Proposals Continue to Surface for ARM Bailouts

The following appeared recently in Forbes magazine and is similar to other proposals that have been offered over the last several months.

Gross Calls for White House Bailout

Bill Gross, the king of the American bond market, says a Federal Reserve rate cut is not the answer to the mortgage crisis. Instead, the billionaire credit-markets guru is asking President George Bush to rescue homeowners who can't pay their bills.

The call comes as Wall Street clamors for the Federal Reserve to cut its federal fund target rate to minimize the fallout from mortgage defaults. Gross said Thursday, however, that even a steep rate cut wouldn't necessarily clean up the mess because upward adjustments on adjustable rate mortgages would continue.

Many homebuyers took out adjustable-rate mortgages to take advantage of low interest payments for the first two or three years. When their rates reset higher after the initial period, those buyers couldn't handle the bigger bills. (See: "Home Foreclosures Rise In July")

The outspoken Gross called for help from the White House because of its history of bailing out financial failures: "Why is it possible to rescue corrupt savings and loan buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 Long Term Capital Management crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner?"

Gross said that there's a need for action because the continuation of high mortgage defaults will cause a housing bust with widespread effects. Over two-thirds of American households are homeowners, so a decline in home prices would likely have disastrous effects on consumer spending.

Gross is managing director of one of the world's largest fixed-income managers, PIMCO. Through savvy bond trading, he's accumulated a $1.2 billion fortune that makes him the 799th-richest person in the world. He's an avid philatelist and owns every stamp produced in the United States between 1847 and 1869.

A presidential bailout of homeowners who can't pay their mortgages would likely be a boon for the companies making the mortgages. Originators like Countrywide Financial, Accredited Home Lenders, and H&R Block, which has a subprime lending subsidiary, have been crunched by rising defaults. It would also benefit companies like Thornburg Mortgage that hold mortgages for investment.

Now May Be the Time To Negotiate

Times have been tough the last several months for homeowners facing foreclosure. In apparent disregard for the statistics showing a steady rise in the numbers of Americans defaulting on their mortgages, many banks have continued to play hard ball in the negotiation process, refusing short sales and showing reluctance to help homeowners work out acceptable payment plans. Recent news shows that this attitude might finally be shifting. Government agencies are now pushing mortgage servicers to work with families facing foreclosure rather than allowing the loans to default.

Recently, several federal and state agencies banded together to issue a staement urging mortgage banks to be more flexible and proactive in their negotiations with borrowers. According to Mortgage News Daily, "This statement is aimed at companies that are servicing sub prime and other mortgage loans...A number of the servicing companies (Wells Fargo and WaMu for example) are subsidiaries of government regulated banks. While the statement is not binding on the servicing companies, it asks that they review the governing documents for the securitization trusts to see how much authority they have to restructure loans that are in risk of default.

The statement points out that these documents may permit the servicer to be proactive in contacting borrowers and, where appropriate, apply loss mitigation strategies. It outlines four areas where servicers could be proactive:

Identifying borrowers at heightened risk of delinquency or default;

Contacting borrowers to assess their ability to repay;

Assessing whether default is "reasonably foreseeable;"

Exploring a loss mitigation strategy that avoids foreclosure or other actions resulting in the loss of home ownership.

The statement said that loss mitigation is generally less costly than foreclosure, particularly when undertaken early in the process. Such strategies can include loan modifications; deferral of payments, extension of the loan term, conversion of ARMs into fixed rate or fully amortizing ARMs, capitalization of delinquent amounts, or a combination of solutions."

To read the entire post click on: http://www.mortgagenewsdaily.com/962007_Mortgage_Servicing.asp

If banks follow the above suggestions, it may become a little easier to avoid foreclosure, if avoiding foreclosure and keeping your home is in your best interest. We advocate that foreclosure and bankruptcy are powerful tools to consider when you are facing financial challenges and should not be dismissed as only a last resort. However, for those who do decide to attempt to renegotiate their loan and keep their home, the above statement is certainly a little bit of good news.

If you would like more information or a referral to a bankruptcy or short sale professional in your area, please contact us at foreclosureandbankruptcy@gmail.com

Congress to Look at Revising Bankruptcy Laws

The New York Times featured an interesting article regarding proposed changes to bankruptcy laws that might help some homeowners avoid foreclosure. Below are excerpts:

"As the squeeze on homeowners becomes worse, the political debate over how to address the problem will intensify. Earlier this month, Senator Hillary Rodham Clinton, Democrat of New York, called for a crackdown on mortgage brokers who engage in so-called predatory lending, and a $1 billion federal fund to help families avoid foreclosure.
Senators Christopher J. Dodd of Connecticut and Charles E. Schumer of New York, both Democrats, recently urged federal regulators to ease restrictions so that Fannie Mae and Freddie Mac, the two giant mortgage agencies, could buy more mortgages and mortgage-backed securities from lenders to add fresh capital to the home credit markets. The lenders, then, would presumably have to use the new capital to refinance loans for borrowers facing default and foreclosure.
Congress is looking hard at changing the bankruptcy law so courts can restructure home loans as they do other personal loans like credit card debt. The goal, proponents say, would be to update the bankruptcy code in line with realities of the modern mortgage market.
In Chapter 13, a borrower’s mortgage obligation remains intact. The most that a person gets is extra time to catch up on payments in arrears, but every nickel on the mortgage must be paid.

