Stop Foreclosure FAQS
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04-30-2007
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Q. What is a Mortgage?
A. A legal claim received by the lender on a property as security for the
loan made to a buyer to facilitate the purchase. Typically, a mortgage
payment must be made monthly to keep the mortgage loan from falling into
default.
Q. What is foreclosure?
A. Home foreclosure is a process in which a lender reclaims a property which
they have financed. This normally occurs when the borrower or homeowner is
behind on mortgage payments and is unable to become current. This generally
is due to circumstances beyond the homeowner's control. When forecloser
takes place, the homeowner must vacate the home forefitting possession of
the property and risking any possible equity. The time frame in which the
foreclosure process takes place varies from state to state. Click
http://www.uslossmitigation.com/foreclosure.php to review foreclosure laws
state-by-state. (we should put a table in with laws for each state similar
to that site)
Q. How does foreclosure happen?
A. There are a many circumstances that can cause homeowner to face
foreclosure. Generally, a hardship occurs that results in a homeowners
inability to keep up with their mortgage payments. These reasons may
include:
Loss of job
Divorce or separation
Unplanned home or car repairs
Filing for bankruptcy
Q. What is Loss Mitigation?
A. Simply put, is a process that uses various programs and techniques to
avoid foreclosure. Foreclosure is a last resort option and should be avoided
whenever possible. Through numerous programs, loss mitigation provides a
means to stop foreclosure and keep people in their homes. Loss mitigation
assistance generally falls into two categories. The first will remedy the
default and retain homeownership. The second results in the sale of the
property to a third party by means of voluntary relinquishment; however, not
a foreclosure, which should be avoided if at all possible. Foreclosure
severely damages an individual's credit.
Q. What does a Loss Mitigation Counselor do?
A. A loss mitigation counselor examines a homeowner's scenario to determine
the most viable loss mitigation program to assist the homeowner resolve
their mortgage issues. The counselor will guide the homeowner and develop
the case to determine the appropriate qualifications and direction to assist
the homeowner. After the counselor has collected all supporting documention
to support the case he will present the case to the homeowner's lender to
resolve the sitution in the most suitable manner.
Q. What are the Loss Mitgation programs used to avoid foreclosure?
COVENTIONAL OPTIONS
Homeowners that face permanent financial crisis through death, divorce, or
permanent disability are less likely to be able to afford the monthly
mortgage payment will have limited options. These options generally involve
a Short Sale (Pre-foreclosure Sale) or a deed-in-lieu of foreclosure.
However, homeowners that are facing a temporary setback but will be able to
continue making the monthly mortgage payments in the future should qualify
for additional options that may include: forbearance, loan modification,
mortgage refinancing, and additional loans against the home to cover the
cost of default.
There are six options for conventional loans and there may be additional
programs if backed by Fannie Mae and Freddie Mac. Options 1,2,5 and 6 are
generally the same as FHA loss mitigation options.
Retention Options (homeowner remaining in subject property)
1. Forbearance
2. Loan Modification
3. Mortgage Refinancing: Mortgage refinancing is an option where the lender
would allow your client to refinance his or her existing mortgage, wrap in
any late payments and fees, and cash out part of the equity in the home to
allow the homeowner to regain control of a debilitating financial situation.
4. Second Mortgage: A lender may offer a second mortgage to a homeowner in
order to make up any back payments, late fees and other charges necessary to
reinstate the loan. The homeowner, in return, will be required to make an
additional mortgage payment to cover the principal and interest payments on
the second loan. Interest rates often rival credit cards and should be
looked at with caution.
Non-Retention Options (homeowner relinquishing the property by means other
than foreclosure)
5. Short Sale (Pre-foreclosure sale)
6. Deed-in-Lieu of foreclosure
FHA PROGRAM OPTIONS
There are five options outlined for FHA-backed mortgages where a homeowner
is facing foreclosure. Three of these options, referred to by FHA as
“retention options”, are available to help your clients that are facing
temporary causes for default.
Reinstatement options
1. Special Forbearance- where you assist the homeowner by arranging a
special repayment plan.
2. Loan Modification- where the mortgage is refinanced or the term of the
loan is extended to accommodate a lower payment.
3. Partial Claim- an interest-free loan from HUD to bring the mortgage
current.
The other two options, referred to as “non-retention options”, are designed
to assist your client in the transition to lower cost housing.
Disposition options
4. Pre-Foreclosure Sale- entails selling the property prior to a foreclosure
at Fair Market Value.
5. Deed-In-Lieu of Foreclosure- voluntarily giving the property back to the
lender.
