Category Archives: Mortgage Foreclosure

residential mortgage foreclosure and defense against it, including mortgage modifications

Counting the Cost of Student Loans

checkbook-image.jpg

Unlike borrowing for housing, transportation, and cash needs, the benefit of a student loan is intangible. Although it may assist in strengthening income over time, that gradual strengthening of income is contingent upon many factors such as type of degree, finishing the degree, health, aptitude for degree specific work, ability to market oneself at a job interview, and local market demand for that skill set.  Large debt for a house or a car gives an immediate tangible result, but  large debt for college does not give one a place to sleep or means to get to work. In that sense, its value cannot be measured in the immediate present.

Normally when a consumer makes mistakes and struggles with too much debt, he can use bankruptcy to adjust his lifestyle and debt. This is not so with student loans, unless a bankruptcy “adversary complaint” is used, which may be uncertain as to result. Thus this consumer debt does not allow for mistakes!

In the worst of nightmares, the student signs on for large private loans, while attending “for profit” schools, if he does not graduate money-dice.jpgand does not advance economically due to education/skills acquired in college, this is bad news.  Without the hoped for benefits of job advancement,  the financed education can assist in creating an onerous burden of debt perhaps too heavy to carry.  Credit report damage and economic pressures can lead to lifelong financial disorientation. Obviously, one is now hampered in other investments such as buying a home, starting a business, making a career change, having children, or marriage to a spouse who chooses to stay at home with the kids.

Regardless of the fact that education is always enriching and worthwhile, the student today is wise to “count the cost”. As a rule of thumb the prospective student loan borrower must ask: “will I make enough in the 10 years after graduation to amortize (and pay off completely in level payments) the entire student loan debt at 7% interest?

To “break it on down”, $50,000 of student loan debt would pay off at $580.54 per month, twice that amount will pay off at twice that amount, 1/2 of that amount will be paid off at 1/2 that amount.  See the chart below.  The big catch is, whatever that amount is, it must be paid every month (on time) for 120 months, no exceptions.  Of course this long term commitment does not take into account job loss or underemployment, divorce, sickness of children or spouse, or one’s own health issues.

And what will it take each month to pay off that $50,000 student loan?  The math says $580.54 per month AFTER that tax man is paid. That means the aftertax dollar must be “bulked up” by 1/3, or $193.51, to $774.06 to be earned each month, so the monies can be taxed by $193.51 and the student lender can be paid $580.54.  And this plan must be steadily carried out each month, on time, for 10 years.

Loan Amount Payment Income needed/month (before taxes) Income needed/year

(before taxes)

25,000 $290.27/mo.

x 10 years

$387.03/mo.

x 10 years

$4,644.36
$50,000 $580.54/mo.

x 10 years

$774.06/mo.

x 10 years

$9,288.72
$100,000 $1,161.08/mo.

x 10 years

$1,548.12/mo.

x 10 years

$18,577.44

So one must “count the cost”.  If not, student loans are a serious dilemma, and caution is advised.

When it comes to timely payment on any financial arrangement, the ability to pay is critical.  In coming months, I will be commenting on this thorny issue of student loans and the cost of college, in the hope of shedding some light on student loan pitfalls.  Of course, I am in the business of providing practical solutions in financial matters, and I welcome your questions as we explore this topic in coming updates.

All About Short Sales: Why They Can Be Beneficial to Both Lenders and Borrowers

The most frequent way used to work out a settlement between lenders and borrowers in real estate is the short sale. In this type of transaction, the borrower wants to sell the property, and satisfy the majority of debt to the lender. However, since his mortgage amount exceeds the amount that can be realized from the sale of the property, it is referred to as a “short” sale.

When property is in foreclosure and a loan modification isn’t on the horizon, a short sale may be the most efficient way to solve the problem. Often, federal regulations give the borrower a release of liability on the remainder of the debt, once the short sale is approved by the lender and a closing occurs. Of course, the lender has to accept less than the full amount of the debt; in this sense, the sale is “short” to him.

Here’s an example. Suppose you own a property worth $100,000 and the debt on the property is $120,000. In this case, if the property sells for $100,000 and selling expenses are 10%, only $90,000 will be realized to pay off the lender, who is owed $120,000. Of course, the practical lender will weigh his alternatives: is receiving $90,000 better than receiving nothing in the short-term and going into foreclosure? Clearly sometimes the best choice is to accept the short sale.

