The Foreclosure Survival Guide
Keep Your House or Walk Away With Money in Your Pocket
The Foreclosure Survival Guide
Keep Your House or Walk Away With Money in Your Pocket
Amy Loftsgordon, Attorney and Stephen Elias, Attorney
September 2015, 5th Edition
Facing foreclosure? Know your options
Updated by Leon Bayer
If you’re one of the millions of Americans in danger of losing your house, The Foreclosure Survival Guide provides the practical information you need, including:
- the ins and outs of foreclosure
- how to decide if you should try to keep your house
- federal programs to help you avoid foreclosure
- alternatives to foreclosure, such as short sales and deeds in lieu
- new federal foreclosure protection and mortgage servicing rules
- new state foreclosure mediation programs
- delaying or avoiding foreclosure with bankruptcy, and
- avoiding foreclosure scams.
The 5th edition provides up-to-date information on the Making Home Affordable programs, new federal rules, foreclosure timelines, and court decisions affecting homeowners’ rights.
About Stephen Elias
Stephen Elias, the original author, was an attorney, President of the National Bankruptcy Law Project and bestselling author of many books.
About Amy Loftsgordon
Amy Loftsgordon has worked in the area of foreclosure for over ten years. She received a B.A. from the University of Southern California and a law degree from the University of Denver Sturm College of Law. She is licensed to practice law in Colorado. Amy has authored numerous foreclosure articles on Nolo.com.
Amy’s Other Pages
About Leon Bayer
Leon Bayer is a Los Angeles, California bankruptcy attorney, practicing since 1979. His primary focus is on representing individuals and small businesses in Chapter 7 and Chapter 13 bankruptcy. He is a founding partner in the California law firm of Bayer, Wishman & Leotta and is a Certified Specialist in Bankruptcy Law. To learn more about Leon, you can visit his Los Angeles Bankruptcy Blog or his Los Angeles bankruptcy attorney website.
Mr. Bayer is a coauthor of Nolo's The New Bankruptcy: Will It Work for You?, authors the “Ask Leon” series on Nolo’s Bankruptcy, Debt & Foreclosure blog, and writes on bankruptcy topics for Nolo’s website.
"...evaluate your options and make smart choices."
“Straightforward and timely.”-Library Journal
“Steve Elias’s proven ability to demystify law is exactly what those facing foreclosure need.”-Jim C. Turner, Former Executive Director, Halt
Your Foreclosure Companion
1. Foreclosure: The Big Picture
- What to Expect
- Your Options: An Overview
- How You Can Stay in Your House Payment Free
- Why Foreclosure Doesn’t Have to Be So Bad
- Don’t Get Scammed by a Foreclosure “Rescue” Company
- Beware of Property Preservation Companies
2. Foreclosure Nuts and Bolts
- How Much Time You’ll Have to Respond
- In or Out of Court?
- Deficiency Judgments: Will You Still Owe Money After the Foreclosure?
3. Can You Keep Your House? Should You?
- The Emotional Part of Foreclosure
- The Economics of Foreclosure: What You Need to Know
- When It Makes Sense to Keep Your House
- When It Makes Sense to Give up Your House
4. Negotiating a Workout
- Do You Have Enough Time to Work Out an Alternative to Foreclosure?
- Using a HUD-Approved Housing Counselor
- The Making Home Affordable Program
- Basic Workout Options
- Remedies and Workouts Under National Settlements With Mortgage Servicers
- Workouts for Government-Backed Mortgages
- Foreclosure Avoidance Mediation Programs
- Hardets Hit Fund Programs
- Special Protections for Service Members on Active Duty
5. How Chapter 13 Bankruptcy Can Delay or Stop Foreclosure
- Using Chapter 13 to Keep Your House
- Using Chapter 13 to Delay Foreclosure
- Coming Up With a Repayment Plan
- An Overview of the Chapter 13 Bankruptcy Process
- Will You Need a Lawyer?
6. How Chapter 7 Bankruptcy Can Delay or Stop Foreclosure
- How Chapter 7 Bankruptcy Helps You
- Using Chapter 7 Bankruptcy to Keep Your House
- Using Chapter 7 Bankruptcy to Delay a Foreclosure Sale
- The Chapter 7 Bankruptcy Process: An Overview
- Do You Qualify for Chapter 7 Bankruptcy?
- Will You Need a Lawyer?
7. Fighting Foreclosure in Court
- How Long Can You Delay the Sale of Your House?