Though FHA does not have a litmus test to determine if a delinquent client’s
situation qualifies for a particular option, FHA relies on the lender and/or
the loss mitigation counselor to determine a homeowner’s eligibility. These
eligibility requirements include type of hardship, the status of the
property, and the evaluation of the client’s situation. Most lenders do not
discuss the qualifying factors to a homeowner, which puts the mortgage
company at an unfair advantage. As a loss mitigation counselor you create
an even playing field for your client; in most cases tipping the scales in
your client’s favor.
It needs to be determined whether the FHA homeowner’s ability to support the
mortgage debt has been permanently reduced. If the homeowner doesn’t have
the means to pay the mortgage, they are likely to only qualify for a
non-retention option. However, if the crisis is temporary in nature, such
as loss of income or illness, the homeowner will more likely be considered
for FHA retention options.
FHA RESIDENCE POLICY
The FHA loss mitigation policy requires that the homeowner must occupy the
property as a primary residence in order to be eligible for any
reinstatement options. Exceptions to this rule can apply when the
non-occupancy is due to the hardship that got them behind in their mortgage
payments and can be proven to have forced the homeowner to move.
Furthermore, the client must not own any other real estate that has a FHA
loan against it or had a FHA loan that incurred a loss as a result of a
foreclosure or forced property of sale. If a property has been abandoned, a
FHA homeowner is not eligible for any reinstatement options. In most cases
of abandonment, foreclosure proceedings are initiated instantly.
Critical to determining your client’s eligibility is the lender’s analysis
of the client’s financial situation. A homeowner will be expected to
provide detailed financial information to the lender and the lender will be
required to independently verify the information.
FHA PROGRAMS
If the cause of your client’s default or delinquency is one that poses a
temporary setback and if the client will have the ability to continue making
the regularly scheduled mortgage payment, FHA prefers the lender considers
retention options in the following order:
1. Special Forbearance
2. Loan Modification
3. Partial Claim
If the loan is not curable and/or the homeowner is not willing to remain in
the home, the lender is to consider non-retention options with a preference
towards the following order:
1. Pre-Foreclosure Sale (Short Sale)
2. Deed-in-Lieu of Foreclosure
Special Forbearance
The first option to evaluate your client for is a Special Forbearance
option. According to FHA’s loss mitigation policy, “A special forbearance
is a written repayment agreement between the lender and a mortgagor
[homeowner] which contains a plan to reinstate a loan that has been
delinquent for at least 90 days.” Generally a lender will accept workouts
you have done on a special forbearance plan for a homeowner through lower
payments over a period of time in order to compensate for the unexpected
loss of income or increase in living expenses. Special forbearance can also
be an increase in mortgage payments over a period of time to bring the
mortgage current. In order for your clients to qualify for a special
forbearance, you, the Loss mitigation Counselor must prove that the client
can meet the following guidelines:
At no time may the mortgage be behind more than the equivalent of the
total of 12 months of mortgage payments (to include principle, interest, tax
and insurance).
The special forbearance must lead to the reinstatement or resumption of
the loan by either gradually increasing the monthly payment in order to
cover the money owed or the resumption of normal monthly payments.
Furthermore, the loan must be between 3 and 12 months behind.
Your client must be an owner occupant and continue to occupy the property
as a primary residence during the term of the forbearance.
You must show your clients will have sufficient income to reinstate the
loan. This may be accomplished through the gradual repayment of the amount
owed or through a combination of a partial claim.
The property must be habitable with no adverse conditions that would
prevent the homeowner’s continued use or the property’s marketability.
Loan Modification
A loan modification is a permanent change to the mortgage note that
restructures the terms of the loan in order to reinstate the loan and
results in a payment your clients can afford to make. Examples of a loan
modification would include lowering the interest rate, extending the due
date on the loan, or re-amortizing the remaining balance on the loan.
In order to modify the mortgage, your client must:
Be three or more months behind in payments,
Have had the mortgage for at least 12 months,
Not in foreclosure,
Prove the loss of income or increase in living expenses,
Live in the property as an owner occupant and continue to live in the home
as a primary residence
Furthermore, the mortgage company has to do a loan modification that must
result in a fixed rate loan that reinstates the loan. At the lender’s
discretion, the interest rate may be set below market or increase the rate
if your client has the ability to support the payment. The lender is also
allowed to include any or all of the back payments into the principal
amount. Any foreclosure costs, fees, and other administrative expenses may
not be included into the modified loan.
