Capitulation II

In my last post I mentioned the trend of homeowners finally giving up on their properties, and just resigning themselves to letting their homes get foreclosed on. This has been happening even when homeowners have a great deal to lose – tens of thousands of dollars for example. I also mentioned a couple in Alhambra who were about to let their home go into foreclosure, but who by working with us instead, earned about $40,000. A happy ending, as it were.

Today I am going to talk about another man who gave up on his property. I will call him Clarence. I knocked on his door on 3 separate occasions. Each time I saw him, he was polite, but told me that he had the situation under control. He told me that he was going to refinance to cure the foreclosure. To get to the point, he did not refinance. He did not qualify for a refinance, as I had told him on two occasions. The last time I saw him was about 8 days before the auction date.

On that occasion he looked sad, but was still polite. He told me that he had given up. He said that the house was going to be foreclosed on, and that was that. I knew that this man had about $140,000 in equity. Immediately I told him that I could help. But to my dismay, he declined. He was just too tired of disappointment, and frustration. He could not bring himself to do one more thing regarding the house.

Eight days later the house was foreclosed on. He moved in the middle of the night, and did not leave a forwarding address. He did not earn one penny to help move forward with his life.

I mention this as a cautionary tale. When in foreclosure, it is best to get the help of a professional early. And even though everyone hopes to get a modification and save their home, it is important to realize that most people will not qualify for this. When in foreclosure you need to know about ALL of your options, including liquidation for the most money possible. If and when the time comes that your first choice does not work, knowing your next best option in advance can give you the strength to move forward, and not give up on the very strategy that can put money back in your pocket.

In the world of foreclosure, the endings are not always happy. But you can almost always set the limits on damage control.

Capitulation – Fight Foreclosure!

To capitulate means to give up, or to stop resisting. More and more I see people who are giving up on their homes, giving up on their options, and have stopped resisting the tide that leads to foreclosure. I hate to see this, especially when having your home foreclosed on, and sold at auction, is almost ALWAYS avoidable. Take my clients in Alhambra for example. I will call them Bill, and Mary.

I met Mary by knocking on her door – a habit I practice when looking for likely candidates in need of the assistance of a real estate professional like yours truly. Like many people, when she opened the door, she immediately dismissed me. There was something very different about Mary however.

Most people tell me (erroneously) that they have already taken care of their situation. Mary did not say that at all. In fact, what she did say seems to me to be becoming more common among distressed homeowners these days. She said that there was nothing that anyone could do to help her, that she had given up, and that she planned on just letting the house get foreclosed on. She motioned to the long deferred maintenance that the house so badly needed, as she said so.

This was distressing to me, especially considering that I knew that there was a way that the foreclosure could be avoided. Even more importantly, we practice a strategy that would allow her to walk away with some money in her hand. In this case it would be somewhere between $20,000 and $40,000.

We recently signed a contract with the family to do just that. But I loathe the thought that although we were able to help this family, there are thousands of others just like them that will end up doing just what Mary and Bill were planning on doing – just giving up.

I use this example to illustrate the stark difference in the alternatives that were available to this family. Scenario #1: The house gets foreclosed on. The family has to move very quickly, or get thrown out by the sheriff. They walk away with nothing. Scenario 2# We step in and stop the foreclosure, give them time to find a place to move to, and hand them a check as they leave.

Not everyone will have the same success that this family did. There are many ways these things can happen. But if you give up, you will not know what could available to you.

Moral of the story: Do not capitulate…and call me if you know someone who needs help!

How to Write a Hardship Letter

If ever a homeowner is trying to obtain either a loan modification or a short sale from a bank, he, or she will be asked to prove that there is a hardship, which makes paying the existing loan at its existing terms impossible. One of the primary pieces of information the bank will need to ascertain this is the Hardship Letter.

Although it might seem self explanatory, I have seen some pretty wild letters come by my desk, as well as countless questions about how to write one of these. Indeed, there are some things that really need to be in there. So, here is a little guide to helping you write a Hardship Letter if ever you need one.

First, you must really have a hardship. Don’t laugh. I don’t want to pay my mortgage anymore, is not considered a Hardship. There must be something concrete that is problematic for you; something in your life that has changed for the worse, since the time you originally obtained the mortgage. Some examples:

  • Job Loss
  • Divorce
  • Death (Yours or someone else’s who used to help pay the mortgage)
  • Salary Reduction
  • Reduced Hours at Work
  • Injury or Disability

Second, you must ask for whatever it is that you want in the letter. Specifically, if you want a modification, state that you would like a modification, and for how much. If at some point you are turned down for the modification, and realize that you will have to sell a house that is upside down, then you will need to state that you no longer want a modification, and that you now want the bank to accept a short sale.