- When It May Be Worth Fighting
- When You Can Sue for Money
- How to Fight a Foreclosure
8. If You Decide to Leave Your House
- Let the Foreclosure Proceed
- Be Community Minded
- Be Wary of Leaving the Home Before the Foreclosure Sale
- Sell the House in a Short Sale
- Offer the Lender a Deed in Lieu of Foreclosure
- Avoiding Deficiency Judgments
- Income Tax Liability for Deficiencies
9. How Long Can You Stay in Your House for Free?
- When You Miss Your First Payment
- After You Receive a Formal Notice of Intent to Foreclose
- The Redemption Period
- After the Sale
- After You Get a Notice to Leave
10. Resources Beyond the Book
- HUD-Approved Housing Counselors
- Real Estate Brokers
- Mortgage Brokers
- Foreclosure Websites
- Looking Up Foreclosure Statutes
Appendix A 50 State Information
Foreclosure: The Big Picture
What to Expect.............................................................................. 10
Your Options: An Overview........................................................... 11
Reinstate Your Mortgage......................................................... 11
Negotiate a Workout ............................................................... 12
File for Chapter 13 Bankruptcy................................................ 14
File for Chapter 7 Bankruptcy.................................................. 14
Take Out a Reverse Mortgage................................................. 15
Fight the Foreclosure in Court................................................. 17
Give Up Your House................................................................. 18
How You Can Stay in Your House Payment Free......................... 22
Why Foreclosure Doesn’t Have to Be So Bad............................... 22
Don’t Get Scammed by a Foreclosure “Rescue” Company.......... 23
Scams That Target Home Equity............................................... 23
If You Don’t Have Much Equity................................................... 25
Mass Joinder Lawsuit Scams .................................................. 26
Forensic Loan Audit Scams...................................................... 26
State and Federal Laws Governing Foreclosure Consultants...28
Beware of Property Preservation Companies................................ 28
The Lender May “Secure” Your Home If Vacant........................ 28
How the Process Works ........................................................... 29
Tips to Keep the Lender From Treating
Your Occupied Home as Vacant............................................... 29
Foreclosure doesn’t usually come as a big surprise to homeowners. You’ll probably know, well before it happens, that you’re going to have trouble making your mortgage payments. Maybe you’ve become unemployed or face unexpected medical bills, or maybe that adjustable-rate mortgage you took out a few of years ago is scheduled to reset at a much higher rate, making payments out of reach.
Once you do fall behind, you’ll have a few months before your lender even starts the foreclosure process thanks to new federal mortgage servicing rules. The fact that foreclosure is a process—sometimes a long one—is good news for you. You don’t need to panic. You’ll have time to plan, negotiate, and evaluate your options—if you act as soon as you smell trouble coming. The more time you have, the better.
If your only problem is a few missed payments, your lender will probably be willing to let you get current over time or even add the missed payments to the end of the loan. If you’ve missed four or five payments, your lender may not be flexible—but you still may be able to work something out.
Indecisiveness May Cost You Big Time
If you’re likely to lose your house sooner or later, your failure to immediately face this reality may cost you thousands of dollars. Here’s why: Any mortgage payments you make now will do you no good if you end up losing your house in foreclosure. Assume your mortgage payment is $2,000 a month and you scrape together enough money each month to pay your mortgage because you don’t want to lose your house. If $2,000 is way more than you can afford even in the short term, it’s inevitable that you’ll start missing payments. If you start missing payments six months down the road and you end up in foreclosure, the payments you scraped together during that six-month period will have been for naught unless you somehow find a way to get current on your mortgage payments or you file and complete a Chapter 13 bankruptcy. On the other hand, if you stopped paying your mortgage six months ago when you first realized that holding on to your house was a lost cause, you would now be $12,000 in the black.
Check for updates. Federal and state foreclosure laws are changing rapidly. Check this book’s companion page on www.nolo.com for recent changes in the law. (See the introductory chapter, “Your Foreclosure Companion” for the link.)
Don’t wait for the lender to contact you. As soon as you realize you’re going to have trouble making your mortgage payments, you should start working on the problem. This chapter will show you how.
You’re Not Alone
Houses are expensive—that’s why most homeowners pay for them over 30 years, one monthly payment at a time. And it’s not uncommon for people to find they just can’t afford to keep making the payments. If you lose your job, get divorced, or face unexpected medical bills, keeping current on your house payments may be next to impossible.
Life events like these aren’t the only reason for foreclosures. Many homeowners—about 34 million U.S. households, or roughly one-third of the nation—took money out of their homes in 2004 through 2007 by refinancing or borrowing against their equity, thereby increasing their debt loads. Many people who bought when prices were high got nontraditional mortgages (interest-only payments or adjustable rates with ultra-low teaser rates at the start), expecting to refinance or sell at a profit later. Others were encouraged by mortgage brokers (with a wink and a nod) to overstate their incomes, also with the expectation that rising prices would make the misstatements irrelevant. But because lenders have tightened credit, it’s no longer as easy to refinance a mortgage, even with a good credit history.
Meanwhile, the interest rates on many adjustable rate mortgages may increase, making monthly payments out of reach for many homeowners.
Don’t panic—and don’t get scammed. Foreclosure rescue scams have popped up all over the country. Almost without exception, you will be worse off with these scams than if you let the foreclosure go through. To find out how scammers work and what to look for, see “Don’t Get Scammed by a Foreclosure ‘Rescue’ Company,” below.