Just as is true with a deed in lieu of foreclosure, these transactions can be complicated by second mortgages, judgment liens, homeowner’s association liens, and other impediments to conveying a clear title. In addition, beyond the problems with liens, there may be repairs needed to the home, which means the property sells for even less. Still, in all of these cases, the lender will benefit from a short sale, as a “bird in the hand” is better than waiting for a very uncertain price at  a foreclosure sale down the road.

When clients want a mortgage modification, they are faced with an uncertain future: if the lender does not approve the modification, they may not be able to hold onto the property. It these cases, sometimes a short sale can be very useful. The property is sold, and the lender is paid something.  The debtor often gets a release on the debt.  In this way he can avoid having to file bankruptcy, with the ensuing credit report damage.

Short sales are becoming more and more popular in the current economy, as mortgage modifications do not always work to get relief for the borrower. In these cases, a short sale can be a great advantage to resolve the situation. Obviously, in working with an attorney for mortgage modification, you want to make sure that he is familiar with short sales, and works with them on a regular basis. I personally have found them to be a highly effective tool, giving more options to the overburdened borrower.

What is a “Deed in Lieu of Foreclosure”?

In the real estate world, when foreclosure is imminent, many real estate owners will consider the “deed in lieu of foreclosure”. Because of the complexity that often surrounds real estate transactions, let me explain exactly what a “deed in lieu of foreclosure” is.

Before the 1980s, a deed in lieu of foreclosure was often used to resolve a situation where the owner of real estate could not pay for the real estate. Because real estate loans were always made for only 4/5 of the value of the real estate, and prices were stable, a lender never lost money when accepting a deed back in place of a foreclosure.

But over the last 30 years, real estate transactions have involved far less money put down by fewer purchasers, and  lenders are often faced with taking back properties where they will have a loss. In these cases, when a lender has a property worth not much more than the loan amount, it’s easy for him to lose money.

Here’s an example. Suppose the borrower buys a property for $100,000 and puts $10,000 down. In this case, he has a “loan to value ratio” of 90%, and the amount of value in the property is 10%. This 10% is known as his “equity” in the property. In a case where he can no longer make payments, the property has not escalated in value, and there has been very little paid down on the loan, the lender who has to take the property back is in a difficult position.

While the foreclosure occurs, the lender will have carrying costs for at least six months (perhaps as long as a year), and will lose money. Further, if the property needs to be fixed up before it can be sold, the lender loses money again. In addition, the cost of a realtor and other miscellaneous closing costs can create another loss.

Obviously, lenders like to make real estate loans where 1) a substantial equity exists in the property, 2) the property does not lose value due to use or market conditions, and 3) the borrower will not impede the lender in moving forward to repossess the property. In a perfect world, this can be done. In the real world, unfortunately, it doesn’t happen all that often.

For these and other reasons (including federal regulations), lenders do not take back deeds in lieu of foreclosure very often nowadays. Problems such as judgment liens, second mortgages, homeowner’s association liens, and other miscellaneous title issues complicate the matter further. In addition, federal regulations often demand that the lender foreclose before attempting to collect from the debtor, in order to get as much value as possible out of the property.

And so we come to the principal advantage of the deed in lieu of foreclosure.  If and when a lender is willing to accept one, in most cases there is a release on the debt.  This is the reason the borrower seeks to have the lender take back the property: so that he can be get rid of his debt. However, these kinds of transactions have not been very frequent in the last few decades, due to lack of equity in properties being foreclosed.

If you can get a deed in lieu of foreclosure accepted when you wish to give the property back to the lender, it is often the quickest and most efficient way to resolve what can be substantial debt involved in owning real estate. If problems arise, a good lawyer can help sort them out.

 

Why Aren’t More Mortgage Modifications Done?

Lenders continue to stall, and refuse to cooperate in modifying mortgages, even where legally obligated to do so under federal law.  Law in the state of Indiana continues to allow foreclosure without meaningful discussion of other options.  The state run website, telling consumers “you can get help for free” is merely a forms gathering service for lenders, sending forms back and forth from consumer to lender.  Once the lender has the forms, all too often he tells the consumer he is not qualified for any help.  Thus there is no assistance, from any source, at any time, to tell the consumer what his rights are and how to get what he is entitled to receive in mortgage modification.