Third, conclude by stating that if the bank does not allow whatever it is that you are asking, then you will surely go into foreclosure. This makes it clear that you are not going sell your children, rob a bank, or go to any other extreme means to pay the loan. You are done paying, come what may.

The format should pretty much be:

  1. I used to make X amount of money, making it easy to pay for my loan.
  2. I had Y happen in my life, which now causes me to make a lot less money, making it impossible to continue paying my loan.
  3. It is for this reason that I would like you to accept a (Loan Modification/Short Sale).
  4. If you do not do this, the house will surely go into foreclosure.

Sweet. Short. To the point. Hope this helps.

Foreclosure Timeline

As I speak with people in foreclosure, I have come to realize that almost no one I talk to understands what “foreclosure” really means, and that it is a process with rules that must be adhered to. I am going to lay out the most important steps in that process in hopes that you will gain confidence in working your situation out, by knowing exactly what you are dealing with.

Step 1 – You have missed at least 3 payments.Even though this technically isn’t a part of the foreclosure process, this must happen before the process can begin. It is standard practice for a bank to begin the foreclosure proceedings after you are 90 days late on your mortgage. *Note – In today’s crazy environment it is not uncommon for banks to wait substantially longer before initiating foreclosure.

Step 2 – Notice of Default Filed. This is the official gun that sounds the beginning of the process. The NOD is public record, and announces to the world that you are taking the first step towards foreclosure. This is a legal step. It gives legal notice to other creditors, and lienholders for example, that your home – which may serve as collateral on a lien they hold – is in jeopardy of being sold at auction. You are supposed to be notified of this step by mail, but if you aren’t, it doesn’t change anything.

Step 3 – Notice of Trustee’s Sale Filed. This typically occurs 90 days after the NOD is filed. This is when the actual sale date is set. It is a notice to you and the world that the property is scheduled to be sold on a particular date. That date will typically be 14-20 days from the date the NTS is filed depending on your state. If you add the time up there are basically 111 days from the time a property enters foreclosure (NOD status), until the day it is sold. Usually. an announcement is posted on the property.

Step 4 – Expiration of Right to Reinstate Loan – All the way up until this point, you have the legal right to reinstate your loan, and continue to abide by its original terms. More simply put, this means that you can pay off all of your back payments, and penalties, and then go back to paying your old monthly payments. 5 business days before the sale date however, your Right to Reinstate will expire. At that point, you could walk up to your bank’s accountant with a cashier’s check, and they don’t have to accept your money. Now, these days, banks have been known to accept money and reinstate the loan even the day of the sale, but it’s important to know that they don’t have to.

Step 5 – Trustee’s Sale. As early as the 111th day after the Notice of Default was filed, the home can be sold at public auction to the highest bidder. In Trust Deed states like California, there is no redemption period in which you can reclaim the property. In other words, once it’s gone it’s gone. There are a whole slew of attorneys who would have you believe that they can get the house back for you after the fact by “unwinding” the foreclosure. The fact is that this is extremely rare, and usually a waste of time, possibly a waste of money, and almost always a set up for falsely raising your hopes, and following up with big disappointment.

There are more subtle parts of the process, but these are the most relevant ones for homeowners. If you have a grasp of these steps, it helps put things in perspective, and allows you to make educated choices when planning your way out of the foreclosure mess.

Foreclosure Scams: Salt in the Wound

Every single day I speak with people who are in foreclosure. These conversations always have several things in common: A stressed, and frustrated homeowner, a bank that has been utterly useless in terms of making the situation any better, and the one that burns me up more than anything else – someone who has attempted, or worse, succeeded at taking advantage of the homeowner in distress, by attempting to perpetrate any number of scams.

I want to cover three of the most common scenarios I come across so that if you run into any of them, you’ll know to run away from them just as fast as you can.