What to Expect
What happens next depends on whether you are trying to stay in your home or are resigned to moving on. (More about that choice later.)
If you want to keep your home. Your first move is to find a HUD-approved housing counselor to help you figure out what options are best for you, whether it be a modification, a refinance, or another mortgage solution. These folks are there to help you stay in your home and won’t charge you a penny for their help. Go to www.makinghomeaffordable.gov and click “Get Started” then “Speak with a Housing Expert” or call
888-995-HOPE and ask for a HUD-approved counselor in your area.
Your HUD-approved housing counselor will help you determine which option is best for you, explain what documents you will need to provide to your mortgage company, and may be able to contact the mortgage company on your behalf. The counselor can also explain available programs under the Making Home Affordable program, like HAMP. See Ch. 4 and www.makinghomeaffordable.gov for eligibility details.
If a modification or refinance is not in the cards, and depending on the procedure required by your state, you’ll receive some sort of notice (usually a formal written notice) that foreclosure is coming unless you make things right. Foreclosure procedures differ greatly depending on where you live and the nature of the loan. (Ch. 2 explains these procedures and highlights the variables you’ll want to know about when planning your strategy.)
Unless you use one of the remedies explained briefly below (and in detail in later chapters), the foreclosure will end, usually after a few months, with the sale of the property, typically at a public auction. The foreclosure process is explained in detail in Ch. 2.
Your Options: An Overview
Here’s a look at your main alternatives when you think foreclosure is on the horizon. We’ll talk about these scenarios in detail later. For now, just try to get an idea of what you’re dealing with.
Your Options If You Are Facing Foreclosure
Check your eligibility for assistance under one of the government programs by visiting www.makinghomeaffordable.gov.
Reinstate the existing loan by making up the missed payments, plus costs and interest.
Negotiate a workout (such as a loan modification, forbearance, or repayment plan) with the lender with the help of a free HUD-approved housing counselor.
Refinance the entire loan under the federal Home Affordable Refinance Program (HARP).
Arrange a short sale or deed in lieu of foreclosure.
Arrange a reverse mortgage, if you qualify.
Delay the foreclosure sale by filing for Chapter 7 or Chapter 13 bankruptcy.
Fight the foreclosure in court and either stop or delay it.
Give up your house.
Reinstate Your Mortgage
If you have enough cash (or access to another loan), you can “reinstate” your mortgage by making up all the missed payments plus fees and interest the lender charges you. Your state’s law will probably give you a certain amount of time to get this done, after the lender gives you notice that the foreclosure is beginning. (You can check your state’s rule in the appendix.)
For example, in California you have the right to reinstate your loan for a period of three months after the lender mails you a “notice of default,” or NOD. After that period ends, if you haven’t negotiated a workout, the lender can and usually does accelerate the loan (notify you that it is declaring the entire amount due immediately) and send you a notice of trustee’s sale, telling you that the house will be put up for sale in 20 days. California state law provides a further right to reinstate the loan up to five days before the foreclosure sale.
In some other states, the lender may accelerate the loan as soon as you fall behind in your payments, and the law does not give you an opportunity to reinstate (though the mortgage contract may provide that right). But more and more lenders are not eager to accelerate the loan and push ahead with foreclosure; they would prefer to work something out with you.
If you have enough resources to consider reinstatement, you can probably also work something out with the lender.
Negotiate a Workout
As mentioned, you should start with a HUD-approved housing counselor and a visit to www.makinghomeaffordable.gov. (See Ch. 4 for more on these resources.) With this assistance, you may be able to get:
temporary relief from having to make your monthly payments or reduced monthly payments (forbearance)
a plan to make up your missed payments (at the end of your mortgage or on top of your current payments within a specified period of time)
a lower interest rate—and as a result, lower monthly payments, or
a reduction in your principal loan balance.
The Home Affordable Modification Program (HAMP)
Over 1.5 million homeowners have obtained significant mortgage modifications under HAMP. You can find out whether you qualify for HAMP and what it will do for you in Chapter 4. Also discussed in Chapter 4 are a number of other government programs designed to address additional issues troubled homeowners face, such as what to do about second mortgages and how unemployed homeowners can get temporary relief from their mortgage obligations.
HAMP and some of the other government programs designed to help homeowners keep their homes are currently due to expire on December 31, 2016. (Others are set to expire sooner, such as the government’s refinancing program, HARP, which is scheduled to expire at the end of 2015.) While the Obama administration may extend these programs, by the time you read this book, the window of opportunity for these programs may be limited. You can check for updates on this book’s companion page on www.nolo.com. (See the introductory chapter, “Your Foreclosure Companion” for the link.)
