Published August 20, 2008
For the millions of Americans receiving foreclosure notices from their mortgage companies, hope that they will not lose their house doesn’t translate to cooperation from lenders or relief from the real estate speculators who are eagerly shorting the market.
Hope Now, a lending industry alliance established in October 2007 and tasked by the Fed with working to assist homeowners in danger of losing their homes, claims to have reached out to 1.8 million at-risk homeowners to date, offering them solutions to avoid foreclosure.
This July, President Bush signed the Mortgage Rescue Bill, a sweeping bailout aimed at backing up Freddie Mac and Fannie Mae, two lending institutions that buy up and back nearly 50 percent of all home mortgages in this country. The government is claiming that this combination of tax incentives, cash infusion, and revised lending practices can reverse a crisis years in the making.
But if Hope is literally knocking at the door, and Rescue is right around the corner, why are foreclosure notices up 55 percent from last year? And why are 2.8 million U.S. households facing the loss of their homes through bank foreclosures?
The federal government and financial institutions are struggling to control an implosion in the housing market by offering the American homeowner slogans and platitudes. But in my experience, when it comes down to fighting to save their home, average homeowners face an astounding lack of lender cooperation.
It’s not that consumers can completely shrug off responsibility for the crisis they find themselves in. After all, there is plenty of blame to go around. The all-American allure of consumerism and easy credit encouraged complicity between banks and borrowers, as Adjustable Rate Mortgages (ARMs) became a popular way for buyers to maximize their immediate borrowing power. Greed led to fraud as deals between mortgage brokers and appraisers ensured maximum home values for applicants. Lenders willingly considered the financial prospects of each loan applicant prospectively -- meaning they projected the ability of the borrower to re-qualify at the time the mortgage adjusted higher. And borrowers willingly overspent, believing that they could avoid higher rates simply by refinancing before their loans adjusted.
It’s painfully clear now, that for either party, the scenario didn’t play out as expected. And now the lenders are in trouble and turning to the government, which is promising rescue. And the borrowers are turning to the lenders who are promising …hope?
And while most people do hope that they won’t lose their house to foreclosure, here are the real world choices for an individual who is in trouble and unable to make his mortgage or home equity payments:
1. Pay Up. This means getting caught up on overdue payments, and staying current on future payments. This option, by definition, is impossible for people who have been caught in the economic downturn and are struggling to get by on a day-to-day basis.
2. Request a Loan Modification from the Lender. The first problem with this solution is that you need to have good credit. Unfortunately, once the foreclosure process begins, credit scores diminish. You can still apply -- filling out forms that require you to disclose extensive personal and financial information. But as your lender’s loss mitigation department takes its time reviewing your paperwork, foreclosure proceedings continue.
3. Deed in Lieu of Foreclosure. This is where you basically offer to give your house back to the lender so it will forgive your mortgage debt. This strategy only works if your bank wants your home. Not very likely in today’s soft housing market.
4. Short Sale. If the house on which you hold a $500,000 mortgage has depreciated to $350,000 and a potential buyer, knowing you are in trouble, offers a bid of $250,000, your bank may take the offer. Of course, it may not let you know it is willing to do so in a timely matter, and most short sales fall through.
5. Abandon the Home. Sadly, this is the track that many former homeowners feel forced to consider. Sometimes they are so angry they destroy their own homes before leaving. In this case, the bank will take over the property and often resell it “as is.” Here’s where real estate speculators are having a field day. They’re willing to gamble on “as is” buildings that are then warehoused and used as rental properties. The fact that an individual has lost his home and future matters little to those with deep pockets willing to wait out the current crisis for future profits from property sales once the market recovers.
6. Think Outside the Box. Some creative homeowners are able to work out non-traditional resolutions to foreclosure, such as leaseback arrangements where they return their house to the mortgage company, which then allows them to rent their own home while the bank attempts to sell it as a foreclosed property. Other people have the patience to wait out the slow-moving bureaucracy and obtain loan modifications at the last moment. These are the folks who have the stamina and temperament to endure several long months of uncertainty and stress.
With literally millions of Americans still fighting to keep their homes, it’s much too early to breathe a sigh of relief and trust that government-sponsored campaigns of hope and rescue will prop up American homeownership.
I believe there are still some hard lessons to be learned. As banks regain confidence in approving home loans, mortgage rates continue to rise, and literally millions of homeowners begin the process of starting all over again, I predict it won’t be long before the housing crisis is overshadowed by the credit crisis, as individuals who have lost their homes once try to regain the American dream of home ownership at any cost.
Robert Massi has been a Fox News legal analyst since 1998 covering high-profile court cases. He is the author of People Get Screwed All the Time: Protecting Yourself from Scams, Fraud, Identity Theft, Fine Print, and More (Collins Books 2007) and the host of a popular Las Vegas radio show that focuses on everyday legal issues, as well as a lawyer in private practice. In addition he has founded The Conscience of America, an organization dedicated to improving the way citizens are treated by the legal system.