  1. Upfront Fees I can’t tell you the amount of money that people I speak with have spent on bogus, illegal, upfront fees. It is illegal for anyone – and I mean ANYONE – to ask you for an upfront fees in connection with helping you with a home in foreclosure – particularly for a modification. This includes attorneys. A lot of attorneys will say they are charging you a legal retainer fee for “other services.” If those services really amount to modification services, however, no fees can be charged legally.
  2. Bankruptcy Since I’m on the topic of attorneys … Remember that they are not exempt from dirty, unethical practice. A dozen times a month I talk to people who have read advertising by attorney’s offices that states that they can “get you out of foreclosure,” the implication being that they can truly solve your problem. Clients file bankruptcy thinking that they are safe, not realizing that bankruptcy is only a temporary solution, that buys you some time to figure things out. It is not permanent. If you come across an attorney who leads you to believe that it is the answer to all your questions, try reporting him to the State Bar. And don’t pay him anything.
  3. Short Sale Scams It is illegal for you to receive any benefit from the sale of your home if it is done through a short sale, unless the bank approves it. And unless you are receiving $3500 from the HAFA Program, or the bank has agreed to a nominal amount of “cash for keys” the bank won’t approve it, trust me. A good friend of mine who was substantially upside down on her property had someone approach her and promise to give her $30,000 if she would allow him to “help her” with her short sale. Not only is this unlikely, but if you accept money from an agent or investor who agrees to “share” in the monies earned by them through commissions, you could be breaking the law, and are subject to penalty, fine and imprisonment.

I’ll cover more pitfalls to watch out for in a future post, but if you or someone you know is in foreclosure, these three seem to be some of the most popular. If you should see any shenanigans coming your way, now you will know what to do.

What is a Trial Modification?

Last Sunday morning, I sat down with some homeowners to discuss their options relating to the foreclosure mess they were in. Through the course of the conversation, I learned that they had just received a letter stating that they didn’t qualify for a loan modification, after having been in a period of “Trial Modification.” Some of you might have heard of people in Trial Mods. Maybe you are in one yourself. If so, there are some things you ABSOLUTELY need to know about how these things work.

What exactly is a Trial Modification? Simply put, it is a period of time when the bank gives you a new lower payment, without committing to allow you to keep that payment permanently. Presumably, this is to see if you can indeed make the new payment. One would assume that if a homeowner were successful at making the payment for a period of time, that the bank would then agree to make the terms of that modification permanent. But you know what they about saying “assume.” Don’t do it. Especially not in this case, ’cause it just ain’t so.

Here’s the rest of the story about the homeowners I mentioned above. The homeowner’s made their “Trial” payments for 8 months. They struggled. They made them on time. They lived up to what they thought was their end of the deal. But 8 months later they got word from the bank that they didn’t qualify for the payment that they were paying successfully.

This was a big surprise… to them. It wasn’t to me. And you can bet it wasn’t to certain people at the bank.

The story above gets worse. The homeowners found that none of the payments that they had been making had been applied to their mortgage. Instead of showing that they had been making payments, the loan now shows over 8 months of no payments having been made. This means that the bank can now go immediately to the advanced stage of foreclosure, the fast track to losing your home called NTS or “Notice of Trustee’s Sale.” An NTS basically allows the bank to foreclose on your property in as little as 21 days, without any further debate, or discussion.

Could you find a new place to live, pack up your stuff, and move in 21 days?

On top of all this, the homeowners were out 8 months of payments – over $13,000 – that they could have saved, to help start over in a new place. Instead they made payments to the bank in good faith, struggling to do so in the belief that they were working towards saving their home. In fact, they were wasting the little resources they had. And now they don’t even have the typical period of time – 111 days – the bank must wait before they can foreclose, without making mortgage payments, in order to prepare to move.

You might think that this is one of those isolated cases, one of the horror stories you hear about. In fact, this is par for the course with trial modifications. In the government HAMP program for example, as of July, 2010 there were 1,334,117 trial modification started. Of that number 663,538 were cancelled. That my friends, just about equals a whopping 50% failure rate. I guess you could say that it is also a 50% success rate, but in this case, I’m sorry, I have to side with the glass is half empty crowd.

You need to be extremely leery of a Trial Modification offer. There are certain ratios that if you fall outside of, will almost certainly disqualify you from obtaining a permanent mod. Call me and I’ll go over them with you.

And by the way, are you wondering why the bank would set you up in a “Trial” offer that it would seem they should have known from the onset if you qualified for or not, and then pull the rug out from under your feet? If this is bothering you, consider the following two scenarios, one hypothetical, one actual. After that it should all be pretty clear:

  1. First the hypothetical one. The bank could have let the homeowners know up front that they didn’t qualify for a modification. The homeowners could have stopped paying their mortgage for 111 days before the bank could have legally foreclosed on the property, and in the process the homeowners could have saved almost $7000 to help them start their lives over.
  2. Now what actually happened. The bank told the homeowners to begin making $1700 a month payments, while breezing through that mandatory 111 day period I mentioned that the bank had to wait before they could legally foreclose. In the process they collected $13,000+ and now reserve the right to kick the homeowners out in 21 days.

