Steps to take if you’re facing foreclosure, Part 3

Here’s the last installment of Liz Pulliam Weston’s tips for dealing with the possibility of foreclosure:

  • Offer a deed in lieu of foreclosure. This is an option if the shortfall between your house’s value and what’s owed on it isn’t too much.  The lender can say, “Yeah, I’ll take the deed back, and you won’t owe anything.”  It’s similar to solving a disagreement through arbitration instead of going to court: It’s less costly for both parties.
  • Negotiate a short sale. If the lender stands to lose a lot of money through a foreclosure, then a short sale may be possible.  The lender agrees to release the mortgage for less than what’s owed, and the deed is transferred to a third party.
  • Allow the foreclosure to proceed. There may be no other option, and your credit rating will be absolutely trashed for a while, but sometimes it’s not possible to avoid.  Foreclosure is never the end of the world, though.

Steps to take if you’re facing foreclosure, Part 2

Liz Pulliam Weston wrote recently on steps to take if you’re facing foreclosure.  There are smart ways to go about it, and not-so-smart ways.  Here are three more of her suggestions with some of my comments:

Be realistic.  A house is just a house.  It may have a lot of sentimental value but when all is said and done it’s just a structure and a place to hang your hat and store your stuff.  If this structure is costing too much, then getting out while it’s still possible to get out is wise.  I certainly wouldn’t want to pull myself away from my house, but when facing foreclosure being able to walk away with the credit rating intact is certainly a better option.  This might mean forfeiting some equity to sell the house, but in today’s market, selling and living to tell the tale is a win.

Get organized. Especially if you’re approaching your lender for a modification to your loan.  Weston writes:  “The lender will specify what it wants, but typically you’ll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a ‘hardship letter’ that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.”  Even if this isn’t the case, organization helps, because maintaining the paperwork from the lender is useful for whatever negotiations you want to attempt. 

Sell the house. If you have enough equity in your home to pay off your mortgage and pay the real estate agent’s commission, this is the best outcome if you’ve reached the conclusion that you can’t afford the house anyway.  The bad marks on your record stop and the problem (your house) is gone.  If you’re actually in a position of positive equity, your lender will be less likely to make a deal with you anyway since their loss is probably covered.

Steps to take if you’re facing foreclosure, Part 1

Liz Pulliam Weston wrote recently on steps to take if you’re facing foreclosure.  There are smart ways to go about it, and not-so-smart ways.  Here are her first three suggestions with some of my comments:

  • Make a budget.  If there are places that can be cut in your budget that will make the difference between losing the house and not losing it, this is the time to do it!  See if there are ways that you can do the little money-saving things again to make up the shortfall.  Depending on how short-term the shortfall appears to be, it may make sense to keep the mortgage current at the (temporary) expense of other bills.  If it doesn’t make sense to do this, then don’t.
  • Consider getting help from credit counseling services associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.  (Members of these organizations abide to standards and agree to oversight by the organizations.)  Additionally, HUD and VA loans have their own assistance and counseling programs.
  • See if you can refinance.  This may be harder to do than it was last year but if you have enough equity it may be possible to refinance and to lower your monthly payment.  This works ideally before the first missed payment but it’s best to look into this before a notice of default has been filed.

The next post will talk about the next three steps in her list.

Recognizing the signs of a family facing foreclosure

Free Money Finance recently had an acquaintance of his go into foreclosure, and the signs of trouble were clear in retrospect.

People don’t advertise that they’re facing foreclosure, at least not outwardly.  Even if money is getting really tight, people can compartmentalize the worry when they’re interacting with others.  One family I know had a fairly substantial problem with debt — work for the main breadwinner was too slow — but if it hadn’t been explicitly told to me elsewhere, I probably wouldn’t have known.

Some things to watch for (perhaps):

  • Breadwinner loses work and hasn’t mentioned another job.  They may mention the job loss, but it would make sense to me that they would come back to share the good news if they had found work again.  I’d be concerned if they didn’t.
  • Spouse goes back to school or work.  Especially if there are school-aged children.  Why would the stay-at-home spouse leave the kids to work?  There are other reasons besides money, but money is a really big one.
  • Strange stories.  At best it may come across as wishful thinking in retrospect, but there’s something in the story that isn’t quite right.  FMF’s acquaintances left their home to move into an apartment, as the new one wasn’t quite ready yet … but they hadn’t sold the house they were in?  “Why move?” was his question.
  • Kids who know the truth.  Kids talk more candidly than adults, and may spill the beans on an impending foreclosure.

It’s sad when someone you know is facing foreclosure, especially when it’s too late.

Will your lender work with you?

This article from the Chicago Tribune made a point about lenders that’s an unfortunate reality:

The more equity you have in your home, the less eager your lender may be to work with you. It’s an ironic fallout of the foreclosure crisis that those who have been the most diligent about making payments and have lived in their homes the longest are most at risk. Simply put, the lender can take what you’ve already paid in equity, sell the home for less than it’s worth and still make money.