It is important for the Loss Mitigation Counselor to make sure their client
is making payments in the amount of their mortgage payment to ALMC in the
Virginia trust account that can be used to pay the foreclosure cost and
other administrative expenses. It is also important to make sure that the
workout package is submitted results in the best possible plan for your
client. Usually you will delay filing, to allow your client ample time to
save up money in the trust to pay the costs that will not be included in the
retention options. This is usually one of the reasons homeowners who
attempted to represent themselves fail and lose their homes.
Partial Claim
A partial claim is a no-interest loan form the government that covers the
amount necessary to reinstate a delinquent loan. Your client does not have
to make payments for this note nor does the note become payable until your
client either pays off the FHA loan or no longer owns the property.
In order to qualify for a partial claim, you must:
Be at least 4 months but not more than 12 months behind in the mortgage
payments,
Not be in foreclosure,
Have recovered from the cause of the default,
Have sufficient income to resume the monthly mortgage payments,
Not have sufficient income to repay the amount necessary to reinstate the
loan,
Occupy the property as an owner occupant and continue to live in the home
as a primary residence,
The partial claim must fully reinstate the loan for your client. The
partial claim may only include the principal, interest, taxes and insurance
necessary to reinstate your loan. This does not include any late fees or
other administrative costs associated with the delinquency. Though the
partial claim is due when the FHA loan is paid off or when your client no
longer owns the home, the partial claim does not carry a prepayment penalty.
Again make sure that your client continues to post his payments to the
trust, to cover expenses not included in the reinstatement options. For
example, a client is delinquent $2,700, and has incurred an additional
$1,700 worth of foreclosure cost; only the $2,700 will be allowed in the
retention options and your client will have to pay $1,700 up front. I would
advise you always plan to file plans after your client has made their second
payment, with the exception of clients that have scheduled foreclosure
dates. If your client has a foreclosure date, it is imperative to inform
them to have the amount of money needed (for your fees and down payment if
needed), prior to accepting them as a client.
Pre-foreclosure Sale
A pre-foreclosure sale allows your clients in default to sell the property,
pay off the remaining balance of the loan, and collect any remaining equity
while avoiding foreclosure. This option is generally used for your clients
who face a qualifying financial crisis that requires the sale of the home.
Clients whose property value has declined to less than the amount owed
against the home are eligible for this option.
To qualify for this option, your client must make a commitment to actively
market their home (with the use of a qualified real estate agent) for a
maximum period of 4 to 6 months. During this time frame, you must make sure
the lender is delaying any foreclosure action. The loan must be at least 30
days behind in payments and your client must be an owner occupant.
The lender is required to obtain a recent FHA appraisal and preliminary
title report for the home. The property must not have suffered any severe
damage and any repair costs must not exceed 10% of the “as is” value of the
home.
Should your client owe more than the value of the home, you may get the
lender to allow the buyer to sell the home for approximately 90% of the
appraised value of the home, assuming that the appraised value is at least
63% of the amount owed. All sales contracts must be approved by the lender.
Failure to sell the home within 90 days of the expiration of the
pre-foreclosure sale time frame, the lender will commence foreclosure
proceedings, at that time it must be determined if an extension of time
needs to be filed or to submit the lender with a deed-in-lieu of foreclosure
option.
Deed-in-lieu of Foreclosure
A deed-in-lieu of foreclosure is a voluntary return of property, submitted
for your client, by deeding the home to FHA in exchange for a release from
all obligations under the mortgage. Your client facing eminent foreclosure
against the home may voluntarily surrender the home to FHA in order to
prevent the foreclosure. Generally this is the preferred to foreclosure
because it avoids the time and expense of a legal foreclosure.
To qualify for this option, the loan must be in default. Your client must
face a situation where he or she cannot continue to support the mortgage
debt, and your client must occupy the home as a primary residence.
Furthermore, the homeowner must not own any other properties subject to FHA
financing.
It is advisable for a client facing this option to first consider the
pre-foreclosure sale. By deeding the property over to the lender, your
client loses all accrued equity in the home. Furthermore, should your
client decide to select this option, he or she must complete the
deed-in-lieu action within 6 months of the date of default unless an
extension was granted by first trying other loss mitigation options or
approval from the lender.
Important Note
Should foreclosure proceeding occur, your client may still reinstate the
loan by procuring sufficient funds to bring the loan current. In most
states, this means you have until the last minute prior to the Trustee’s
sale to reinstate the loan. See state foreclosure processes for the state
that applies to your client, for specific timelines.