HUD-Approved Housing Counselors May Be Overwhelmed
Providing effective counseling in the foreclosure arena is a labor-intensive activity, which means that using a counselor may require patience and persistence on your part. If you are in the midst of a foreclosure, you may not be able to put up with the delays and inevitable glitches that seem to accompany the mortgage modification process. If you cannot get the service you need from your HUD-approved counselor, you might be tempted to pay someone to get the job done for you. Because scams abound, it’s best to hire a lawyer. It’s not that a lawyer will necessarily do a better job than a nonlawyer, but in most states you will have some type of recourse if the lawyer turns out to be just another scam artist.
If you can refinance at a better rate and pay off your old loan, you can start fresh. Unfortunately, refinancing can be tough unless you have equity in your house and the home value curve in your community is trending up rather than down. Of course, if your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac and you qualify for a refinance under the Home Affordable Refinance Program (HARP), your refinancing worries may be over—the program is designed to help those who are unable to get traditional refinancing because the value of their homes has declined. (HARP is discussed in Ch. 4.)
File for Chapter 13 Bankruptcy
In this kind of bankruptcy, you come up with a plan for making your regular monthly payments and paying off the arrears. If the bankruptcy court approves your plan, you’ll have three to five years to make the payments. Chapter 13 bankruptcy also reduces or eliminates your total debt load, making your mortgage more affordable in terms of your overall budget. In some situations (and depending on where you file the bankruptcy), you can get rid of a second or third mortgage entirely, reduce a first mortgage on a vacation or rental home to the market value of the house, and even reduce the interest rate on your first mortgage to 1.5 points above prime rate. If you live in one of the nonjudicial foreclosure states—where foreclosures regularly take place without the review of a judge or the benefits of a court hearing—Chapter 13 bankruptcy may be your best opportunity to challenge the legality of your mortgage and any threatened foreclosure. (See the appendix to find out whether your state is a nonjudicial foreclosure state.) Chapter 13 bankruptcy is discussed in Ch. 5.
File for Chapter 7 Bankruptcy
If you are current on your mortgage (or can get current in a hurry) but have no room in your budget to continue making your payments, filing for Chapter 7 bankruptcy can make your mortgage more affordable by reducing your total debt load—and so help to prevent foreclosure in the long run. Chapter 7 bankruptcy is quick (it takes about three or four months). It’s also inexpensive if you represent yourself, which many people do. (Although if you’re worried about losing your home, it’s wise to at least consult with a lawyer.) Chapter 7 bankruptcy typically will wipe out your unsecured debt—for example, credit card debt, personal loans, medical debts, and most money judgments. This will free up whatever income you were using to pay down those debts so you can put it toward your mortgage payments.
Even if you have decided to leave your house, bankruptcy can be of great assistance in keeping you in your home for a few extra months free of charge, as well as giving you a fresh start by wiping out liabilities arising from your mortgage or the foreclosure itself.
Despite these benefits, Chapter 7 bankruptcy may not be appropriate for you. For example, you may have more equity in your house than you can protect (exempt) in your bankruptcy, which means the bankruptcy would trigger an involuntary sale of your home. Also, unlike Chapter 13 bankruptcy, Chapter 7 bankruptcy provides little opportunity to mount a legal challenge to the validity of your mortgage or foreclosure proceedings. (Chapter 7 bankruptcy is discussed in Ch. 6.)
Take Out a Reverse Mortgage
A reverse mortgage is a way to tap into the equity of your home without selling the house. You get money from a lender and generally don’t need to pay it back as long as you live in the house. The loan must be repaid if you sell your house, permanently move out, or die.
You’ll be able to get a reverse mortgage (also called a home equity conversion mortgage or HECM) if you have substantial equity and are over age 62. The Department of Housing and Urban Development (HUD) administers the HECM program and almost all reverse mortgages are currently made under this program. A reverse mortgage can provide a safe approach to preventing foreclosure and preserving your equity for your own needs. However, a reverse mortgage, because it takes part or all of your equity, leaves less value for you to pass on to your heirs at your death.
Even though you don’t have to make payments on the reverse mortgage, you are responsible for paying the property taxes and insurance, as well as maintaining the property. As of 2015, lenders must now complete an assessment when making a reverse mortgage loan to ensure that a new borrower can keep up with these expenses. If the lender determines that you might not be able to pay for these items in upcoming years, the lender must also establish a set-aside account to cover taxes and insurance. Reverse mortgages are discussed further in Ch. 3.
More information about reverse mortgages. Learn more at www.consumerfinance.gov/askcfpb/224/what-is-a-reverse-mortgage.html.
Fight the Foreclosure in Court
If you can show that the foreclosing party violated your state’s procedural rules for foreclosures or the terms of your mortgage agreement, you might be able to derail the foreclosure, at least temporarily.
Some courts require foreclosing parties to present documentary evidence of ownership and authority for bringing the foreclosure action before letting the foreclosure proceed. And because of the way mortgages were sold and resold during the real estate bubble, sometimes this evidence is missing.
Foreclosure defense attorneys have also uncovered instances of lenders violating laws governing the recording, notarization, and assignment of mortgages. In some cases, major mortgage lenders temporarily ceased foreclosure activities pending internal investigations of their foreclosure practices.