The Indiana statute was passed, effective July 1, 2009.  It provides for a “settlement conference” should the consumer elect to bargain with the lender instead of passively allowing foreclosure. The theory of the statute, on its face, is to give the homeowner a chance to ask and be educated on alternatives to foreclosure.

In practice, certain critical flaws have become apparent:  1) the government website is of no help to consumers in transmitting forms; 2) courts are not supervising settlement conferences and what actually takes place at those conferences; 3) lenders are refusing to obey the federal law on mortgage modifications and often do not attend settlement conferences or offer any alternatives to foreclosure.  These problems can be tracked back to the major flaw in the 2009 Indiana legislation:  it is permissive, not mandatory.  The statute says the lender may offer alternatives, but it does not say that he must offer alternatives to foreclosure.  The statute was created with the appearance of helping the consumer, but it was created “without teeth”.

Many of us don’t know it, but the federal government is by far the “biggest player” in the mortgage market, on a national basis.  Very few mortgages are made or paid today on a local basis, that is, the money doesn’t come from or go to Terre Haute or Kokomo, Indiana.  We have a variety of players now, in place of what used to the just one lender holding the loan he wrote; we now have lender correspondents, wholesalers, mortgage brokers, securitizers, investors, servicers, insurors, and packagers, all with a stake in the document, information, and payment stream of the American home mortgage.

It is not untrue to say that we have created even a global market in US home mortgages; but who is in charge?  The federal government owns, buys, sells, and insures the vast majority of US residential mortgages.  As such, the power of the federal government to affect foreclosure over time is immense.

But federal regulation is tricky; one rule conflicts with another, complex procedures and paperwork rule.  How to wade through the swamp of authorities and paper?

Fortunately in the mortgage market, two federal buyers and traders of mortgages are preeminent: the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).  Since they process a majority of American home loans, the government picked these two entities to be “point men” in the initiative to stop foreclosure, lowering mortgage payments if necessary to keep homeowners in their homes. Since “Fannie and Freddie” have become involved, loan modifications are happening on their loans, even though the pace is slow.

Mortgage Modifications Are Good For Everyone

A few years ago, I decided to put my thoughts in writing regarding “the mortgage mess”.  It seemed to me then, as it does now, that the solution was simple: make mortgage payments affordable so that fewer homes are foreclosed.  So I started to write an article which was on point, showing how a matrix/chart/interest table could explain in financial terms what was required.  That article I have included here, and I suggest you read it for background on the issue of mortgage modification.  See The Mortgage Crisis

The question I pose in that article is quite simple:  why are we forcing foreclosure to be the “one size fits all” solution, when both parties essentially want the same thing? Homeowners want to stay in their home, and lenders want to keep being paid?  What are the creative ways we can use to slow down the foreclosure crisis?  Is there a way to stop the loss of neighborhoods, investments and homes?

Why should lenders go to the trouble of modifying mortgages?  What’s in it for them? Why bother?  The answer is quite simple: lenders modify mortgages to make money, and to avoid losses that are certain in foreclosure.  Yes, that’s right…to make money.  Studies by lenders, the American Bankers Association, and mortgage servicers show that foreclosure is no way to a quick profit. It is actually a dead loss, with the lender losing 50% or more of the loan value, as a result of deteriorating real estate, legal and realtor fees, and loss of mortgage payments.  All commentators agree: foreclosing on homes will not make a profit.

Many lenders blame the current mortgage crisis on foolish consumers borrowing too much money.  They are quick to forget the lender’s role, and the huge sums made in the structuring of loans for 125% of equity, thousands of dollars in hidden charges, floating rates of interest, misrepresented payment structures, false appraisals, prepayment penalties, and making loans beyond the ability of the consumer to pay with no proof of income.  Much lending activity has been subject to investigations by state and federal authorities and condemned as less than honest.  Truly, the mortgage community has talked consumers into many a foolish loan for excessive short term profit on their end.  As a primal cause of the current mortgage crisis, the lending community can see that their mistakes have created a bad result.  Of course, the consumer is also to blame, but which came first, the chicken or the egg?

