Written and Contributed to Kooperman Law Offices by Ken Mirkin, Esq. Receiving a foreclosure complaint can be a very intimidating and alarming event. The good news is a foreclosure action can actually yield positive results. Even though as a borrower, you are being sued, the fact that you are involved in a court action is not the end of the line in your efforts to keep your home. In fact, a borrower can look at a foreclosure as a way to force the bank to finally sit down face to face and explore available options in retaining the borrower’s home. Preparation and organization are key to negotiating with your lender during a foreclosure action.
The first step in any foreclosure action is to find a competent attorney with experience handling residential foreclosures. An attorney may identify defenses that a borrower might have against the lender, and can also help the homeowner determine whether keeping the home is a prudent financial decision. An attorney in the county in which the foreclosure action is brought should know the local rules regarding foreclosures, as well as homeowner retention programs the county might have available. Almost every county in Ohio offers foreclosure mediation programs. Understanding the court programs available to borrowers is essential when formulating a plan on how to handle a foreclosure case.
The worst thing a homeowner can do is ignore a foreclosure action. Borrowers must file a response with the court within twenty-eight (28) days after receiving a foreclosure complaint. In many instances, a borrower is negotiating a loan modification at the same time the foreclosure action is filed. Often, the bank’s representative will tell the borrower that no action is necessary in the foreclosure action because a loan modification is in process. Do not heed this advice. Without the borrower’s participation, a foreclosure action will conclude with default judgment against the borrower for the outstanding balance of the loan, the bank’s legal fees, and an impending sheriff’s sale of the borrower’s home—all while the bank is processing the loan modification.
Obtaining a Loan Modification
The primary goal for a borrower trying to save a home may be to obtain a modification of the current loan and mortgage. Borrowers that successfully qualify for a loan modification may potentially receive changes to their original loans, such as a reduced interest rate, a smaller monthly payment, or even a reduced principal balance.
Borrowers should contact the lender, express an interest in retaining the home, and request a loss mitigation packet. Additionally, a borrower should also ask to be considered under both the government’s Home Affordable Modification Program (HAMP), as well as modification options offered by the lender.
Throughout the loan modification process, the bank will request financial documents, perhaps on a repeated basis, so that they are able to effectively evaluate the borrower for a loan modification. These documents, along with bank-provided financial worksheets and forms, make up the loss mitigation packet. Prompt responses to these document requests help to ensure an efficient mediation process. It is essential for the borrower to get financial documents in order so that lender’s requests can be responded to as quickly as possible.
In an attempt to avoid a court action, many borrowers may have already completed these packets more than once prior to a foreclosure being filed. However, even if the forms have been provided to the lender on prior occasions, the lender will always require a fresh packet with current documents. Unfortunately, providing the same documents over-and-over to the bank is a consequence of trying to obtain a loan modification. It typically takes several months to obtain a loan modification, or obtain the lender’s approval for a short-sale. The most important element in attempting to secure a loan modification is being proactive, organized, and extremely patient.
The documents set forth below are almost certain to be requested by the lender throughout the loan modification process. All of the following documents should be maintained by the borrower in an organized fashion during the entire process. Borrowers should retain copies of every document sent to the lender.
1. Proof of Income. Almost all banks will require proof of income for the preceding one (or more) months. Proof of income includes pay stubs, any government award, e.g. social security, unemployment, welfare, food stamps, disability, worker’s compensation, spousal support, child support etc.
If the borrower is self-employed, most banks will request a profit and loss statement showing a detailed description of income and expenses broken down by month. Some banks will even go so far as to request up to twelve month’s worth of income. Keeping receipts or records of all income and expenses should make this an easier task. If the borrower does not have receipts or other proof of business income and expenses, it would be a good idea to look at bank statements and circle all business related income so that the bank has some idea of what kind of money is coming in to the household on a monthly basis.
2. Bank Statements. Lenders normally require bank statements for the last two (2) months for any checking and savings accounts that the borrower might have in their name. Some banks will request more than two months, especially if the borrower is self employed. If the borrower does not have any open bank accounts under their name, the lender should be provided with a written statement explaining the nature of any saving kept by the borrower.