Finally, violations of federal fair lending rules and other federal and state laws regarding consumer transactions may also provide a defense against foreclosure. (Fighting foreclosures in court is discussed in Ch. 7.)
Extra protections for service members. If you are on active duty in the military, or have been on active duty within the previous year, you can delay the foreclosure lawsuit—and get other help as well. See Ch. 4.
Give Up Your House
For some people, it makes good economic sense to give up their houses and move on. If you arrive at this decision, there are several ways to say goodbye to your house. You’ll want to choose the method that causes the least financial and emotional upset to you and your family. (There’s much more about making this decision in Ch. 3.)
Although this book covers several basic approaches to giving up your home, sometimes the best approach is to simply stop all further mortgage payments. When you walk away, you will almost certainly lose your house in foreclosure. However, while the foreclosure process chugs along, which can take months, you don’t have to make mortgage payments to anyone but yourself. This can result in a sizable nest egg, which you can then use when searching for new shelter. The subject of “walking away” is discussed throughout this book, most specifically in Ch. 8. Here we give you a brief overview of the subject.
People walk away for two main reasons. The most common reason is that the mortgage has become unaffordable due to an increase in interest rates, the loss of employment, or some other unexpected occurrence. Even after a mortgage modification, circumstances may still render the mortgage unaffordable.
The second reason for walking away is that your home has turned into a lousy investment. Even if you can afford your mortgage payments, you may be better off walking away if your mortgage is deeply underwater and you bought the house as an investment rather than a place to live. While it’s impossible to predict what will happen to home values in the future, more and more homes are moving out of negative territory as the economy and housing market continue to recover. Though there are still millions of homeowners who are underwater, things are looking up in many areas of the country. Even if your situation isn’t improving, there may be a better option available to you, such as a short sale or a deed in lieu of foreclosure. You might even get some money to help with your relocation costs if you complete one of these options. For more on this topic, see Ch. 8.
Walking away from a home when you can afford to pay the mortgage has been labeled a “strategic default.” The default is strategic because the homeowner voluntarily chooses to default after completing a cost–benefit analysis. There are several risks involved for those who choose this route. If you strategically default, you won’t be eligible for a Fannie Mae-backed mortgage for seven years from the date of the foreclosure. Fannie Mae has also stated that it will take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.
Rather than strategically defaulting, you may be able to give up the home through a short sale or deed in lieu of foreclosure. Fannie Mae and Freddie Mac will let some borrowers who are delinquent or current on their payments give up their underwater properties and cancel the debts under special deed in lieu of foreclosure programs, if the borrowers meet certain criteria. These programs could provide an alternative to strategic default for some borrowers. For more on this topic, see Ch. 8.
Aside from not being able to acquire a new home loan after a strategic default, walking away can lead to other negative consequences:
Sooner or later you will lose ownership of your home through foreclosure—unless you are able to successfully challenge the legality of the mortgage in state court or in bankruptcy.
In most states, you can be sued for the difference between the amount your house was sold for at foreclosure and the amount you owed at the time of the foreclosure sale. Your liability for this difference, called a “deficiency,” can be discharged in bankruptcy, but if bankruptcy is not for you, for one reason or another, you may be stuck with a large debt.
The mortgage lender may write off the deficiency as a loss. The amount of the deficiency would then turn into taxable income for you. This tax liability can be avoided in several ways—including declaring insolvency or bankruptcy—but if you don’t qualify for one of the exceptions, you can be nicked for a lot of money. More information about the potential tax liabilities related to foreclosure is provided in Ch. 8
Arrange a “Short Sale” Without Foreclosure
You can negotiate with your lender to sell your house, without a foreclosure, for less than the amount you owe on your mortgage. This is called a short sale. If you live in a state that allows your lender to sue you for the deficiency (the difference between the amount you owe on the mortgage and the sale price of your home), a short sale can be a good idea, but only if you get your lender to agree (in writing) to let you off the hook for the deficiency.
If you have a second or third mortgage, you’ll also need to get those lenders to sign off on the short sale. This is usually difficult (if not impossible) to accomplish because, by definition, a short sale produces less than is owed on the first mortgage and the holder of the second or third mortgage stands to get little or nothing from the deal. If you can talk the first mortgage lender into giving some of the proceeds from the sale to the second and third mortgage lender, you’ll have a better chance of getting the deal done.
Another pitfall of short sales is that the buyer of your home will probably want you to leave immediately after the sale closes. This won’t be a problem if you don’t mind leaving, but you’ll miss out on the opportunity to build a healthy nest egg by living in the house without paying your mortgage.
If you qualify for a short sale under the federal Home Affordable Foreclosure Alternatives (HAFA) program, you can’t be sued for the deficiency. You may also receive $10,000 in federal funds to help with your relocation. The HAFA program is described in more detail in Ch. 8.
