you the way. These are often called "forebearance" and "deferment" options.
- But to get your lender's help, you need to contact them as early as possible when you know you can't afford the payments. This is essential. Picking up the phone and calling your lender at thirty days late gives you many more options than calling at ninety days.
Be professional about your mortgage. Do not avoid phone calls or letters from your lender. Contact them often and stay in touch. Get to know a person at your lender's office and make them your official contact person on the loan. Call George or Linda and only them. You will likely be working with someone in the loss prevention or collections office of your lender and you want them to "take ownership" of you and your problem. Be friendly. Ask for their help. BUT CALL EARLY. Do not waste another hour of another day. And get all your contacts in writing and keep a diary so you have a record of who you spoke to, on what date, and what they wanted or what you promised to send them. Follow through on all your promises. If you say you are faxing a tax return to them or making a partial payment by the first, do what you say. If you build credibility you can avoid a formal default on your loan and end the foreclosure process before it starts. Your bank or lender may charge you some small fees, like late fees and paperwork costs, but grin and bear them and learn the lesson of making mortgage payments on time at all costs.
Second, get professional help.
If your loan is already in default or despite your best efforts you cannot work out an agreement with a lender, you need to find IMMEDIATE PROFESSIONAL LEGAL HELP. Foreclosure is a legal problem. You need a lawyer.
If you are that anecdotal movie or rock star, business executive, or famous doctor who is about to lose your property to a foreclosure, hire the best law firm you can afford to advise you.
If you have the money to hire a lawyer, retain one. You need professional advice now and this is not the time to skimp on money. Paying someone a few hours of time for some specific advice is crucial right now. Legal fees of the type you need at this early consultation level would cost no more than $1,200 in the most expensive city in America and likely much less elsewhere.
If you are poor and have little or no money to hire a lawyer, seek legal assistance with public and private agencies because foreclosure assistance these days is plentiful and available for free or almost free. Landlord/tenant organizations can also point you in the right direction to find this help and even an Internet search for "free foreclosure help in (insert your city)" reveals options for someone in foreclosure. Here's one I found in my home city of Seattle, WA for free foreclosure assistance:
YOU MUST HAVE INDEPENDENT HELP to maintain a clear judgment at this time for a great many reasons. First, there is the stress of whatever caused the foreclosure, such as a spouse with an illness or an elderly parent with Alzheimer's Disease. Next, there is the added stress of the foreclosure itself and losing your home, having to move, and have your credit rating destroyed. On top of this, most people have little experience with the court system, writs, foreclosure proceedings, and other lawyer-talk. It's quite intimidating for most to be served with legal papers and threatened with the sheriff.
YOU NEED SOMEONE ON YOUR SIDE, who has only your financial interests to protect. Someone who knows the law and can provide you with a myriad of options, everything from selling your property fast to filing bankruptcy to avoid or delay the scheduled sale, to a defect in the foreclosure process that can instantly derail a date on the courthouse steps.
YOU NEED A LAWYER. Find one immediately no matter how much money you have. You have no excuses here because even if you don't have dime you can find free legal help where you live.
Third, avoid and ignore all the foreclosure peddlers who come knocking at your door.
When your name is made public information, especially published in the newspaper, it will be noticed by many real estate investors, sales agents, brokers, and other businesses that specialize in marketing services and products to people when a foreclosure is imminent, everything from moving companies that offer to carry your goods, investors seeking to buy properties at discounted prices, service companies that say they can delay or cancel a planned sale upon payment of a fee, and all other sorts of predators, parasites, and vampires who will knock at your door at all hours of the day or night seeking to speak to you or look inside your home. Again, more stress and it most definitely is a great deal.
What all these people have in common is they want to profit off the foreclosure process and make money on you when you are down and out. The investors are looking for cheap bargains, the service companies want high fees, everyone has their hand out offering help but at a stiff price. Plus this area is fraught with con men and scam artists preying on people in foreclosure. The NCLC report mentioned above chronicles the explosion of these foreclosure scams and my free newsletter at www.investinginland.com routinely reports on these abuses and the victims.
