Twelve Bits of Helpful Advice for Financially Troubled People with Mortgages
Okay, I said I didn’t want to quit the subject of foreclosures without saying something useful about it — with all I’ve experienced counseling and helping people who are facing, avoiding, or going through foreclosure, it just doesn’t seem right to bitch about work like I did a few weeks ago, and then just leave it at that.
So. This is all nothing but an informed opinion (I AM NOT A LAWYER), but maybe it’ll help you or someone you know. And then I think I’m done with this depressing subject for now, if that’s alright with you. ;)
If you’re suffering financially and worried about your mortgage:
BASICS:
1. Pay your mortgage FIRST, barring essentials like food and medicine. Pardon my french, but fuck credit cards; they are unsecured and while they can be a pain in the butt debt to have, you can’t lose your house over them! Similarly, if you’re looking at having to put a house payment on a credit card, do it rather than missing a payment. Missing a payment puts you in immediate risk of foreclosure, not to mention hurting your chances to refinance. Don’t do it if at ALL possible. If you have to miss payments, at least make sure you don’t get 90 days (3 payments) behind — that’s typically when foreclosure proceedings begin.
2. Do not make a deal with anyone that you heard about through a mailer, a sign on the road, etc.; they’re almost ALL scams. If you need to cut some kind of deal, these are the only people you should work with: A trusted attorney or nonprofit, family you really really trust, and your mortgage lender / servicer. Consider everyone else a likely scam. Visit the Federal Trade Commission website (www.ftc.gov) if you want good information on foreclosure scams in general. If you’re not sure about the scamminess of a particular offer, ask a local politician (congressperson, governor’s office, etc.) to look into it for you. If you find a scam, bring it to the attention of your state’s Attorney General; they usually have a web-page that tells you how.
3. Don’t ignore a second mortgage or home-equity loan. Those are secured against your property too, and they can pull your house into foreclosure if you don’t pay them. Also, while the first mortgage has the biggest say in any mortgage workout or deal, the second mortgage company has some say; and moreover, they can actually be an asset. If the home goes to foreclosure, a second mortgage company typically gets zilch, so sometimes they’ll even help you talk to your first mortgage company in order to protect their own interests. Lastly, you probably have a personal obligation to pay your second mortgage or home-equity loan (in addition to the lien on your home), so you don’t want to settle up with the first mortgage and/or walk away, and then find out later than you’re getting sued for several grand anyway!
4. NOW is the time to learn all about the foreclosure process in your state. You want to understand what could happen WAY before it does; that way you’ll recognize the signs, and know how much time you have between certain events, and be able to orient your plan of action(s) with the reality of how the other players (banks, courts) are going to act. If you’re smart, the second you realize you may have a problem paying your mortgage, you’ll be all over the Internet or the Library or a local professional, finding out everything you can about the foreclosure process: When does it start? How long does it take? At what point do you lose the ability to cut a deal? What programs exist in your area that might help you set things right? (Every state has some, though most of them don’t help many people, to be honest. Still, you might qualify, and the earlier you find out about them, the better your chances.)
YOUR MORTGAGE COMPANY:
5. Stay in insanely close touch with your mortgage company (or servicer), even though you will feel 90% of the time like it’s a completely useless waste. They have obscene phone-trees, clueless reps everywhere, and will drive you absolutely insane. (If you can’t handle keeping track of five calls a day in what basically amounts to a massive customer-service nightmare, and you can afford it, hiring an attorney, or finding a nonprofit, to do this part for you can be a good idea.) Also CALL THEM EARLY, basically the second you notice a problem. They will take forever to do most things, so you don’t want to be just beginning the process with them while the clock ticks for you!
6. Talk to "Loss Mitigation" or the Legal Department, even if you’re not late on your payments. Customer service cannot help you if your mortgage is in trouble; they will just brush you off, often causing you to waste valuable time waiting for them. The way to get help from your mortgage company is also not to stress what a good customer you’ve been and how good your credit is — that only tells them that you should be able to continue making your payments! Insist, to whomever you get on the line, that you’re in trouble and you can’t keep making your payments (even if you haven’t missed any yet, which is the best time to start calling) and that you need to talk to Loss Mitigation or their equivalent department. Be very wary of people who tell you to miss payments just so you can get through to the right department — occasionally this is necessary, but most times you can just bully them into letting you talk to loss mit.