Yet the mortgage often is the financial culprit these days. That is particularly true of lending in the subprime market of zero-down loans with terms fixed for two years and then floating rates, arranged by aggressive national mortgage brokers and bankers who earn lucrative fees.
“The bankruptcy law was written for a different world, and we want to give the bankruptcy courts, and creditors, more flexible tools to work with borrowers to save their homes,” said Senator Richard J. Durbin of Illinois.
In September, Mr. Durbin, the Democratic whip, plans to propose amendments to the bankruptcy code, in a bill called the Helping Families Avoid Foreclosure Act. It would, among other things, permit writing down loans and stretching out payment terms.
Some bankruptcy experts agree that it is time to change the law. “Our bankruptcy laws are not well designed to deal with a massive wave of mortgage foreclosures,” said Elizabeth Warren, a professor at the Harvard Law School. In particular, Ms. Warren said, bankruptcy courts should be able to rewrite mortgages in line with market conditions.
The banking industry, which pushed hard for the tougher bankruptcy law in 2005, wants no easing up now. "

The column also mentions:

"According to an article in About 1.7 million households will lose their homes to foreclosure this year and next, according to estimates by Moody’s Economy.com. That would be nearly double the number of the previous two years.
Looking at foreclosure warning signs like loan delinquency and default rates, which are spiking, Mark Zandi, chief economist of Economy.com, said the outlook was “very dark,” largely because of the current “self-reinforcing downward cycle” of falling house prices, loan defaults and credit tightening that pushes house prices down further."

Bankruptcy Help and Information: Check back with the blog as we continue to monitor this situation.

Bankruptcy to Avoid Foreclosure

It may sound odd to suggest declaring bankruptcy as a means to avoiding foreclosure, but in some cases this is possible. Usually this type of strategy (like a short sale option) applies when you have negative equity in your home (that is you owe much more than the home is worth in the current marketplace) as opposed to certain sales strategies that can help you avoid foreclosure if you have some equity in your home.

It works like this: If you currently owe so much on your home, or the value of your home has declined so much, that your second mortgage or HELOC (home equity line of credit) is completely unsecured by the equity in the home, you may be eligible to dismiss the second/HELOC through a chapter 13 bankruptcy filing. As an example: Let's say that you bought your home with no money down and financed the entire purchase price of $300,000. Since you were living in a town like Las Vegas, and you bought two years ago while the market was still appreciating, after owning the home for 8 months, you found that you could get an appraisal for $350,000. You decided to take out a HELOC in order to access that cash. You did so, and were approved to take a $40,000 loan against the new found equity in your home. Now fast forward 16 months. You are having difficulty making your payments and are considering foreclosure or bankruptcy as an option. Your home, under current market conditions, is now worth only $290,000. Since you owe more than this on your first mortgage, your HELOC has beome completely unsecured by the equity in your home. As such, it may be treated as any other unsecured debt and is eligible to be stripped and discharged under a Chapter 13 Bankruptcy proceeding. And the great news is, that if you are able to continue making your payments on your first mortgage, you can stay in the home, avoid foreclosure, and if you later decide to sell the house, you will not have to pay back the second/HELOC.

Bankruptcy Help and Information: To determine if your home might be saved using the above strategy, you need to contact an experienced bankruptcy attorney. For a referral to an experienced bankruptcy attorney in your area, contact us at foreclosureandbankruptcy@gmail.com

Negotiating a Short Sale

If you owe close to or more on your home than what it is worth in its current condition and at present market value, one alternative to foreclosure is to negotiate a short sale. A short sale occurs when a bank or other lending institution accepts less than full repayment of the mortgage amount. Short sales are possible because the bank realizes that if they go into foreclosure on the property, they will have to go through the expense of seizing the property, holding it on their books, and eventually reselling it, at which time they are only likely to receive between $0.50 and $0.80 on the dollar of the property's fair market value. Historically, banks have been very unpredictable when it comes to accepting short sales. Some will be quite willing to negotiate with a potential buyer and seller, others will refuse almost any offer, no matter how reasonable it appears. As the number of foreclosures mounts in the U.S. (and especially in the former "bubble" areas of rapid appreciation) we expect to see more and more banks and mortgage lenders looking favorably at short sale offers as a way to lower the inventory of foreclosed properties they are expecting to carry.

