Mortgage Forgiveness Debt Relief Act of 2007 extended

For many underwater homeowners — homeowners that owe more on their mortgage than the house is currently worth — they have a bit of an upper hand with their lenders.  Lenders are reluctant to foreclose on these homeowners even if they’re in default, because that would mean realizing a loss on the property:  selling below market value, losing money on the mortgage, and incurring all of the costs of foreclosure.

A less costly option for everyone concerned is a short sale.  This is a sale that the lender agrees to which is less than what is owed on the mortgage.  The lender takes a hit, but does not incur the costs of foreclosure.  Additionally, the borrower doesn’t suffer as bad a sting on their credit report.  It’s bad, but not foreclosure bad.

Additionally, there was some extra help on the lawmaking front as Congress avoided fiscal cliffery at the end of last year.  The Mortgage Forgiveness Debt Relief Act of 2007 was extended another year, through January 1st, 2014.  This law will save people foreclosed on, or who go through short sales, or who have their loans beneficially modified, a bit of tax money.

Since a short sale (or loan modification, or foreclosure) is a forgiveness of debt, it is normally taxable as income by the IRS.  The Mortgage Forgiveness Debt Relief Act of 2007 made this forgiven debt non-taxable.  The law was set to expire at the end of 2012, but it is now in force for another year.

Not there’s ever a good time to go through foreclosure, but this year will be a bit less painful if for no other reason than the additional tax savings.

What is foreclosure stuffing?

Ran across a new term at the Zero Hedge blog called foreclosure stuffing.

Foreclosure stuffing is a term that describes lenders’ efforts to slow the foreclosure process as long as possible in order to keep the prices of the existing foreclosed homes on the market from falling too rapidly.  It’s an effort to control the price by controlling the supply.

How do lenders slow down the arrival of foreclosed homes on the market?  They don’t foreclose on people, even when they’re in default.  They allow the borrowers to live rent-free.  Why are they doing this?  They’ll take a loss on the property if they foreclose, because even the market rates for some of their properties won’t allow them to pay off the loan in full, let alone a “distressed property” price, which can be quite a bit lower.

So, as people live rent-free in their homes, the banks bleed due to this build-up of shadow inventory.  The banks are stuffing a block into the foreclosure pipeline.

The result for buyers is that the prices remain higher than they would otherwise.  People are being allowed to keep their homes, even though they’re not paying for them, and probably shouldn’t be in them.

Some estimates (Zero Hedge) put this “foreclosure backlog” at 2.5 million homes.  This will take a while to clear up.

Nevada banks want the foreclosure process to be easier

Apparently requiring banks to produce proof of ownership before foreclosing on someone is too hard.

Up for discussion is a 2011 law in Nevada that criminalizes foreclosure fraud.  In essence, it restates the obvious: Only foreclosure if you’re legally entitled to do so.  However, it places the people initiating the foreclosure process on notice by making them sign an affidavit attesting to their personal knowledge of the documentation history that supports the foreclosure.

Banks would like the law repealed, which would allow them to initiate foreclosure proceedings with less stringent proof.

The law isn’t a bad thing for people in danger of foreclosure, of course, because it forces the lenders to have their ducks in a row first.  If the original mortgage documents were done hastily then their whereabouts could be challenging to track down, or their validity could be called into question.  There have been more than a handful of cases for which the banks have foreclosed wrongly, be it without an actual default, or on the wrong person.

The housing market continues to be a mess for many people, including the bankers — if for no other reason than they have to sort out their paperwork first.

Fannie and Freddie have a soft spot?!

Very interesting article about how Fannie Mae and Freddie Mac are postponing evictions briefly so that they occur at the very beginning of next year.

This reprieve comes as a bit of year-end, quasi government foreclosure help.  A representative from Fannie Mae calls the measures an attempt “to relieve some stress at this time of year.”

Both Freddie Mac and Fannie Mae will suspend repossessions beginning the week before Christmas, and will resume at the very beginning of 2013.

Over the past few years, mortgage lenders have had their butts handed to them both financially, and in the eyes of the public.  The predatory lenders among them have blemished the entire industry.  The recession has made lenders more cautious about lending to anyone, except those with pristine credit.

So this small bit of holiday cheer may be an effort to repair a badly-damaged public image.  It may also be an effort to postpone repossession at the very worst time of the year for selling property; December is usually a very slow month for home sales.

An extra two weeks is an extra two weeks

Two weeks may not seem like much, but if foreclosure is inevitable, it’s two weeks’ worth of rent that doesn’t need to be paid.

If there is a workaround, then it’s an extra two weeks to scurry around for last-minute help to stop foreclosure, if it’s available.

Or, the two weeks could simply be used by families for the purpose that Freddie Mac stated: to spend time with family during the holiday season without a foreclosure sale happening right in the middle.  “It’s Christmas!”

Toni Braxton foreclosed on

I enjoyed Toni Braxton’s singing but the lenders didn’t enjoy her not paying on her 11,000+ sq. ft., six-bedroom six-bathroom house in Duluth, Georgia.  From the face of it it’s beautiful.  A Chapter 7 restructuring plan didn’t work out.

This was the second of Ms. Braxton’s homes that was foreclosed on.  The first was in Las Vegas in 2010.

