Avoid a Foreclosure Notebook A foreclosure is a catastrophic event for any property owner and has serious legal, credit and tax implications. Working with homeowners on the verge of foreclosure or in the foreclosure process is challenging for all parties involved. However, as a REALTOR you can provide expert assistance during this difficult time, but you need the specific knowledge and skills required to effectively counsel homeowners. Understanding foreclosures and the process yourself is the first step. With this type of knowledge you can make yourself an invaluable source of information that prepares homeowners for the challenges they are likely to face, yet you can offer them some guidance and alternatives to foreclosure. The information provided here is an overview of foreclosures and how to meet with a homeowner facing a foreclosure and hopefully help them to avoid a foreclosure. Please note that the foreclosure process is different from state-to-state and therefore the information provided focuses on the common components fundamental to the foreclosure process. Foreclosure prevention must become a core component of what REALTORS do. CRS recommends you become well-versed in the laws that govern the foreclosure procedures in your specific marketplace.
Why are there so many foreclosures? You watch the news, hear stories, and know people are losing or have lost their homes. There are several factors that have been contributing to the rise in foreclosures over the last several years. Predatory Lending: Loans approved for borrowers who do not have the necessary financial resources to meet the obligations of the debt; along with, the lenders failure to provide sufficient information regarding future adjustments of the interest rates (i.e. Adjustable Rate Mortgage - ARM). Declining Prices: Millions of homes are now worth less than the loan amount and are referred to as being upside down. In this scenario, if homeowners are having difficulty making payments, many choose to walk away from the property and the mortgage allowing foreclosure to take place. Unfortunately, foreclosed properties are typically sold at below market prices which further contributes to price reductions. Unemployment: Because the real estate market is directly tied to the job market, the rise in unemployment has had an adverse effect on the market. New jobs are needed to create the need for new homes. It has been estimated that it will take 1.2 new jobs to create the need for one more house. Increased Debt: The amount of credit card and installment loan debt in this country has been continually increasing for a number of years, as have the interest rates on those loan instruments. Increase in Home Inventory: The National Association of REALTORS estimates that six-months of inventory creates a neutral market, meaning that there is an equal number of buyers and sellers which causes the price of real estate to remain static.
Types of Foreclosures Foreclosure processes vary from state to state, yet it's important to know the different types. Visit the United States foreclosure law website for complete state foreclosure information. Foreclosure: The legal process by which the lien holder, (bank, mortgage holder) takes possession of the property used as collateral to satisfy the unpaid debt of the borrower. The foreclosure process is generally triggered by the borrower's failure, or inability, to make timely payments. In most instances, possession of the property is obtained through public auction which is referred to as either a 'Trustee' or 'Sheriff's' sale. Judicial Foreclosure: The foreclosure process resulting from a lawsuit and carried out in a court of law. It may take months to resolve. If judgment is granted to the plaintiff, a public auction of the property is conducted by the Sheriff or other officer of the court. Referred to as a 'Sheriff's' sale, this judicial foreclosure process is usually more time consuming and costly than a 'Trustee' sale. Trustee's Sale or Non-Judicial Foreclosure: With this foreclosure process, the lender is granted the authority to foreclose using the Trustee method - commonly referred to as a 'Trust Deed' or a 'Deed of Trust'. This method takes less time and requires less cost for the lender to take possession and ownership of the property.
Terms You Should Know Redemption: The borrower s right to buy back the property or to bring the mortgage up-to-date while the property is being foreclosed on or, after it has already been foreclosed on by the creditors. Notice of Default (NOD): From the financial institution to a borrower when the mortgage payment is past due and, that the mortgage is in default. The notice states the date at which the foreclosure proceedings will begin if the mortgage is not brought up-to-date. Real Estate Owned (REO): Owned by the financial institution including real estate obtained through the pre-foreclosure process or through foreclosure. Bankruptcy: A legal declaration of an individual s inability pay their debts. Deficiency Judgment: This is a judgment lien against a debtor whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. State laws vary on these amounts; some states do not allow deficiency judgments for this purpose.