The best way to negotiate a short sale for your home is to use a real estate professional in your area. A Realtor will do two things: first, they will list your house below the current market value and will actively pursue buyers for your home at a discounted price, second, they will negotiate with the bank to approve your short sale and get it finalized. This is important because banks typically prefer working with Realtors as opposed to property owners and some lending institutions refuse outright to negotiate with the owners themselves without an intermediary agent. Realtors are also sometimes able to persuade the bank or lending institution to extend the time period before foreclosure in order to allow a short sale to go through. However, once you have determined that you want to attempt a short sale, you need to move quickly as it will take time for your Realtor to locate a buyer and negotiate the sale.

Foreclosure Help and Information: If you are considering a short sale, we can recommend a professional in your area that specializes in these types of transactions. Contact us at foreclosureandbankruptcy@gmail.com for a referral.

Seller Beware!

When facing foreclosure, it is important to carefully consider all your options and not allow yourself to be taken advantage of by the many people that may try to benefit from your situation. There is an entire group of investors that are devoted entirely to purchasing foreclosure and pre-foreclosure properties as inexpensively as possible. We've all seen their signs by the side of the road, "Cash for your house!" "We buy anything" etc. These investors are an important part of the real estate market but their primary objective (regardless of what their ads might say) is not to help you, it is to make money. Just because you are facing foreclosure doesn't mean that you have no bargaining power or that you should settle for the first price you are offered. Contacting these investors may make sense for you, but you should know your home's true value before you call.

Many home owners mistakenly believe that websites will give them an accurate value for their home. http://www.zillow.com/ is famous for having extremely over-inflated "home values" in some areas and ridiculously low values in others. http://www.realestateabc.com/ is thought by some to be slightly more accurate, but the best way to determine the true value for your home is to ask a Realtor to run recent comps for the neighborhood. This information is ESSENTIAL if you are going to negotiate with a potential buyer. If you do not use a Realtor, at the very least check several of the home valuation websites and compare their results. Then take a walk around your neighborhood to see what similar homes to yours are listing for.

Another tactic to watch out for is companies or individuals who promise to make payments on your mortgage and lease or rent the home back to you at a lower monthly payment. While these types of arrangements can sometimes work if they are executed properly, all too often, the homeowners will begin paying rent only to find out several months later that after one or two payments their "savior" stopped paying the mortgage bills...leaving them in foreclosure and out the amount of the rents.

Finally, if you decided to accept an offer for the purchase of your home, insist that the buyer pay for a licensed escrow and title company to handle the transaction. Speak with the escrow agents personally and make sure to ask any questions you might have about the sales contract or any aspect of the transaction.

Foreclosure Help and Information: If you are considering doing business with a company or an individual that "buys houses" google them first to see if there has been any negative feedback regarding their services posted on the web. It's not foolproof, but it can help you avoid some scams.

Homestead Exemptions

Homestead Exemptions are often misunderstood and their applications overstated, however, used properly they can save a primary residence from being seized to pay certain types of debts.

It is important to understand that Homestead Acts will NOT protect the family home from being seized to pay a mortgage debt that is secured by that home. Homestead acts only protect equity in an owner occupied property from being seized to pay other creditors that might otherwise try to enforce a lien on the property. Also, Homestead Acts do NOT protect the entire home from being seized, they only protect a certain amount of equity in the property. For example, Nevada law has a maximum Homestead Exemption of $350,000. If John Q. Citizen owns a home free and clear worth $375,000, and owes his credit card company $40,000, they can still place a lien on John's property in order to force a sale that will liquidate his equity in the home. However, once this sale takes place, provided that John has properly registered his home for Homestead protection in the state of Nevada, $350,000 of that sale will be protected for John and the credit card company will only be entitled to the remaining $25,000.

The amount of equity that can be protected under a Homestead Act as well as what must be done by the homeowner to qualify for Homestead protection varies by state. Follow this link for a state by state listing of Homestead Exemptions. http://www.assetprotectionbook.com/homestead_exemptions.htm

When evaluating foreclosure, bankruptcy, or a combination of the two it is important to consider the ramifications of the Homestead Act in your state. Perhaps you are over burdened with debt from credit cards, auto loans, or other sources not related to your primary residence, but you would like to keep your home and could afford the mortgage payments if you were able to eliminate the other debts. Perhaps you have equity built up in your home that you would like to retain. In those cases, you might want to consider filing bankruptcy to eliminate your unsecured debts and using a Homestead Exemption to protect the equity in your property.

Foreclosure Help and Information: Contact us at foreclosureandbankruptcy@gmail.com for referrals to a qualified bankruptcy attorney in your area.