The economy hasn’t been kind to many people at all, even high-profile celebrities. Some of the 1% join the 99% even as we speak.

 

Older Americans at higher risk for foreclosure

The golden years aren’t so golden for increasing numbers of Americans fifty years and older.  The American Association of Retired Persons reports that three million older Americans are staring down the dark tunnel of foreclosure.

The foreclosure rate among this age group has increased to nearly ten times what it was only five years ago (2.9% in 2011 vs. 0.3% in 2007).  Three and a half million people 50 and older are underwater on their mortgages.

For those aged 75 years and older, the median mortgage balance has nearly quintupled over the past twenty years ($52,000 in 2010 compared to $11,800 in 1989).  Factoring in inflation, this is still 2.5 times higher.  Nearly a quarter of people aged 75 or older carry a mortgage.

Many will need to go back to work

The independence that was once sought in retirement may no longer be possible for many older Americans.  The average fifty-year-old has saved only around $44,000; getting to anything sustainable is a huge game of catch-up that is only made worse by large mortgage payments.

It might not be too far out of the realm of realism to say that retirement is an outdated notion.  Upon arrival of “retirement age” there’s either enough money and/or income to survive without holding down a job, or there isn’t.  Best to plan to retire into another line of work rather than retire out of one.

Barring the ability to work, though, if an older person can no longer live in their home because it’s been foreclosed on, then someone has to pick up the slack.  Either the family pays (by taking the person in) or we all pay when the government steps in.  Either way, it’s not the best outcome.

Should every old person expect to stay in their house?

In many ways the story of a 103-year-old saved from eviction is heartwarming.  Deputies and movers in Atlanta, GA, couldn’t go through with tossing a 103-year-old woman and her 83-year-old daughter on the streets after her home of 53 years was foreclosed on.

Kudos to the folks sent to do the unpleasant task for not being heartless.  That would have broken my heart, too.

It might set a precedent, or it might not.  Probably not.  It’s a dangerous precedent to set.  There are an awful lot of people behind on their mortgages, and some of them are bound to be very old.  Charity and business are not one and the same thing.  Businesses shouldn’t be prevented from being charitable, but on the other hand they shouldn’t be forced to, either.

Nor should they be shamed into doing so, either.  Business is business.  It’s far too easy to gang up on banks for being heartless.  Shouldn’t adults be held responsible for their actions, lack of planning, whatever?  Shouldn’t older people be wiser as well?

I’m glad Ms. Hall and her daughter can stay in their house for the moment.  Banks shouldn’t be forced to let them, though.

Four million foreclosed borrowers eligible for review

If you were in the process of foreclosure during calendar years 2009 and 2010 in the US, you may be entitled to a review of your foreclosure for potential wrongdoing.  The Office of the Comptroller of the Currency (OCC) put together this agreement with mortgage servicers and the Federal Reserve.  The mailings to potentially affected borrowers began this past week and will continue through the end of the year.

The borrowers have until the end of April, 2012, to request a review under the guidelines of the agreement.  The parties involved acknowledge that it will be a huge amount of work to process the potentially 4 million requests, but have pledged to do so thoroughly and fairly.

Much of the rest of the process and its consequences are unclear now but the sheer volume of reviews could aid the recognition of patterns in foreclosure processing based on just about any measure — income, racial background, mortgage servicer, credit history, etc.  It will be interesting to see.

What’s good for the goose …

… is also good for the gander.

It’s entertaining to see the tables turned on a bank for once.  After a bank wrongfully foreclosed on a homeowner who apparently never even carried a mortgage against the property, a judge ruled in the homeowner’s favor and ordered the bank to pay the homeowners’ legal fees.  When this didn’t happen for months, the homeowners’ attorney took motions to seize the bank’s assets — effectively, foreclosing on them.  Sweet music, no? 🙂

Commercial properties — yes, even banks — are not immune to foreclosure.  Many will be foreclosed on in this economic downturn.

 

Want to protect your house against foreclosure due to job loss?

The best way to do this is: don’t lose your job.

That’s a bit of a smart-aleck answer, but there is reality to back this up.  In the United States currently (2011) there are programs to help homeowners in trouble, but relatively few are designed to extend help to homeowners with extended bouts of unemployment. From the linked article, here are where the shortfalls are:

  • A Treasury Department program begun in 2010 allows qualifying homeowners to put off mortgage payments for three months, but the typical length of unemployment is three times that.  In addition, only slightly about 7,000 homeowners have participated.
  • Loan modification incentives usually require some payments to be made.  This is a problem without income, so unemployed people don’t qualify for these programs.
  • Some programs are targeted for subprime mortgages only.  Unemployment affects people holding all kinds of mortgages.
  • The government can offer, but lenders aren’t compelled to take.  Whether aid is extended to borrowers or not is largely up to the lenders, and they have other considerations.

There is some aid available for homeowners battling unemployment, but it’s not enough. It’s impractical for all concerned for it to be enough.

That’s why it’s so important to protect income streams. Make yourself more valuable at your place of work. Use “free” time to start a side business. Build up an emergency fund to add a cushion so that the mortgage payments can be made for a while despite job loss.

Because when you’re looking for a bail-out, the best you get might be a thimble.