2009 has been one of the most difficult years for householders in the United States. The general malaise across the economy has contributed to a large increase in the number of people unable to maintain payments on their mortgages. In the third quarter of 2009 foreclosure notices were sent to almost one million American homes and this represented almost a 25% increase from the number of these notices issued in the previous year. If the latest estimates are to be believed, seven million American homes are under threat of foreclosure. Although the more optimistic commentators point to various signs that the economy is starting to stabilize it is hard to know what comfort such analysis can offer to someone who has just received that most unwelcome of bank letters.
Bank Also Want to Avoid Foreclosure
There are steps that can be taken to forestall foreclosures and, contrary to the popular image, banks are as interested in avoiding foreclosures as homeowners. It is not necessarily a case of bankers being reluctant to seize your home, though certainly some of them will be more sympathetic than others, but rather the fact that it does not make economic sense for banks to acquire property they are going to have difficulty selling off in a market characterized by falling house values. Banks are reluctant real estate dealers, because their prime objective is to recover their loans, and whenever alternative arrangements can be made to satisfy their needs they are often willing to make adjustments.
Avoiding having to go through the stresses of the foreclosure process is an achievement in itself, but there are also clear financial advantages to the borrower in preventing damage to their credit status which could adversely affect their chances of getting a mortgage in future.
The Foreclosure Process
While there are certainly many more people today who have personal knowledge of the foreclosure process, or know someone else in this difficult situation, many more people only know about foreclosures through reading the news, so a brief word of introduction is in order. If you take out a mortgage to buy a home, or borrow against home equity, you sign a contact with the bank to pay off the loan according to a set schedule, with your home serving as collateral against the loan. Failing to make the scheduled repayments breaks the terms of the contract and lays you open to whatever actions the law allows your creditor (the bank or mortgage company) to take.
How the scenario is likely to unfold varies from state to state and according to the specific terms of the mortgage contract. Sometimes the lender turns to the courts to obtain a judgment against the delinquent borrower for the whole amount of the loan. The court makes its investigations and if they determine the borrower is in default they issue a judgment in favor of the lender to allow them to recover the amount owed including the costs of the foreclosure process. If this route is followed your home might end up offered for sale in a public foreclosure auction.
An alternative foreclosure path proceeds outside the judicial framework. The lender issues a “Notice of Default” that gives the borrower a certain time to resolve their debt. Failing this resolution, a “Notice of Sale” is issued and a public auction held. Once the sale is completed only a short period passes before the dreaded eviction procedures commence.
Forestalling a Foreclosure
The fact that both the bank and the householder are interested in avoiding foreclosure creates a basis for consideration of alternatives:
It is usually well worthwhile trying to renegotiate payments terms with the bank as soon as you get into difficulty with the current payments schedule, but you must be sure that you have the means to keep to the new arrangement. You might be able to persuade the bank to reduce the amount due each month or even suspend mortgage repayments for a certain period, or perhaps agreement can be reached to reduce the payments by changing the loan to a fixed-term loan or extending its period.
Taking into consideration the complexities of mortgage contract laws and the differences between states, it pays to first seek expert advice. A good and economical place to start is the Department of Housing and Urban Development (HUD). House owners who meet certain criteria might also qualify for special loan modification or refinance assistance under the President’s new Homeowner Affordability and Stability Plan.
If there is no possibility of renegotiating the mortgage, selling your house yourself is still preferable to waiting for the bank to execute a foreclosure. From the lender’s perspective if they estimate that they are going to have difficulty recovering the full value of the mortgage it makes sense to try and recover as much of their investment as possible as well as avoiding the additional costs involved in foreclosure. Thus the lender may agree to allow you to conduct the house sale and they will accept a lower amount than the sum you owe. As well as avoiding the unpleasant foreclosure proceedings, this method allows you to save your credit ratings.
While this approach has its advantages to the borrower, a few points must be taken into consideration. Sometimes the bank is going to ask for a promissory note to cover the difference between the amount raised in the house sale and the sum owed on the mortgage. In addition, any portion of the debt forgiven is considered taxable income and this can translate into an increased tax burden.
Deed In Lieu of Foreclosure
Another option for satisfy the creditor is to voluntarily sign over to them the deeds of the property through a legal arrangement known as a “deed in lieu of foreclosure.” Sometimes the mortgage lender agrees to offer the delinquent lender a small stipend in return for their speedy departure from the house and its orderly transfer into their control.
Last Minute Options
If all the possibilities of averting a foreclosure have been exhausted and the procedure has started, a few exit options still remain open. Even when the public auction is announced the lender can still try and find funds to cover their debt and stop the auction proceeding. In some states the debtors have an additional period of grace after their house has been sold where they have the right to buy back their home from the successful bidder.