Follow these guidelines and you will do fine.
- NEVER do business with someone who solicits your business at this time. Throw away ALL the letters, postcards, business cards, flyers, and other communications people either mail you or leave on your door. Don't even bother to read them. Many of these people will be professional scam artists and they have powers of manipulation that are almost magical. They can literally sell ice to Eskimos. They will capitalize on your fears and stress and you will sign papers you never thought possible. Avoid putting yourself in this situation. Throw them ALL away the minute you get them. And don't return their phone calls, either.
- Do not call anyone who offers foreclosure help you learn about from a bandit sign, which is a sign stapled to a telephone pole or left on a highway divider. These signs themselves are illegal. That's why they are called bandit signs. It tells you a great deal about the ethics of someone who solicits business through a method that flaunts the law and makes many neighborhoods physically unattractive. They are not advertising to help you. Many want to steal your property. Avoid all of them.
You need to stay in touch with two ESSENTIAL parties through every step of a foreclosure. Your lender and your lawyer. No one else is on that list. Do not add any others or believe anyone who tells you that you should break off contact with either, for example, sign documents without first getting legal approval of them from your lawyer.
- You do not need a stranger you meet through a letter, or a newspaper advertisement, or a flyer in a supermarket, in the process. This isn't the time to make friends and trust me, these people want your property or a great deal of money to perform services you could easily do on your own.
- NEVER QUITCLAIM or sign any new deed to anyone else without your lawyer approving the transaction and explaining to you the consequences of this action. Con men and pretend real estate investors will want you to sell your property in many cases "subject-to" or leaving the current financing intact and simply you giving title of the house to them. They likely will have all sorts of other documents with them that they will use to explain the legality of what they propose. NEVER GIVE ANYONE A DEED TO YOUR PROPERTY UNLESS THEY ARE BUYING YOUR HOME AND PAYING OFF THE CURRENT MORTGAGE IN FULL. NO EXCEPTIONS. NONE. If you give them such a deed, you are still liable for the original mortgage debt and payments, no matter what they promised you, you lose all your repayment options with the lender, and can legally be evicted from your own home. NEVER agree to make payments on your home to anyone but the original lender. If you make payments to anyone but the lender, there is a high risk they will never be made.
- NEVER SIGN ANY DOCUMENTS without getting them approved in advance by your lawyer. This includes documents from any "buyer" of your home to those given to you by your lender. Your lawyer is your secret weapon in this process. Find one you can trust.
Fourth, be realistic if you can't afford your home anymore.
If you know you simply will not able to ever afford your current mortgage loan again, try to sell your property rather than risk losing it. This is a last resort but you will likely get a better deal with a private buyer than at an auction. You will also save a great deal on fees.
This last ditch solution makes the inevitable happen sooner than later. A two-earner income suddenly becomes one paycheck family forever. A bitter divorce leads to financial ruin. A business that has failed and can't meet its obligations now and in the future. Disaster happens and sometimes they are permanent without any easy solutions. It's not just the simple loss of a job but a permanent disability and the ability to even hold one again. In these cases sometimes it is obvious that help is not going to be possible. Your lawyer can help you arrange a quick sale if that's your only way out. Explore every option first but know you have parachute with you if things go very badly. You will pay for a quick sale by having to offer a buyer a substantial discount but half a loaf is better than none.
The Bottom Line
Foreclosure happens to good people. It happens to the rich sometimes and the not-so-rich all the time. The fact you can't pay your mortgage does not make you a bad person, it means you are broke likely because your luck has been bad lately. Get in touch with your lender as soon as you know you have a financial problem and ask for their help. Get a lawyer (and pay them if you can ) but get one to be on your side. Avoid all the people who contact you during the foreclosure because they are on their side and not yours. Be honest with your lawyer and let them work up some realistic options for you.
Do not lose hope. The vast majority of scheduled foreclosure sales never take place and are cancelled by lenders or borrowers who have worked through their problems and sought help.
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