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Posted over 13 years ago

Beat the Bank

InvestorDirector.com

Creative solutions to help empower distressed homeowners

Real estate industry professionals and distressed homeowners know how difficult it is to receive help from lending institutions. Homeowners who are having trouble making their mortgage payments generally gravitate towards two options which seem most feasible: sell the house for less than what is owed through a short sale, or try and negotiate a loan modification with their mortgage servicer. This article will explore how challenging these two options can be for homeowners and introduce new methods, not commonly thought of, to keep distressed homeowners in their homes.

Short sales and loan modifications aren’t in the banks plans

Homeowners looking to escape pending foreclosure through a short sale have about a 20% chance of accomplishing their objective. Real estate agents and homeowners from all over the country are reporting that besides low success rates, the process is tedious, frustrating, unregulated, and can take up to a year or more to close. For homeowners who want to try and work with their lender in an attempt to restructure their mortgage through a loan modification, their success rates are worse than those who try and short sell their homes. The government’s Home Affordable Modification Program (HAMP) was intentionally designed to protect banks; allowing them loopholes to disqualify HAMP qualified distressed homeowners. In a December 2009 article, Time Magazine reported that less than 1% of probationary loan modifications become permanent.

Get creative

Knowing how high the failure rates are for short sales and loan modifications, homeowners need to become aware of more creative and reliable ways to fend off foreclosure. They are as follows:

  1. Sheriff’s sale buy back. A distressed homeowner can find a family member, friend or real estate investor who has cash and notify them of their pending sheriff’s sale. The selected individual can buy the house for a price slightly higher than the bank bids, but still far below what is owed. The homeowner and the selected buyer can reach terms and the home can be leased and bought back later as credit and finances are built back up for the formerly distressed homeowner. The problem with this technique is that if an investor is selected for the purchase, they will probably be “numbers only” and be turned off if bids get too high. The bank or another investor may outbid.
  2. Reverse mortgage. Distressed homeowners can go to an older family member or friend and ask them to take out a reverse mortgage against their current property. This sounds like too much to ask until it’s realized that a reverse mortgage carries no monthly payment for the mortgage holder. Therefore the cash accessed can be used to pay down the distressed homeowner’s mortgage while a much more affordable payment can be made by the formerly distressed homeowner towards the reverse mortgage, paying it down over time, at will. If the current distressed homeowner owes more on their home than that home is currently worth, then hire a short sale professional and use the reverse mortgage funds to buy out the home at the short sale price. An individual with a different last name than the distressed homeowner will have to be used on the purchase agreement as mortgage lenders will not approve the short sale from one family member to another.
  3. Spousal bailout. If one spouse in a married couple owns that couple’s primary residence, but the other spouse has the credit and monthly income to afford a new home, then why not let the current residence go and finance an entirely new home in the other spouse’s name? Sure the spouse that walks away from their current home will have damaged credit for some time, but imagine the money saved in interest on the old loan, and the awesome deal that can be had on the new home based on today’s prices. From a financial perspective, this decision can be the best one a married couple can make. A word of caution though: close the new home before letting the old one go. Financing in today’s market is never guaranteed.
  4. Hard money/private money. This solution only applies to a handful of homeowners who have a large amount of equity in their homes but, for whatever reason fell behind on their mortgage payments and cannot provide a lump sum to bring their mortgage current. Many “hard” and private money lenders will create mortgage terms with homeowners solely based on collateral, or in other words, how much equity a homeowner has in their home. Hard and private money lenders are notorious for foreclosure bailout loans, which often carry high interest rates and require repayment within a year.
  5. Strategic default. Many people make the terrible mistake of dragging out their inevitable foreclosure, spending thousands of dollars every month in interest. That’s what banks want homeowners to do; they will collect the excess interest, then take the home in the end. This option is devastating for homeowners and maximizes profits for banks. The worst mistake a homeowner can make is dipping into their savings or investment accounts to “float” their mortgage in hopes that their lender will finally help them in the end. For homeowners that know they truly cannot afford their mortgage and have to dip into savings or borrow from someone else to “stay alive” should cease making their mortgage payments immediately as they are just delaying the inevitable. Homeowners who can afford their payments but owe much more on their homes than their homes are worth may consider strategically defaulting as well. Why not live payment free on the banks’ back during the foreclosure process while saving every penny? In some places, those savings can buy a foreclosed home for cash, or can go towards a new home three years down the line when the former homeowner can qualify for a new mortgage on a home of better value.
  6. Produce the note. In an extremely small percentage of cases, homeowners who ask their lenders to show them proof that their mortgage actually exists are finding their lenders cannot.  How can a mortgage lender foreclose on a home if they cannot produce the original copy of the homeowner’s signed mortgage note? They can’t, which is why asking your lender to produce a copy of your original signed mortgage note delays foreclosure proceedings until they can. In some extreme cases, distressed homeowners are going to court where judges are forgiving entire outstanding mortgages based on this premise.
  7. Forensic loan audits. Many mortgage lenders committed some sort of fraud in creating a homeowner’s loan. Hiring a reputable forensic loan audit specialist can add the necessary leverage that underwater homeowners need to “encourage” their mortgage servicer to modify their loan or approve a pending short sale. A forensic loan audit is simply a legal review of a borrower’s loan documents designed to pinpoint frauds committed by the lender. Homeowners need to make sure that the audit firm they choose is a licensed law firm and in good standing with the state bar in the state where the homeowner is located. If there is no license or they are not in good standing, homeowners should steer clear as there are many sham forensic loan audit companies.

The worst thing you can do is continue to pay interest every month on a mortgage – especially if the home is worth less than you owe or you know the situation is futile. By combining the right people and financial resources, the tactics above should be able to help distressed homeowners in just about any situation.


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