When lenders work with borrowers to put off foreclosure, it’s all about themselves, not the borrowers.  The lenders have a business reason for working with a borrower who’s upside-down and falling behind on their payments.  Foreclosure and repossession are expensive prospects, and taking less money in now in order to keep the payments coming back is far better selling a property at a loss, and paying foreclosure costs, or even worse, going through the foreclosure process and not finding another buyer.

If the borrower is not upside-down, but instead has equity the asset, it’s very little risk for the lender just to take it back and sell it.  A loan balance equal to half of the house’s value is far less risky for the lender — and far riskier for the borrower — than a fresh loan with a low down payment, or one that was written a couple of years ago when housing prices were at their highest.

This is unfortunate.  If you’re in a position with a fair bit of equity in your home, guard your income streams zealously, and do everything you can to keep your mortgage payments going out on time.  It’s just not worth your lender’s time to work that hard with you.

Modern-day ghost towns

Some new developments in California are mostly, or just about entirely, vacant.

The housing industry had been stepping on the accelerator for a few years at the beginning of the decade.  As big as it is, it gained momentum over those years.  But now that it’s been barreling along so fast for so long, it will take a while to slow down, even with both feet on the brakes and the parking brake on.  With the lightning-fast pace of construction in once-hot areas like California, builders are still building, and are still holding, new homes that would only fetch two-thirds of what they would have fetched a year ago.

On the other coast, some friends from our church live in a newer subdivision.  It’s not quite ghost-town status but there are quite a few vacant lots nearby.  A few are sold; some aren’t.  The houses are big:  4,000 square-foot-ish.  I suspect the prices will come down quite a bit before the rest are sold.  They’ll probably be sold one way or another, but until then, the neighbors next door are vacant.

Living in a ghost town is lonely, and things tend to rot and fall apart.

Virulent foreclosure side effects

Foreclosures are making people sick.  Literally.  It’s possible that there is a link between the West Nile virus and foreclosed properties, particularly properties with swimming pools that become standing water once abandoned and provide a home to lots of mosquitoes.

Falling property values in neighborhoods with abandoned houses makes sense.  Increased crime due to vandalism of abandoned properties make sense.  Increased occurrences of the West Nile virus from abandoned swimming pools makes sense once the pieces are put together, but that was probably beyond most people’s thoughts.  I know it didn’t occur to me.  Makes you wonder what else is down the road as the mortgage mess unravels.  I’m sure there will be more problems.

Do you have any friends facing foreclosure?

Even though it’s hard to go more than a few days without hearing about the housing slump and foreclosures, it’s a bit of a distant concept if no one you know has faced it.

Well, over the past couple of weeks we took a "love offering" at our church for one of our families.  A substantial amount — five figures — of money was needed for this family to avoid bankruptcy and possibly foreclosure.  All of a sudden the concept of foreclosure isn’t so distant anymore.  An entire family you know could be out on the street.

We haven’t had any friends thus far get into this kind of trouble but I imagine they won’t be the last before this downturn is over.  Professions that were once booming are now busting.  Companies are starting to take a hard look at who they can afford to keep on, and though I doubt that managers enjoy firing people, they probably will have to.

We helped out this family through a special donation, but will that be enough?  I pray that it is, but though God is in control and He will take care of His own it may not necessarily be by keeping them in their house.

How would you handle a friend in foreclosure?  Or have you already crossed that bridge?

Vacant home burglaries result in costly repairs

Fifteen to twenty thousand dollars in repairs because thieves stole $40 worth of copper? Ouch. That was a bit more than I would have guessed. Maybe a couple thousand at the most to repair a wall or some floors? Not $20,000!

Very costly repairs like this will drag down housing prices further. The extent to which they’ll be dragged down depends on the effectiveness of the deterrence of such burglaries. (I’m not saying law enforcement will just stand by, but there may only be so much they can do.) Not only will owners be selling at a loss, they will be needing to repair the losing properties just to get them up to code so they can sell them, at any price.

The threat of vandalism is an extra cost of owning an illiquid asset like real estate, and this threat becomes reality more often if the home is vacant. Further, because the house is vacant, insurance costs go up, and for some types of insurance it can’t be purchased at all, like with fire insurance. (The insurance companies know the risks better than most, of course.)

I wonder if there will be a rise in the formation of companies dedicated to protecting vacant homes from vandalism. This would likely be costly, but it could fill in where insurance and law enforcement leave off.

Hey, at least you can get a free drink

Capitalism at its finest.

Restaurants are feeling the pain with $4 gas and tightening pursestrings, so they’re sharing the pain by offering “recession specials” — slightly cheaper offerings to help strapped clients enjoy some of the finer things. These deals aren’t really that great compared to cooking in but it’s better than no discount at all.

Padre’s Modern Mexican is going out on a limb and offering any drink for free when the customer brings in a foreclosure notice. Although drinking is usually not the solution for problems like this, I suppose it’s an opportune display of thoughtfulness for what has to be the beginning of a tough time.

I expect to see more deals like this as businesses try to keep sales up in the midst of economic downturn and people losing their homes.