Basics of the Foreclosure Process Though the foreclosure process does vary from state to state and from financial institution to financial institution, there are basic components you should be aware of. Be sure to contact your local legal experts so you understand the exact foreclosure process in your area.
Foreclosure Timeline When meeting with a homeowner you must determine where they are in the foreclosure process so you can provide the best advice. Your ultimate goal is to help homeowners avoid foreclosure. Each state has its own specific timelines for a foreclosure
Foreclosure Tax Implications You need to refer your clients to a property tax professional. Unless you are a CPA, or a qualified tax consultant, you should not be a tax professional to your clients. Always refer your clients to the correct professionals. Explanation When you earn a dollar, the government wants its tax. If you borrow a dollar, the government does not take any of this. However, when you borrow money and don't pay it back, the government wants its tax. In other words, when you breach the obligation of paying back a loan, the government will tax you. Debt relief is taxable, but there are exceptions. The Mortgage Forgiveness Debt Relief Act of 2007 says the debt relief is NOT taxable if: 1. The property is the owner's principle residence, as defined in section 121 of the Internal Revenue Code. 2. The debt that is forgiven must be "Qualified Principal Residence Indebtedness", i.e. the money used to acquire a principal residence. The limit is $2 million. 3. The debt is forgiven in calendar years 2007 through 2012.
Link between a Homeowner's Credit and Foreclosure A foreclosure is a huge mark to a credit score. Under Fannie Mae guidelines, a borrower will not qualify for a loan for at least five years, and probably seven years. FICO is an abbreviation for Fair Isaac Corporation and refers to a person s credit score based on credit history. Lenders use the number to decide if the person is likely to pay his or her bills. A credit score is usually between 300 and 850. A credit rating where the FICO score is 660 or above means there have been no late mortgage payments within a 12-month period. This is the best credit rating to have when entering into a new loan.
Early Warning Signs of Foreclosures Homeownership is a cornerstone of America that is protected, promoted and cherished. To lose a home for any reason is devastating, but to lose it through foreclosure can also be embarrassing and demeaning. When you are having conversations with homeowners that have mentioned foreclosure, revisit the warning signs here. Credit card debt out of control. (Maxed out cards). Paying the minimum amount due. Paying for necessities with credit cards (groceries, utilities, etc). Cannot meet monthly financial obligations (choosing which bills to pay). Borrowing from friends and family. Loss of employment, or reduction in hours or wages. Major illness which can cause loss of work and an increase in health expenses. Divorce, separation or other traumatic family or personal situations. Death of a spouse or significant other. Cannot pay the new Adjusted Payment on the ARM mortgage loan. Major unbudgeted maintenance expense. Excessive debt is the number-one cause of financial collapse and foreclosure. If you detect any of these warnings, early intervention could help save a home.
Homeowner Alternatives to Foreclosure When you meet with a homeowner, you ll want to make sure you cover all options available. Avoiding foreclosure is in everyone s best interest. Go through each option, listen to the homeowner s story, and provide information. Here are some options to discuss: Bring your loan payments up-to-date and maintain regular payments in a timely manner. This is the best option and can be achieved by: - Working out a repayment plan with your lender. - Refinancing your home with better rates and terms. - Modifying your current loan with your lender. - Borrowing money from a relative or friend to bring your payments current. Other options to discuss include: Rent your home and make the mortgage payments to your lender. Sell your home and pay off the loan amount due. Get protection under the Servicemembers Civil Relief Act (SMCRA). Enter into a Deed In Lieu of Foreclosure or friendly foreclosure. File for Bankruptcy protection to stall the foreclosure process. Sell your home in a short sale if the lender will accept a discounted payoff for the outstanding mortgage due.