FHA Timelines
In order to qualify for one or several of the options listed above: your
client must exercise his or her option(s) within the first 6 months of
default. Exceptions to this rule apply if:
The loan is reinstated
Your client agree to a special forbearance
The loan is modified
The loan is reinstated by a partial claim
Your client sells the property
Your client deeds the property back to FHA
The lender initiates foreclosure
An additional 90 days may be allotted if the lender has initiated but is
unable to complete the special forbearance, loan modification or partial
claim within the 6 months and no other intervening delays (such as
bankruptcy) impede the process.
NEGOTIATING WITH FHA LENDERS
As a loss mitigation counselor prepares to work with his or her client’s
lender, there are several areas to focus on before any interviews begin. As
stated before, FHA relies on the lender to determine your client’s
eligibility to include the type of hardship, the status of the property, and
an evaluation of your client’s financial situation. A successful
negotiation is determined by good preparation and good communication. In
the outsourcing program, most of the preparation of paperwork and the
negotiation is done by us, but the elements of the interview are important,
so let’s discuss them.
When preparing for the interview, ask yourself the following:
For all types of mortgages- FHA, Conventional, FmHa, RHS, etc
Why did your client default on the loan? Is it a result of just not
making the payment or has the client suffered a verifiable loss of income.
Lenders will listen if you can prove verifiable and temporary setback in
your client’s income. The key is being able to support your reasoning
behind your client’s delinquency. If the reasons are due to temporary
layoffs for example, send the lender a letter from your client’s employer
stating that they have been laid off. If you do not plan carefully and file
no reasons for being behind (or weak reasons), this may limit your client’s
options.
Have you cut back your client’s expenses appropriately? Does your client
really need cable, or the BMW, when clearly they are facing the threat of
losing their house? This expenditure analysis will be done by you and by
the processors at ALMC in Virginia.
Can your client sell an asset to compensate for the deficiency or loss of
income? Does your client have any assets that they are forced to make
payments on? Would selling that asset decrease the monthly expenses and/or
generate sufficient cash to apply towards the loan for your client? In some
cases a client may be able to sell a car, for example, to reduce the monthly
expenses by eliminating the car loan. Also, any profits from the sale of
the asset could be used to bring the loan current.
Do your clients know anyone that could loan them money to get back on
their feet? Do they have family members, relatives, or other sources that
could loan them the money? Though most people are ashamed to ask, asking a
family member or friend may be the only hope of saving the family home.
Is it worth your effort or your client’s to save their home? Would it be
advisable to have them seek advise on selling the home and giving them a
fresh start? In some cases you will have to help your client realize that
they may not be able to handle the burden and stress of keeping the house.
Should you have your client seek legal advice on filing bankruptcy? When
facing a financial crisis, some clients will often look towards bankruptcy
as an option to alleviate the problems. Before your client makes a decision
to file a bankruptcy, determine how it will affect your client’s ability to
keep the home. Bankruptcy often delays the foreclosure, but statistically
bankruptcies that involve real property often fail.
If you were the lender, would you justify the cause based on your client’s
situation? Though this is one of the most difficult questions to ask, be
realistic. Inform your client, if they loaned someone $100,000 dollars,
would they believe his or her excuse for being late? If not, you and your
client might want to consider redrafting the hardship letter. Remember that
the lenders prefer to hear about temporary setbacks versus permanent
situations.
The lender will do a detailed analysis of your client’s loss mitigation
package, once submitted. The lender will scrutinize the reasons for the
default. The hardship letter needs to include all the necessary
documentation to support the reason for the delinquency. Reiterate the need
to gather all the applicable paperwork including letters from the employers
showing a decrease in income, bills and receipts justifying an increase in
expenses. These documents need to be readily available in the event that
the lender requires additional documents to support your client’s claim.
The second key to successful negotiations with a lender lies in good
communication. Good communication is achieved by quick action, immediate
responses, and positive cooperation. I can’t stress this enough. Require
clients to inform you if they are going to be late on their monthly
postings. All the correspondence from the lender needs to be documented on
their file. This allows us to track down the progress of the case.
Once the report has been sent and the representative for the lender has been
identified the dialogue with the lender begins. You need to create a
communication log as part of your client’s file, which will be used to
document every phone call, letter received and meeting with your client.
Furthermore, as the counselor you need to put emphasis on your client’s
desire to resolve this mortgage problem. If the cause for the default has
been resolved or will be resolved, it is your job to assure the lender that
your client’s problems are behind him. This opens the doors for the lender
to be more lenient and willing to work with you to bring a solution to your
client’s problem.