Lenders and bankers can be a cynical lot, with little willingness to take blame for their own mistakes, and little trust that the homeowner will pay.  Many are like adolescent “sore losers”, disheartened and threatening to “take my ball and go home”.  The assumption was that they should have been able to profit handsomely from bad loans to more consumers, with no downside risk.  But it didn’t work out that way, and now bad loans must be adjusted to more reasonable terms in the present circumstances.  The times have changed, and they call for a change in approach.

Both parties are to blame, and both must “give a little to get a little”.  Even while acknowledging that some real estate deals will never work out, lenders and borrowers all profit when a homeowner pays consistently and foreclosure is avoided.

Of course, workouts don’t work in every situation.  Some homeowners just can’t stay caught up with mortgage payments.  But when loans are adjusted to levels where they can and do perform, everybody wins.  Adjusting mortgages is good for the lender, the investor, the servicer, the homeowner, neighbors, businesses nearby, and the town where the neighborhood is situated.  When homeowners do not pay mortgage payments steadily, everyone loses.  And most importantly, the economic picture becomes bleak: depression sets in. When that happens, it’s bad for the entire country.

The economy runs on consumption, and consumer spending is 70% of that consumption.  If the consumer is evicted from his home, he spends less, works less, and gets disoriented and detached from community and friends.  His job performance may suffer, as he works through his personal crisis.

Do we want to save the economy? Then save the consumer’s peace of mind, and his home.

Planning the use of money (Part 6)

By now, if you have reviewed the five videos in previous blog posts, you should have a fair idea of where your money is going, and where it needs to go. Now comes the hard part: actually making the necessary decisions.  Some expenses will definitely have to be modified.

Remember: every dollar saved is a dollar earned.  Indeed, the dollar saved is an “after tax” dollar, all of which you get to keep.  The dollar earned is a “before tax” dollar, and you will only get to keep 70 cents of it, at most.  So we can see that keeping expenses down definitely helps in money terms.

In personal terms, the stress that comes from unpaid bills is removed.  Family life is easier, and there is time for exercise and good diet.  Medical bills are less in the long term.  Although this is not true in every case, a simple budget can often help to organize and reduce stress in many other areas of life.

So make your life easier with a budget!  If you want the sample file I used to create these videos in MS Excel, just email me at
mike@mikenorrislaw.com
and I will be happy to send it with a reply.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

 

Download This Episode

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Lender attorneys don’t want to know about loan modifications

At my last foreclosure defense settlement conference, the lender’s attorney attended with me and my client.  His lender client is out of town, and the attorney didn’t even know who to call, although he had previously suggested to me a contact and phone number.  So no phone call was made, and nothing was done at the settlement conference.

I was given a new phone number to call, with a different lender representative than had been previously suggested. I offered to follow up, so the next time we met we could all be more organized.

The lender’s attorney became angry that I wanted to continue the conference, since his client did not attend.  He claimed that we had completed the settlement conference, and now he was entitled to continue the foreclosure.  The danger, as I suggested to him, was that nothing had been discussed; nothing had been put in writing.  My clients were in danger of losing their home if the foreclosure proceeded.  We needed written reassurances from the lender that they intended to follow federal law in modifying this mortgage, and we wanted that agreement reinforced by a court order in this foreclosure proceeding.

But the lender’s attorney was resolute:  he is filing a report with the court that the settlement conference has been held, and we have no further right to impede his goal of taking away my client’s home.  Unfortunately, under Indiana state law, he was right.

Now we must file objections, and process more paperwork asking for a hearing before the judge on the question: “Does the lender have the right to continue foreclosure, without meeting federal guidelines for mortgage modification?”

Well, someone has to solve this stupidity.  I will end up having to cut the deal with the lender, and the new contact I was just given.  I will also have to make sure the paperwork is right.  Unfortunately, the apathy of attorneys and lenders makes what should be a simple transaction an uphill climb filled with delays and “hiding the ball”.  Hopefully it will get easier over time.