Alternative to Foreclosure: Deed In Lieu of Foreclosure A deed in lieu of foreclosure occurs when an owner gives a deed to the property to the lender in order to avoid the foreclosure process. Why aren't there more deeds given in lieu of foreclosure? Many people do not know about them and some REALTORS don't discuss them because there is normally no commission paid. Benefit: Saves the lender time and expense of a foreclosure. Benefit: If accepted, the owner is done with the house. Benefit: Get the bank to accept the property in full satisfaction of the entire debt, so that the owner will not be chased by any debt collectors after the recording of the deed. Benefit: The owner can negotiate a smooth transition out of the property. Disadvantage: The effect on a homeowner's credit score. Under the Fannie Mae guidelines, a deed in lieu will make the borrower ineligible for that type of loan for four years. Disadvantage: A lender does not have to accept a deed in lieu. There have been owners who have written out a deed, recorded it and sent it to the lender. They do not have to accept it.
Strategies to Avoid Foreclosure Post these strategies for homeowners on your website or include them in any materials you may provide to new homeowners. You want homeowners to know their options and be informed so they can avoid a foreclosure. Be proactive about the problem when the first warning signs appear. Contact your lender when you become aware that you have a problem. Read your mail. Not knowing does not solve the problem it just delays the final result and increases the pain. Contact a HUD approved housing counselor. Prioritize your spending. Pay the house payment and health insurance first. Look for ways to generate cash. Don t get scammed by a private foreclosure prevention specialist, instead go to HUD.gov to obtain valid information about foreclosure prevention. Make an appointment with a REALTOR to discuss the problem and to get advice.
Making Home Affordable: Help for Homeowners If your clients want to remain in their homes, discuss the Making Home Affordable Program. This is a government sponsored, comprehensive strategy to get the economy and housing market back on track. This program offers two different potential solutions for homeowners: 1) Refinancing mortgage loans through the Home Affordable Refinance Program (HARP). To refinance, a homeowner must be current on mortgage payments but unable to refinance to a lower interest rate because the home value has decreased. 2) Modifying mortgage loans through the Home Affordable Modification Program (HAMP). To modify, the homeowner must no longer be able to afford to make the monthly loan payments. A modification would make the monthly mortgage payment more affordable. Millions of borrowers who are current, but having difficulty making their payments and borrowers who have already missed one or more payments may be eligible. The next step is for the homeowner to contact his or her mortgage servicer to discuss the situation
More Alternatives to Foreclosure In many instances, a homeowner will need to contact his or her lender to discuss which options are available. As the agent, you can explain the following options as alternatives the homeowner could request from a lender. The better the homeowner is educated, the more likely a beneficial conversation with the lender will take place. Forbearance Reinstatement Repayment Plan Loan Modification Plan Deed In Lieu of Foreclosure Cash for Keys Sell the Home Upside Down Properties
Avoid a Foreclosure and Avoid a Short Sale Some homeowners want to get out from underneath their source of stress, the home. Many agents may want to jump right into a short sale discussion. However, the first step is to decide if you can sell the home for enough money to pay off the mortgage. If so, list it at that price, even if it is debatable. Some lenders ask for a history of the marketing of the property. If you can show that you tried to sell it for enough to pay off the loan(s), that will help your presentation for a short sale. In other words, your first step is to try to avoid the short sale all together. If it is clear that the market will not support a regular sale, explain the entire process to the seller to be sure they are willing to go through everything it takes to get it sold. There is nothing worse than doing all the work of a short sale, then failing to close. Even before you list the house have the sellers get everything they will have to submit to the bank. Many times it is the same information they gathered to get a loan.
