Options for the Distressed Property Owner

Your financial decisions and the economic events of the past few years may have left you with a mortgage payment that has become unbearable.

You may have missed a payment.

You may even have a mortgage balance higher than the value of your home.

What can you do?

Your options depend first upon whether or not you wish to keep your home.

Briefly summarized, if you wish to keep your home your options are:

1.  Refinance the Loan – You need equity. Any delinquent amounts will be settled in the process. Great solution if you can do it.

2.  Rent the Home – If you are willing to be a landlord, you may be able to rent the home for more than you need to pay for alternative housing, thereby freeing cash to continue making the mortgage payments. Note that moving out of the home may affect its status as your “primary residence” for tax and recourse loan purposes, so consult an experienced professional if you seriously consider this route.

3.  Modify the Loan - Many suggested options going by various names fall under the umbrella of the following loan modification approaches:

a.  Forbearance – You may be able to arrange a temporary payment reduction or suspension of payments with your lender. The lender will look for assurance that you are able to meet the new payment plan requirements.

b.  Reinstatement of Defaulted Loan – You may be able to pay any arrearage (the default amount plus interest, attorney fees, late fees, taxes, etc.) through a separate repayment plan.

c.  Government Sponsored Loan Modification Programs - Utilize the existing mortgage company to refinance the debt or extend the terms of the loan in order to catch up at a more affordable level. The well-intentioned government loan modification programs are not working as hoped (less than 10% succeeding), and do not address big value losses. Lenders’ experience is that a high percentage of these modified loans default later, so in order to qualify you must show the lender that you have fixed the problem that caused the missed payment in the first place.

d.  Warning: Loan modification “consultants” have come under fire for less than scrupulous practices. In Oregon, "Debt Management Service Providers" must register with the Oregon Division of Finance and Corporate Securities (see DFCS site here). We are real estate brokers; we are not debt management consultants. We can, and would like, to help you with your real estate concerns.

Here are a few other helpful web sites:

·   HUD at www.MakingHomesAffordable.gov

·   NeighborWorks America at www.NW.org

·   Better Business Bureau at www.bbb.org

·   Fraud Guides at www.fraudguides.com/mortgage-foreclosure-rescue-scam.asp

·   All Foreclosure Informaton at www.all-foreclosure.com/help/scams.htm

·   Federal Trade Commission at www.ftc.gov/bcp/menus/consumer/credit/mortgage.shtm

·   Federal Reserve’s 5 Tips Series at www.federalreserve.gov/consumerinfo/fivetips_foreclosure.htm

4.  File a Chapter 13 Bankruptcy – Discussed below.

Homeowners with little or no equity who have decided to sell or otherwise dispose of their homes don’t have good choices. Most of the options, from “least bad” to “worst,” are briefly summarized as follows:

1.  Short Sale – If the market value of your home is less than the amount needed to pay off all liens and convey clear title, you may be a candidate for a short sale. In a successful short sale the lender(s) agree to release their liens without getting full payment of the amount owed. Often the lenders will also agree to forgive the balance owed. Why would they do this? Lenders have discovered that they recover a much higher percentage of their loan value if they work through a short sale than if they go through the foreclosure process, so they have become much more agreeable to approving short sales. The process, though still lengthy and complicated, has improved greatly in the past few months, and is often the best option. Call us at 503.222.4300. We are short sale professionals. We can help.

2.  Deed in Lieu of Foreclosure – If your lender is willing, you might simply deed the property to them instead of waiting for them to foreclose. Many lenders require the home to be marketed for sixty to ninety days before considering “taking back” the home, and usually require mortgage payments and taxes to be current and the home to be well-maintained. The existence of junior lien holders often precludes this possibility, as their rights would survive and even improve upon transfer to the senior lender. Furthermore, liability for the lender’s loss on resale, unless negotiated, may stay with you.

3.  Foreclosure – No agreements are made with the lender. Your only protection is the legal framework of your state. In Oregon, almost all recent foreclosures have been non-judicial, but the lending industry’s response to the MERS “robo-signing” scandal may lead to more judicial foreclosures, with significantly different implications for homeowners. A lot of bad advice is in circulation as to whether or not lenders can come after you for any deficiencies, so it is absolutely imperative that you get good legal advice regarding your specific situation.

4.  Bankruptcy - An option for some homeowners who are facing financial pressures in addition to their real estate issues. Bankruptcy, though usually the last choice, can discharge debt and/or allow more time to work with creditors.

a.  Chapter 7 (Liquidation) - Non-exempt assets are sold by the Chapter 7 trustee and the proceeds are distributed to creditors according to the priorities established in the U.S. Bankruptcy Code. With certain exceptions, all personal debt is eliminated. Eligibility standards were added to the code in 2005 to prevent “abusive” filings.

b.  Chapter 13 (Wage Earner Plan) - Chapter 13 allows individuals to keep possession of assets, catch up on secured debt, and discharge unsecured debt at the end of the plan. Debt is restructured and a payment plan created to make payments over three to five years, after which the remaining balances on unsecured debts are usually discharged. Chapter 13 permits you to pay debts that can’t be discharged in Chapter 7, such as recent taxes or back child support; to cure defaults on home mortgages; and to eliminate that part of most other liens that are greater than the value of the encumbered assets. Creditors don’t get to choose whether to be bound by the plan, and they must stop collection actions during this time. Think of Chapter 13 as a court enforced debt management plan.

c.  Chapter 11 (Business Reorganization) – Most debt is restructured. Though flexible, Chapter 11 is also much more expensive to administer than Chapter 7 or 13, and is usually attempted only by large businesses.

Each of these options has risks and consequential issues, including:

1. Continuing Debt Obligation

2. Credit Rating

3. Income Taxes

4. Time

This is a very brief summary of a very complex reality. Seriously consider your situation, consult qualified professionals, and take quick action in order to allow yourself enough time to complete the best option for you.

Call us at 503.222.4300 for more information and to discuss your particular situation in confidence.