3. Taxes. The borrower’s two most recent filed tax returns will also need to be produced. If the borrower does not have to file taxes, the lender should be provided with a written statement explaining such. If the borrower is required to file taxes but has not done so in the past two years for whatever reason, that should be addressed immediately. It will be very difficult to obtain a loan modification without having done so. Borrowers should expect the lender to request an executed W-9, as well as form 4506T for the relevant tax years.
4. Hardship Letter. This letter provides the borrower with an opportunity to explain to the lender why they were unable to keep current on their loan. This letter needs to be truthful, and as detailed as possible. The hardship letter should explain the borrower’s financial circumstances, the reasons that led to those circumstances, and why the borrower will be unable to make loan payments in the future. Examples of hardships include: death in the family; divorce; separation; injury; serious medical issues; drop in salary/wages; decrease in hours; or unemployment. Any dishonesty identified by the lender will most likely cause the modification request to be denied. Lenders usually request that the hardship letter be dated and signed within the last thirty days.
5. Proof of Ownership. Some banks will only evaluate a borrower for a loan modification if the property being foreclosed on is the borrower’s actual residence. As such, banks request that the borrower provide a current utility bill. Any utility bill will suffice so long as it has the borrower’s name and address. (cable, water, gas, electric, etc…). In some circumstances, banks will require copies of all utility bills.
It is also prudent to keep the following documents close by, so that if requested by the bank, the borrower can respond as quickly as possible:
- Homeowner’s insurance declaration page
- Divorce decrees
- Deed to the home
- Current print out of your real estate taxes
- W-2’s for the past two years
- Medical Bills
- Death Certificates
- If you have a roommate, you may need to get a contribution letter from them stating how much money they contribute to the household
- If you have a tenant, you may need to provide the lender with a lease agreement, specifying the amount of money the tenant gives you per month
Obviously, the key to retaining your home is affordability. The more money you are able to pay, the more likely you will be able to preserve your home. However, having a complete and accurate financial packet can go a long way.
Hiring a Lawyer for Loan-Modification Help
Unfortunately, because of the large number of foreclosure filings nation-wide, bad actors have emerged looking to take advantage of vulnerable borrowers. When a borrower begins searching for a lawyer or credit counselor for help with their foreclosure they need to beware of some of the following red flags:
- Promises of guaranteed loan modifications
- Requests for the subject property be titled over to another party
- Redirecting monthly payments to a third party
- Offers of representation by an out-of-state attorney, who may not even be authorized to practice law in the state where your foreclosure has been filed
For more background information, read the following article:
Taking Advantage of Financial Assistance, Mediation & Counseling
Restoring Stability Ohio is a program available through Ohio's Save the Dream initiative and is designed to offer funding to homeowners that are either in foreclosure or in danger of defaulting on their loan because of unemployment or a major loss in earnings/drop in wages. This program evaluates homeowners in need of assistance, and if approved, the homeowners may receive up to $15,000 from the state to help pay off any money they might owe to the lender. Receipt of assistance funds is conditioned on the borrower remaining in the home for five years. If the homeowner decides to leave the home within five years of receiving the money, then they would have to pay the money back. In addition, the funds will be secured by a second mortgage against the property. If the homeowner remains in the house for more than 5 years, then the mortgage is released, and the balance of the loan does not have to be repaid.