Short Sale versus Foreclosure Many times a short sale is not the best option for a homeowner. There may be situations when a foreclosure is better for an owner than a short sale, though not the majority of the time. Foreclosure Benefits: It's quick. After the sale on the courthouse steps and the expiration of any redemption period or time for an upset bid by another buyer, it is over and the house is no longer the former owner's responsibility. The owner gets rid of the property and doesn't have to maintain it. In comparison, short sales take longer to get a buyer and even longer for lender approval. On a practical basis, the agent who is going to market the home after the foreclosure will probably offer the family two weeks to move out, and a little money to help in the move called Cash for Keys. Foreclosure Disadvantages: Emotional toll. Little time to pack and move. Credit report and future loan applications. A foreclosure is a huge mark to a credit score. Under Fannie Mae guidelines, a homeowner will not qualify for a loan for at least five years, and probably seven years. Deficiency judgment, meaning there is no negotiating a settlement of any balance due on the loan. In some states banks can come after the borrower for the balance of the loan, attorneys fees and other charges incurred in the foreclosure. In states like West Virginia, North Dakota, Montana, Mississippi, Minnesota and California, this is not a factor as state law prohibits a "deficiency judgment". More Foreclosure Disadvantages: A short sale hurts a homeowner's credit report less than a foreclosure. Try to get the loan reported as "paid as agreed" to have the effect on the credit score minimized, but it is not common that you will succeed. Tax consequences can be complex. Both a foreclosure and a short sale may qualify to be nontaxable under the Mortgage Forgiveness Debt Relief Act of 2007. The cost of the foreclosure sale is added to the debt in a foreclosure sale, so the amount owed is larger than in a short sale possibly resulting in worse tax consequences. The rules for the "non-recourse" states of West Virginia, North Dakota, Montana, Mississippi, Minnesota, and California are complicated, so consult your tax advisor, particularly in California where the IRS seems to say that they treat sellers there like the "recourse" states for some situations and not for others. If it is truly non-recourse situation, there are no tax consequences of a foreclosure. For the rest of the states, look at the IRS forms that tell you to start with the amount of the debt right before the foreclosure and add the attorneys fees and other costs to that debt. Then, you subtract the fair market value of the property (which means you get to argue about whether the amount paid at the foreclosure sale was the fair market value, which it usually is not because fair market value is a willing buyer and seller with neither one under any undue pressure and I think foreclosure is the ultimate in undue pressure). The difference is usually taxable, unless you qualify for one of the exemptions in the Internal Revenue Code. In short, the difference between what you owed and the fair market value of the home is taxed as income tax, and the lender will send you a form 1099 A or 1099 C to specify the size of the tax consequences.
Foreclosure Conversation Checklist You are meeting with a homeowner that has contacted you and this could be a foreclosure situation. Initial Contact: Question the homeowner to identify any possible Early Warning Signs of Foreclosures. Determine where in the Foreclosure Timeline the homeowner may be at this time. Set up a meeting and ask the owner to gather the Appropriate Documentation for the meeting During the Meeting: Explain the meaning of a Foreclosure and how it impacts the owner. Go through your state s specific Foreclosure Process and Timeline and identify where the homeowner is within the foreclosure process. Explain what this means. Based on the owner s specific situation outline Alternatives to Foreclosure. Make sure the owner selects multiple options to explore including contacting their lender. After the Meeting: Within the next week follow-up with the homeowner to determine if one or more of the options may be viable. Encourage the homeowner to keep trying and looking into all the possible options you discussed. You may find you ll want to explain those alternatives again as information overload may be an issue. Remember, this process is challenging, embarrassing and frustrating. You will want to counsel the homeowner in a patient and caring manner that is polite and professional.
Summary An agent that understands foreclosures is an invaluable source of information for homeowners. Foreclosure prevention must become a core component of what REALTORS do. CRS recommends you become well-versed in the laws that govern the foreclosure procedures in your specific marketplace. Being able to clearly explain the types of foreclosures, describe the process, and then identify alternatives to foreclosure for a family can help keep more people in their homes. You don t have to specialize in foreclosures, just being educated with information and access to resources is beneficial.