Recent news on mortgage modifications

As of July 1, 2009, Indiana now allows homeowners to contest the foreclosure process.  They may ask for a “settlement conference” with a lender representative to work out foreclosure alternatives.  The diligent homeowner will make sure he asks for this conference, as soon as the foreclosure is filed.  At that hearing, the homeowner can present his gross monthly income for the household, asking the lender to consider 31 to 38% of this figure as an appropriate payment to keep the home.

Unfortunately, the state law does not require the lender to use gross monthly income for fixing the appropriate payment, even though he is encouraged to look at the documents which establish that income.  Sadly, the lender can refuse this common sense solution, and demand the homeowner surrender the home.  Of course, this is not good for anybody including the town with vacant homes and unpaid real estate taxes, and the neighbors who see their property values go down because of too many homes vacant and unmaintained.

Of course, for most homeowners the desired result at a settlement conference is a change in the mortgage payment, allowing the homeowner to keep his home.  The federal “Make Home Affordable” plan has been active since March of 2009, and is referred to in this post as “MHA”.  MHA specifies that regardless of Indiana law mentioned above, the homeowner can insist that household gross monthly income is the only criteria relevant to setting a new mortgage payment.  This right under MHA applies in 75% of the foreclosures filed in the country today.

But lenders are slow to admit that MHA applies in any particular foreclosure.  My experience has been that lenders must be forced to admit that MHA applies.  Even when they admit that it applies, they are not willing to admit that gross household income determines the mortgage payment, right down to the penny.  In short, it is simply an issue of power and control.  Lenders are not used to consumers and their lawyers knowing what their rights are.  Lenders are very reluctant to give in to consumer demands, even if the law requires them to do so.

What a happy surprise I had last week.  At a scheduled settlement conference, a large regional mortgage lender admitted that gross income would indicate that an adjustment in the loan terms was best for both lender and homeowner.  Indeed, the lender even offered to reamortize the loan to 30 years at 5%, without any demand for back payments.  They also offered to start at the new payment two months from now, with no payment until then!  I was shocked, especially since this loan was one of the 25% not covered by the MHA guidelines.  NOW THAT IS WHAT I CALL A SMART LENDER!  And all is well that ends well.

In other cases, lenders are still unwilling to admit they are covered by MHA, even though I know they are.  The foreclosure process drags on, with unfruitful settlement conferences and lender demands for judgment.  Just today, I talked to a lender lawyer who admits that MHA is becoming the standard, but his lender clients are taking their time in understanding what is required of them.  Let’s hope for the future: less time in foreclosure, less legal fees, more results outside of the courts.  The foreclosure mess needs to end immediately.  We need to move forward with financial recovery, as homeowners and as a country.

What is going on with Mortgage Modification?

You really want to know?  Well, you better allow a few months for the market to “catch on” to the concept….

In essence, the Obama administration has published a plan which should apply to 75% of the mortgages in the country. The “Make Home Affordable” initiative is designed to assist the homeowner who is delinquent in payments, and cannot afford 100% of his normal payment, based on current household income.

In theory, the monthly mortgage payment is adjusted downward for 5 years.  The hope is to save homeownership, a stable tax base, cash flow to the lender, and neighborhood values.  There are many obvious advantages for all.

But most lenders don’t understand the details.  In 5 recent foreclosures where I have represented the homeowner who is trying to keep his home, lenders didn’t know program specifics (nor did their attorneys).  Their approach was the basic “we win, you lose;  see you at the foreclosure sale”.

I have had to continue hearings while giving the lender personnel time to research what they are legally obliged to do:  offer loan payment modifications for a 5 year term, if the homeowner does not have the money to make the contractual payment.

Stay tuned for further developments………

A radio show…….why bother?

Most Saturday mornings, I start the day with a warm cup of coffee while I read the newspaper, or maybe several different newspapers, if I haven’t yet caught up with the news of the week.  After immersing myself in reading for a while, I take some time to peruse the articles that I’ve arranged on the kitchen table in front of me.

As the “theme of the week” becomes clearer, I’m typically lost in thought while I organize the main “themes” and my presentation.  And before you know it I’ve got the topic for my weekly radio show.

Once done, I critique it. Was it compelling?  Lucid?  Relevant?

Why bother?  Just for the thrill of thinking out solutions to everyday problems in a world where people need someone to trust.  In the practice of law, communication is everything.  Let us start with building trust, based on reliable and solid advice.