Hand Over the House Without Foreclosure
You may be able to get your lender to let you deed the property over so that no foreclosure is necessary; this is called signing a “deed in lieu of foreclosure.” But before you go this route, you’ll want to have an agreement (in writing) that the lender won’t go after you for any deficiency. With a deed in lieu of foreclosure, the deficiency amount is the difference between the total debt and the fair market value of the property. This remedy probably won’t be available if there are second or third mortgages since those lenders won’t get anything out of the deal.
How Will Your Choice Affect Your Credit?
Foreclosures, short sales, and deeds in lieu of foreclosure are all bad for your credit. (Only a bankruptcy is worse.) If you avoid owing a deficiency with a short sale or deed in lieu, your credit score probably won’t fall as much; but, overall, these events are pretty similar when it comes to how they affect your credit.
It’s virtually impossible to predict how much damage a foreclosure, short sale, or deed in lieu of foreclosure will do to your credit. For one thing, credit scoring systems change over time. For another, credit scoring agencies do not make their formulas public, and your score will vary based on your prior and future credit practices and those of others with whom you are compared.
But it also depends, in large part, on your credit before you lose your home. Most people who resort to foreclosure, short sale, or a deed in lieu of foreclosure have already fallen far behind on mortgage payments. According to experts, late payments cause a huge dip in your credit score, which means a subsequent foreclosure will not matter as much since your credit is already seriously damaged. If you are one of the rare homeowners who hasn’t missed a payment before doing a short sale or deed in lieu of foreclosure, those events will cause more damage to your credit.
For more information on the subject of consumer credit, and how to rebuild it, see Credit Repair by Robin Leonard, updated by Amy Loftsgordon (Nolo).
How You Can Stay in Your House Payment Free
If, early on, you decide that you don’t want to keep the house and will ultimately be moving on, you’ll be able to skip payments for several months before the foreclosure process finally begins. Even if you apply for a modification once the foreclosure starts, the proceedings are put on hold pending an assessment by the mortgage servicer as to whether you qualify for a payment reduction under the government’s Home Affordable Modification Program (see Ch. 4) or any in-house options. During this time, you don’t have to make any payments. After the foreclosure sale, chances are great that you can keep living in the house for a while longer free of charge. You may be able to live in the home during the redemption period (if there is one). And, in some states, you can stay in your house until the new owner gives you a formal written notice demanding that you leave, and a court orders you out after you receive notice and a hearing is held. Though, generally, it is best to vacate your home after you get the notice demanding that you leave and thereby avoid a formal eviction. (See the information for your state in the appendix.)
Having payment-free shelter for many months—before the foreclosure action is brought, during the foreclosure, and after the sale—gives you a golden opportunity to save some money. And that will grease the skids when you do have to find a new place to live. (See Ch. 9 for more on how to come out of foreclosure with some cash in your pocket.)
Why Foreclosure Doesn’t Have to Be So Bad
Home ownership can be overrated. Americans take for granted that owning a home is superior to renting one, especially if you have a family. We accept the phrase “American dream” without question when applied to home ownership. And politicians are wringing their hands over the prospect of the American dream being lost for the millions of homeowners who face foreclosure.
However, ownership is not an automatic key to happiness. (We go into this in more detail in Ch. 3.) For now, just try to open your mind to the possibility that renting rather than owning is not always a bad way to go, and that your particular dream need not include home ownership.
Don’t Get Scammed by a Foreclosure “Rescue” Company
A large “foreclosure rescue” industry, much of which is a scam, has mushroomed right along with the number of foreclosures. If you are close to losing your home to foreclosure, you may receive an offer of help from a foreclosure rescue company. Companies scour public records and call homeowners who’ve received foreclosure notices.
The con artists who run these companies will tell you that they have resources that are unavailable to HUD-approved housing counselors and that they care about you and will find a way for you to save your “American dream.” But unlike HUD-approved housing counselors, these companies aren’t really trying keep you in your house. They’re trying to make money. If you have equity in your house, they go after it. And if you’ve only got money in the bank, they’ll go after that, instead.
Scams That Target Home Equity
If you have significant equity in your home, you are a prime target for the mortgage rescue scams aimed at getting ownership of your house away from you.
One common trick sounds especially good because the mortgage gets quickly reinstated, at least temporarily.
What you’ll hear: “We’ll buy your house right now—just temporarily, of course. We’ll make the mortgage payments. You can stay right where you are, lease the house from us, and buy the house back when the loan is paid off.”
How to Protect Yourself
Never rely on an oral promise, such as, “Don’t worry; you’ll get the deed back in no time.” Get everything in writing.
Never sign an agreement unless you understand every word and phrase in it, even if you’ve had help from a HUD-approved housing counseling agency.
Never sign anything that has blank lines or spaces. Representations and information you had no knowledge of can be inserted and appear to be part of the signed agreement.
Never transfer ownership of your property to the “rescuer” or a proposed third-party lender.