Is anyone still unclear?

How long does it take to foreclose on a house?

It was sensible. It was reasonable. It went something like this: If you didn’t pay your mortgage for 90 days, a Notice of Default was filed. You got 90 more days to pay, and if you didn’t then a Notice of Trustees Sale was published, and if you still couldn’t pay, your home was sold to the highest bidder 21 days later at the county courthouse steps. The total process from the days the NOD was filed took 111 days. Ah, the good old days. If only things were so simple today.

In today’s world there is no obvious rhyme or reason to the manner in which foreclosure is conducted. The average home in foreclosure doesn’t actually go to auction until (Ready for this?) 461 days after the NOD is filed! Some take substantially longer than that. Some people might say that given the overwhelming numbers of people in foreclosure today, and the existence of a genuine crisis for so many, this could be a good thing. It could help someone when they need it most. Although it can feel that way for many people, I couldn’t disagree more.

Although it can indeed be helpful for someone to have an extended period during which no mortgage payment is demanded of them, the real issue arises from the fact that there are simply no rules anyone can count on any more. The average homeowner is lulled into a sense of complacency after 400 odd days of not having made a mortgage payment. And when the bank finally does decide to foreclose it’s akin to a hard unexpected left to the jaw.

I talk to people all the time who literally believe that the bank won’t foreclose. Who could blame them for such a thought? When the original Trustee’s Sale was scheduled, they trembled at the knees, and scrambled for a way out. But the original Trustee’s Sale came and went. And so it was with the 2nd 3rd and 4th extension the bank – for no apparent reason – granted.

After a while, a new Trustee’s Sale Date was old news. It lacked teeth. No one paid much attention until it suddenly it was too late. At the 11 (hundredth) hour, the bank finally got around to doing what they should have done 300 days earlier, and with no uniquely different warning than they had been giving for over a year, they swiped the property out from under the (by now) unsuspecting homeowner’s feet.

Standardized foreclosure procedures, although tough give people something to latch onto. A time frame to work within. Something they can count on at a time filled with chaos.

Now I’m all for the banks giving a little extra leniency during these difficult economic times. But please, let’s dole this out in an at least somewhat uniform manner. People need parameters to work within. And when homeowner’s are lulled into complacency, or worse a false sense of security, no one wins.

Homeowners Lose Equity to Banks

Have you or anyone you know ever had to deal with foreclosure? If you live in CA 2010, and if you stop and think about it, the answer is probably, “Yes.” If this is the case, then I have some info you need to know. According to ForeclosureRadar.com, within the county of Los Angeles alone, there were 3026 foreclosures in 09. These weren’t your ordinary “I’m sick of hearing about them on every front page” variety foreclosures. No sir. These were special. This unique group of foreclosures represents the worst variety of foreclosure known to man. These 3026 foreclosures were properties that went back to the bank while the owner still had at least 30% equity in the property.

What does this mean? In plain English the people in this group lost between $50,000-$250,000 each when the bank foreclosed. I don’t mean they lost this money on paper. This isn’t money lost because the house dropped in value. I mean that had they simply sold their homes before the bank foreclosed, they could have walked away with between $50,000 and $250,000 hard, cold cash in their pockets.

“Huh,” you say?

Why in the world wouldn’t a homeowner with so much to lose simply sell their home when it looked like there was even a remote possibility that the bank might take it? Why, indeed.

There are 2 primary culprits that lead people into this situation. The first is a combination of good old fashioned ignorance, and fear. People in foreclosure are often in denial. They think the cavalry, the lottery, perhaps God Himself will make an eleventh hour entrance and save the day. I’m not exaggerating. When the reality of the situation is too difficult to face, people often act in illogical ways. People of normally sound judgment, act very differently when their home is on the line.

The second, and in my opinion the worse by far, is that homeowners are lead to believe that they have a fighting chance of keeping their homes, when in fact they don’t. The average homeowner would prefer to stay in his home, and is busy chasing after a modification. The truth though, is that he probably won’t get one – not if the stats have anything to do with it. The number of homeowners that actually end up getting their loans modified to the point where they can realistically stay in their homes for the long term, is abysmally small. Yet banks, politicians, attorneys, and even Oprah would have you believe that you have a fighting chance.

I’m not saying that you can’t get your loan adequately modified. People do every day. The problem is that those people are in a very small minority. Those are the 3 ex fat people on the “Lose 100 lbs in 2 Weeks” infomercial, with microscopic writing underneath saying that “results may vary.” You can’t bet on a long shot when you have a lot to lose should that bet fall through.

