In the context of falling behind on mortgage payments, there are six terms commonly heard, and to some extent they represent a series of potential options for you, depending on your financial situation. If you understand these options, and know where they fit in your financial picture, you can make better decisions, and often get on the road to financial recovery a lot faster.
The six areas are:
- Credit Counseling
- Debt Consolidation
- Loan Modification
- Short Sale
- Foreclosure
- Bankruptcy
Let’s take a look at each in turn; then we’ll talk a bit about the relatively new Washington State Distressed Homeowner Protection Law.
Credit Counseling - The point of credit counseling is simply to talk with someone knowledgeable about your financial situation, ways to work yourself out of your financial problems, and resources to help you further if the problem is not too severe. There are many sources of financial counseling services, but here is a good article on what to watch out for: MSN Guide To Consumer Credit Counseling. The article includes a reference to Consumer Credit Counseling Services, a long established non-profit counseling service. Here is the link to the CCCS affiliated agency in Kirkland: http://www.debtadvice.org/takethefirststep/compinfo.cfm?agency_id=12053
Debt Consolidation - The purpose of debt consolidation is simply to try to reduce the total of a family's monthly payments to something that is manageable within their current income. In some cases there may be negotiation with creditors to accept a change in payment terms – amount, interest rate or schedule, and in some cases several debts may be rolled-up into a single debt package with more manageable terms. While you can certainly try to do some of this yourself, doing it with the guidance, and perhaps assistance, of a credit counseling agency is probably the better path.
Loan Modification – On March 4, 2009, the federal government announced the details of the federally supported home mortgage modification and refinancing program. For homeowners in financial hardship situations, one part of the program will try to reduce the interest rate on the existing mortgage down to a level which is affordable to the homeowner, and keep the rate at that level for five years. The second part is a program for refinancing homeowners into a lower cost fixed-rate mortgage, even up to 105% loan-to-value ratio if needed to make it work. Other potential actions may include some principal payment deferral or even partial principal forgiveness. A good place to start investigating these new programs is the federal site: http://www.makinghomeaffordable.gov/
Short Sale - A short sale is a sale of the home in which the mortgage holder agrees to take a payoff that is less than the amount owed. That means that there are three parties to the sale - a willing buyer, a willing seller, and a willing (maybe) mortgage holder. Typically a short sale process is initiated by the home-owner as a way of avoiding foreclosure, although it may also be suggested by the lender as a better solution than foreclosure. Historically, mortgage holders have been very reluctant to settle for less than what they are owed, for obvious reasons. But hard times have been training mortgage holders that it may be better to figure out what the house can be sold for in the open market, and cooperate in doing it, than wait more months until they have had to foreclose on the property, and then have it sold in a foreclosure auction sale for a bigger loss, or have to take it back on their own books as a non-earning asset, called REO (Real Estate Owned). A short sale is in fact a loss for the lender, and the amount of that loss is called a deficiency. The lender may be willing to forgive, i.e. cancel, that deficiency because you are insolvent and can’t be expected to repay it. However, the deficiency may be reported on your credit record. A short sale means that you walk away with no money from the sale, but it can be much better for you than a foreclosure. The effect on your credit record of a short sale will be less than a foreclosure, and may be mitigated in a year or two. And you can get clear of the mortgage and get on with your life sooner. If you think a short sale might be the right path for you, or just want to explore that option, contact us.
Foreclosure - In the state of Washington, the foreclosure process is generally one called ‘non-judicial’ foreclosure, i.e. no court is involved in the process. The process of foreclosure is a legal process guided by state law and managed mostly by foreclosure process firms. If a homeowner cannot make his mortgage payments and falls too far behind, the mortgage holder can start the process of foreclosing on the home by filing a Notice of Default, which is a publicly recorded document. The foreclosure process has a number of very specific notification steps to be completed, and takes a minimum of 190 days. It can be stopped at any time by agreement between the mortgage holder and the borrower. If the foreclosure process is completed, the property will be sold at public auction on the courthouse steps to the highest qualified bidder. If the winning bid is higher than the mortgage holder’s stated minimum, the mortgage holder will receive the proceeds and the bidder will get the deed and become the new owner or the property. If the bid does not exceed the minimum, the mortgage holder gets the title to the property as satisfaction of the loan. The homeowner generally walks away with nothing – except the record that he has been foreclosed, which will have a severe impact on his credit record for three years or more. Here is a potentially useful link for more information and guidance: Avvo Guide to Washington State Non-Judicial Foreclosure, and a federal Guide to Avoiding Foreclosure.
Bankruptcy – Bankruptcy is an action filed in a federal bankruptcy court that allows a debtor to reorganize or discharge credit obligations due to insolvency. A property owner may temporarily halt foreclosure action by filing bankruptcy; however, the court will then decide whether or not to let the foreclosure proceed. Bankruptcies remain on a credit record for seven years and can severely limit a person's ability to get credit or borrow during that time. Here is some further information on bankruptcy options that may be helpful: Avvo Guide to Bankruptcy.
Washington State Distressed Homeowner Protection Law – this new 2008 (modified in 2009) consumer protection law protects ‘distressed homeowners’, defined as those whose principal residence is in danger of foreclosure because the homeowner has defaulted on a mortgage, is at least 30 days delinquent on the mortgage, or hasn't been able to pay real property taxes. The purpose of the law is to prevent a number of types of pre-foreclosure ‘rescue’ and equity skimming scams that have been so often perpetrated on distressed homeowners in the pre-foreclosure process. Under this new law, an individual who claims to be able to help homeowners avoid foreclosure in exchange for a fee may be deemed a ‘distressed home consultant’. As a ‘distressed home consultant’ they are now legally required to represent the best interests of the homeowner, i.e. to take on a fiduciary responsibility to the homeowner, and to include special legal provisions in a contract with the homeowner.