Never accept a loan that you can’t afford or that must be paid back quickly at a high interest rate as a condition of staying in your house.
What really happens: The foreclosure rescue company is confident that you won’t be able to buy the house back, especially if it involves a big balloon payment, which is common. Ultimately, you lose your home and are quickly evicted. Eviction comes quickly because you have only the status of a tenant under the lease or rental agreement that was supposed to be temporary. By contrast, if the house had gone through foreclosure, you would have been able to stay there for months payment-free as the foreclosure process wore on.
Another scam involves wresting ownership away from the homeowner without the homeowner’s knowledge.
What you’ll hear: “We’ll get a workout with the lender. We’ll handle everything—just send your mortgage payments to us and we’ll pass them on to the lender.”
What really happens: The papers you sign actually transfer ownership to the company. (This can easily be accomplished because people expect legal documents to be full of gibberish they don’t understand or don’t notice that the documents they sign have blank lines that can be filled in later with terms they never agreed to.) Instead of sending your mortgage payments to the lender, the scammer uses them to refinance the property. Then it sells the house to an innocent third party and disappears, leaving you without equity or a workout.
If You Don’t Have Much Equity
If you have little or no equity in your home, you probably won’t be approached by anyone who wants title; what would be the point? But if you are close to a foreclosure sale, there are plenty of other snake-oil peddlers out there.
For a stiff up-front fee—often in the thousands of dollars—they offer to help you fight your foreclosure by finding affordable loans or by negotiating with your lender for a mortgage modification, an interest rate freeze, or an arrangement in which your missed payments get added to the end of your loan. But not only will you not get results, there’s a good chance that these people will disappear once your money is in their hands.
When the Home Affordable Modification Program was announced in March 2009, hundreds of brand-new “modification specialists” hit the street, many “certified” by schools set up to train former mortgage brokers for this new bonanza. These people are taking money for services that can be obtained for free from HUD-approved housing counselors or the Making Home Affordable website at www.makinghomeaffordable.gov.
Example: Frieda and Ted are in foreclosure. They wake up one morning to find a flyer on their doorstep advertising the Compassionate Care Foreclosure Rescue Service, which seems tailor-made for their difficulties. The flyer asks, “Is your home about to be sold at a foreclosure sale? Do you want help negotiating a loan modification with your mortgage servicing company? Want to refinance your mortgage at a low interest rate? We can help!”
They call the number on the flyer and are referred to a “foreclosure rescue specialist,” Nick, who tells them in a soothing voice that Compassionate Care has helped “thousands of people just like you” work out their mortgage difficulties and stay in their homes. After Frieda and Ted give him information about their plight, Nick tells them that he can negotiate a loan modification with the servicer on their behalf and get an extension of the foreclosure sale date. The fee: $1,500—up front.
Frieda and Ted borrow the $1,500 from Frieda’s son and send a cashier’s check to Nick at a post office box, along with a signed power of attorney form that Nick says he needs so he can negotiate with the servicer. A few days later Nick tells them that he has gotten the foreclosure sale postponed. Two weeks later, though, the home is to sold at a foreclosure auction. Frieda and Ted get a call from someone they’ve never heard of telling them that he bought their home at the foreclosure sale and wants to make arrangements for them to move out. Frieda and Ted call Nick in a panic. The number has been disconnected. Frieda and Ted have lost their home—and paid $1,500 for the privilege.
Mass Joinder Lawsuit Scams
In a mass joinder scam, a group claiming to be a law firm (often it’s not a law firm at all or they use unqualified attorneys) sends out unsolicited mailings inviting distressed homeowners to participate in a lawsuit. The mailing informs you that you can join together with other homeowners to sue your lender and force it into providing loan modifications or stopping foreclosure. You then call the number listed on the mailing and talk to a sales representative who provides false information or makes misleading claims about the success of such a suit. To join in the mass joinder lawsuit, you must pay up-front legal fees that can range from $5,000 to over $10,000. Typically, once the scammers have taken your money, they either do nothing (and disappear with the funds) or file the lawsuits and neglect them, leading to dismissals.
Forensic Loan Audit Scams
In a forensic loan audit scam, you pay a company an up-front fee of several hundred dollars for a so-called forensic loan auditor to review your mortgage loan documents to determine if your lender complied with mortgage lending laws. Companies offering this type of service often claim that the audits find lender violations 90% of the time. They further claim that, if a forensic loan audit finds violations of the law, you can use the results to stop a foreclosure, force the lender to give you a loan modification, or rescind (cancel) your loan.
In fact, there’s no evidence that forensic loan audits are effective in accomplishing any of these things. First of all, the “audit” is typically completed by a processor who simply plugs information from your loan origination documentation into loan compliance software, which then supposedly identifies violations and compiles them into an automated report. Secondly, often only minor violations are found. Even if the audit does find fraud, predatory lending, or other significant violations of state or federal law, you would need to file a lawsuit against the lender (either as an answer to the lender’s judicial foreclosure complaint or as your own lawsuit in a nonjudicial foreclosure) to stop a foreclosure. Sending a copy of the audit report to the lender or telling it that you had a forensic loan audit done will have no effect on your foreclosure.