And by the way, the bank has far less incentive to cooperate with you when you have equity in your home. If it gets sold, they get all their money. They are more likely to negotiate when you’re upside down passed your ears, and haven’t even thought about making a payment for a while. If they foreclose on someone who is upside down, they are going to lose money. But for the guy with equity, they are going to make money when they sell your home at auction.

Is it any surprise then, when the bank says, “Yes Mr. Homeowner, we will give you a trial modification to see how it goes. They then proceed to collect payments for 3-6 months, and suddenly conclude that you actually didn’t qualify for a modification, and furthermore inform you that they will be foreclosing in 2-3 weeks time.

When all is said and done, the case for selling is a strong one, particularly when you have equity. And if you you really can’t bring yourself to sell, then I’d put my money on the cavalry, the Lottery, or Oprah before I put my money on the banks to come through for me. The results are about the same, and they’re a lot nicer to deal with.

When Loan Modifications become Dangerous

When faced with foreclosure, the first thing most homeowners will do is to call their lender in hopes of obtaining a loan modification. The vast majority of people would like to remain in their home if at all possible, and a loan modification is usually the only way that this can be achieved.

For a very select group of people, loan mods are the answer to their problems. For most however, putting your faith in the success of a loan modification can cause serious problems.

Here are some depressing facts:

  1. More than 98% of loan modifications are still in the “Trial Period”
  2. Right now, less than 2% of loan modifications have been accepted as permanent modifications by lenders.
  3. In 2009 only 66,465 of the 3 Million mortgages in foreclosure were permanently modified.
  4. And here’s the most disturbing fact of all. Nationwide, only 4764 “Permanent Modifications” actually have a 9 month history of successful payments.

Just to put this in perspective, according to ForeclosureRadar.com, as of today, there are currently 47,316 homes in foreclosure in Los Angeles County alone. There are about 4 million households across the country who need help. And in the face of millions of struggling homeowners all across the nation only 4764 people were actually granted permanent modifications. This means that when all is said and done, you have about a .01% chance of success when attempting a permanent, long-term modification.

These pitiful results make it clear that homeowners betting on a loan modification coming through are betting on very poor odds indeed. Even if the bank does make some sort of concession, it is likely that it simply won’t be good enough to allow you to stay in your home indefinitely. This is significant beyond itself, and can in fact be quite dangerous to homeowners, particularly those with equity in their homes to lose.

Let’s look at the following example:

Benjamin Homeowner hasn’t been able to make a payment on his mortgage for 90 days. The bank has sent him a Notice of Default, and now that the threat of foreclosure has become a reality, he knows that something must be done. He fully realizes that he can no longer pay the $250,000 mortgage on his home valued at $500,000.

The obvious strategy is for him to sell the home, collect $250,000 minus various costs, and fees, and move on with his life. Benjamin, however has lived in this home for almost 20 years, and really doesn’t want to move. He is also worried that due to his poor credit, finding a new place to live might be a possibility. He has heard about the banks modifying loans for people, and wants to see if this might be a possibility.

Can Bankruptcy Really Stop Foreclosure?

Every day I speak with people who are in foreclosure. Every day the answer I receive when I ask about their situation is, “We’ve taken care of it.” Whether it’s because they just don’t want to talk to me, or because they truly believe they have done what needs to be done is a subject for another post. This post addresses the people who really believe that they have indeed “taken care” of their situations, specifically, the ones who believe that they have done so by claiming Bankruptcy.

Bankruptcy is a useful tool when dealing with creditors who call your home and work relentlessly. It can help to put the brakes on a situation that has spun out of control, giving you time to sort things out and to decide what your next move should be. You can think of it like a “Time Out” during the last few minutes of the Superbowl. The whistle blows, everything stops, and you can plan out your next strategy.

One thing that a BK absolutely cannot do however, is to end your foreclosure problem for good. It is a common misunderstanding among people I speak with, that your home can be included in a bankruptcy. It can not. Two debt items that a bankruptcy judge cannot forgive are student loans and mortgages.

What consulting a good bankruptcy attorney can do for you is to put the brakes on, slow things down a bit.  During the final stretch before your home actually goes to auction, BK can be invaluable in stopping the sale. This can give you more time to explore all of your options. It can help determine if the forgiveness, or restructuring of some, or all of your debt, will allow you to stay in your home.

If you truly can’t afford to stay – and this is usually the case – then you will have more time to find a new place to live, clean out your belongings, and move at your own pace, your dignity intact.