Whether a borrower hires a lawyer or not, being proactive is a key factor in retaining a home. Part of being proactive is to take advantage of the available county programs for homeowners going through foreclosure. For instance, the Franklin County Mediation program requires lenders and homeowners to sit down with a court approved mediator to discuss available options, so long as the homeowner signs up for the program within twenty-eight (28) days of receiving the foreclosure complaint. According to an article entitled “Foreclosure Mediation Can Help,” written by Elizabeth Gibson from the May 15, 2011 edition of the Columbus Dispatch, 1,892 of qualified foreclosure cases were sent to mediation last year, which is nearly 1 in 5 foreclosures in Franklin County. In Cuyahoga County, 3,851 foreclosures were referred to mediation, which is a little more than a third of all foreclosures in that county. For information and statistics on mediation in Franklin County, you can access the article here: http://www.dispatch.com/live/content/local_news/stories/2011/05/15/foreclosure-mediation-can-help.html
Unfortunately, one of the main observations of credit counselors, court staff and lenders are that not enough homeowners are taking advantage of the available programs. Even the banks are making efforts to reach out to borrowers to prevent foreclosures. According to an articled entitled “Counseling Offers Often Unheeded, Banks Say,” written by Jim Weiker and Mark Williams in the June 26, 2011 edition of the Columbus Dispatch, both Wells Fargo and JPMorgan Chase invited local homeowners who they felt might benefit from foreclosure counseling sessions. According to the article, Wells Fargo sent out 2,000 invitations and only fifty-five homeowners attended, while JPMorgan Chase sent out 2,400 invitations, with 300 people participating. For information about the lenders point of view, see this article:
The following link is a Foreclosure Mediation Contact sheet for all 88 counties in Ohio: http://www.supremecourt.ohio.gov/JCS/disputeResolution/foreclosure/ForeclosureCtyContact.pdf
Borrowers that are current on their mortgages may have other loan modification options
Due to the sharp decline in the local housing market and other contributing economic factors, many borrowers are “underwater,” meaning they owe more on their loans than their homes are worth. In fact, as recent as February 2011, reports indicated that almost as many as 1 in 4 homeowners with mortgages are underwater. This staggering number has led to the enactment of numerous government programs designed to assist homeowners overcome this unfortunate obstacle.
Last year, the Federal Housing Administration (FHA), introduced a program allowing borrowers to refinance their loans so that they receive a reduced principle balance. The program, commonly known as a Short Refi, allows homeowners who owe more on their mortgage than their home is worth to refinance to an FHA loan more in line with the actual value of their property. In essence, so long as the borrower is current on their mortgage and the lender or investor of their original mortgage writes off the unpaid principal balance of the mortgage by at least ten percent (10%), they may qualify for this FHA refinance program. However, both borrower eligibility, and mortgage servicers and lenders willingness to participate in the program determines whether acquiring a Short Refi is an option.
Borrowers who think they may qualify for a Short Refi should contact their lenders and mortgage servicers and inquire as to their willingness to participate in the FHA program. Below are some of the basic eligibility requirements of the program:
- The borrower must have negative equity in the home.
- The borrower must be current on their mortgage payments.
- The property at issue must be the borrowers primary residence .
- The borrower must qualify under FHA underwriting requirements, and possess a qualifying credit score.
- The original loan that is being refinanced cannot be FHA insured loan.
- The original mortgage lien holder must write off at least ten percent (10%) of the remaining principal balance.
- The new FHA loan cannot be more than 97.75% of the current value of the home, and the combined amount of the new loan and any subordinate non FHA loan (i.e. second mortgage) cannot exceed 115 % of the current value of the home.
Alternatives to Loan Modifications
For those borrowers who choose to walk away from their home because of affordability issues or otherwise, the following are two options that a borrower might want to consider. Of course, both options need the cooperation of the lender in order to be successful:
- Short Sale – the borrower sells their property to a third party for less than what is owed to the lender. However, the borrower will still owe the bank for any deficiency in the amount owed after the sale. The lender may still initiate suit to recover the deficiency.
- Deed in Lieu of Foreclosure – the bank simply takes ownership of the home instead of going though with the foreclosure process, and typically results in a cancellation of the outstanding debt owed on the property.
When all else fails, bankruptcy is another option to consider that can stay a foreclosure and keep a borrower in a home for a bit longer. Although bankruptcy generally will have a negative impact on your credit, the reality is that most individuals going through foreclosure will have negative credit to begin with. Assuming a borrower is eligible to file for bankruptcy (according to the U.S. Bankruptcy Code), a borrower has the potential to walk away from a home debt-free so long as the borrower does not reaffirm the debt, making them responsible for the balance owed on the mortgage. If considering bankruptcy, it is essential to consult with a bankruptcy attorney to assist in the decision making process.
While loan modifications have a minimal effect on a borrower’s credit score, short sales, deeds in lieu, foreclosures, and bankruptcies have more negative consequences on a borrower’s credit.
For more information on how foreclosures can affect credit see the following article. http://www.nytimes.com/2011/03/13/realestate/13Mortgages.html?ref=mortgages