Profile of a Scammer: What to Look For
The people who prey upon homeowners in foreclosure use many tactics to gain your trust. Be wary of anyone who:
contacts you by phone or mail or knocks on your door (legitimate foreclosure consultants don’t seek you out; you must go to them)
provides little or no information about the foreclosure process
claims government affiliation
uses “affinity marketing”—Spanish speakers marketing to Spanish speakers, Christians to Christians, senior citizens to senior citizens, and so on
offers “testimonials” from other customers
claims the process will be quick and easy (dealing with foreclosure is never quick and easy) and uses messages such as “Stop foreclosure with just one phone call” or “I’d like to $ buy $ your house” or “Do you need instant debt relief and CASH?” or
tells you to cease all contact with the mortgage lender.
State and Federal Laws Governing Foreclosure Consultants
If a company approaches you using the above tactics, it very well may be breaking the law. Many states have laws governing the activity of foreclosure consultants. In addition, in 2010, the Federal Trade Commission (FTC) promulgated rules regulating “mortgage assistance relief services” (MARS) in an effort to protect homeowners from foreclosure consultant scams. Among other things, the MARS rule (now known as Regulation O) requires MARS providers to make certain disclosures about their services, prohibits advance fees, and bans certain misleading advertising claims. The FTC and the Consumer Financial Protection Bureau (CFPB) enforces the MARS regulation. To lodge a complaint with the FTC about a MARS company (in English or Spanish), call 877-FTC-HELP (877-382-4357), or go to www.ftc.gov. You can also submit a complaint with the CFPB at www.consumerfinance.gov.
To learn more about the MARS regulation, go to www.ftc.gov/opa/2010/11/mars.shtm.
Beware of Property Preservation Companies
Mortgage servicers hire property preservation companies to secure homes when homeowners move out before the foreclosures are complete. Recently, however, there have been reports of property preservation companies illegally changing locks, removing belongings, or taking other actions while homeowners are still living in their homes.
The Lender May “Secure” Your Home If Vacant
While you have the right to occupy the home during foreclosure, if you abandon (move out of) the home during the process, most mortgages give the lender the right to do whatever is reasonable or appropriate to protect its interest in the property. For example, the lender may do the following things to secure the property if it is vacant:
enter the property to make repairs
change the locks or padlock the entrance
replace or board up doors and windows
remove debris or trash
have utilities turned on or off, and
eliminate building or other code violations or dangerous conditions.
Generally, the task of securing the home falls on the mortgage servicer (on behalf of the lender), which typically farms out these services (called field services) to property management firms, which are called field service companies or property preservation companies. Property preservations companies are hired to inspect, clean, and secure abandoned homes. Unfortunately, however, these contractors often get it wrong and clear out homes people are still living in. They may prematurely change your locks, remove your belongings, or take other actions even though you are still living in your house.
How the Process Works
When you fall behind in your home mortgage payments or go into foreclosure, the servicer will usually hire someone to do a drive-by inspection to figure out if the home is occupied or vacant. If the inspector determines that the home is vacant (sometimes mistakenly), the servicer might take steps to secure and maintain the home, such as making sure that trash is picked up and that the home is protected against the weather. In too many instances though, property preservation companies have been known to let themselves into currently occupied homes, causing damage and illegally taking the homeowners’ personal property.
Tips to Keep the Lender From Treating Your Occupied Home as Vacant
If you are in the midst of the foreclosure process, you want to make sure your home and your belongings are protected. There are several steps you can take to ensure that your mortgage lender or servicer (or the field services company that it hires) doesn’t treat your occupied home as vacant.
Call your lender/servicer when you are late in payments. If you are behind in your payments, call the mortgage lender or servicer (the company you make your payments to) and let it know you still live in the property. (To figure out who your loan servicer is, look at your monthly mortgage payment coupon.) All loan servicers keep communication logs that note each time you call and include information about the conversation. While the communication logs are not especially detailed, if later on there is a dispute about occupancy, at the very least there should be a note in the servicer’s records that you said you are still living in the property.
Inform your loan servicer in writing that you’re still living in the property. You should also send a letter to the lender or servicer informing it in writing that you are still occupying the property. Send the letter by certified mail, return receipt requested, so you can prove that you sent it and that the lender or servicer received it.
If the field service company leaves a notice, call it too. A field service company may post a notice that it has deemed your property vacant before locking you out. If so, be sure to call the company and let it know that you are still living in the property. It is also a good idea to send a letter (via certified mail, return receipt requested) to prove that you have notified it of your occupancy. Even if you do all these things, a property preservation company may still lock you out or illegally take your belongings. If this happens, you should consult with an attorney to figure out your next steps.