7. Don’t play the help-me-I’m-a-perfect-customer card. When you get on the line with loss mitigation, continue to stress that you cannot make your payments as they stand, and you really want to keep your home and work something out. They will probably send you paperwork, requesting a "hardship letter" and some proof of your troubles. Get a specific name and phone number of the person you need to send it to, and use that person as your contact from now on, or every time you call you’ll be starting over! Write a short, to the point hardship letter detailing why you can’t make your payments anymore. Include bullet points like "January 2008: Lost my job. April 2008: Unemployment ran out. July 2008: Savings ran out." or "January 2008: Payments increased $500 per month due to ARM adjustment. April 2008: Car accident caused $10,000 in medical bills" — that kind of thing. Don’t lie! End the letter with a statement like, "Because of the above, I cannot make my payments and do not expect to be able to make them in the foreseeable future." They often ask for loads of highly personal information as well, such as your taxes and pay stubs. We usually don’t send it (or we ask them for the name of the person who will be responsible for keeping it confidential, and they drop that requirement). They usually aren’t equipped to handle that kind of information, and either don’t use it or misuse it. The hardship letter and some basic proof is usually enough in my experience.
8. Know what you need and ask for it; don’t call them seeking "help". They’re a bank; they don’t "help" people (regardless of what they say to the press). Do you need payments that are $200 less a month? Do you need your interest rate lowered? To get your ARM turned into a fixed-rate loan? The total loan amount reduced so you can sell your home? To walk away without taking the hit for a foreclosure on your credit report? Mortgage companies can do all of those things, but they’re not going to just because you ask for "help". Get professional advice to help you figure out what you need, if possible.
9. Remember that you’re negotiating — however much they make it sound like this is about "policy" and "procedures", it’s not; it’s a straight-up negotiation between you and them. (This is why lawyers often can get better results than you can: They know that, and they know the laws, so they know what’s at stake on both sides. If you’re just not a good negotiator or you know next to nothing about the mortgage world, you may be much better off hiring a lawyer.) That means all the usual rules of negotiating apply: Don’t tell them things they don’t need to know that hurt your case; start asking high and expect to be talked down; etc.
WALKING AWAY:
10. Know when to hold ‘em, know when to fold ‘em. If your mortgage is $50,000 more than the current value of your home and your mortgage company isn’t budging, what should you do? If you’re behind and can’t make the payments, should you pull money out of your retirement account to get out of trouble? …Only a lawyer can advise you to walk away, but there are tons of people out there with informed opinions that you should talk to. Anybody you know in real estate or finance, or a relevant nonprofit, is a good place to go for educated opinions. Just call them and tell them you want to know what they think, or what they would do. Make sure you talk to people in (or read websites relevant to) your state, since state laws matter a lot. For example, in Michigan anybody getting foreclosed on has six months to live rent-free at the home while they find another place. If you didn’t know that and just walked away with nowhere to go, it would be a huge mistake!
11. Have a long-term plan. What will you do if you walk away? Where will you go, and how much money do you need to have to pull it off? Does your credit matter in the near term? (Foreclosure hurts your credit probably worse than anything else, including bankruptcy, but if you won’t be buying/renting/leasing anytime soon, it can be a good thing to sacrifice for, say, that six months’ rent-free time to save up money!) How are you going to handle your other debts and obligations? The more you know about your long-term plans, the better a decision you can make. This is where nonprofits that will help you with budgeting and financial planning can come in really handy.
12. Plan to pay a lawyer, at least to read any documents you sign. Most attorneys will read and comment on a document for a one-time, reasonable fee of a hundred bucks or so. You should plan to pay this, because if you give up your home by signing the contract the other side’s lawyers hand you sight-unseen, well, you’re an idiot. You want to make sure the paperwork says what you understood it to say, and that there’s no possibility of negative effects coming back on you later (like a clause that says, "If we can’t sell the home for the value of the mortgage, you owe us the difference." –Yes, I’ve seen those.)
13. It’s not a high-school breakup. If you walk away, literally, without making any arrangements with your mortgage company, don’t expect that you’ll never hear about it again. You can’t just wander away from a huge debt and never have it come back to bite you in any way. I always advise people to "walk away", if they decide to, as openly and in as controlled a manner as possible; never like thieves in the night. That way, you can protect yourself as much as possible, and if there are likely future consequences, at least you can be aware of, and hopefully prepared for, them. Unfortunately, many people are ashamed of their situation and so don’t talk about it or plan it out, and this only makes it worse in the long run. Remember, the bank would bail on a bad investment too, and if your house is, due to the market or other circumstances, something that you can no longer afford, then cutting your losses is a perfectly reasonable financial decision — if you do it like a grown-up, and tie up your loose ends as much as possible.
There, I hope that’s useful. Please keep in mind that I’m probably not the person to give you specific advice, and if you put personal information in the comments I’ll delete it for your safety. I’m happy to clarify any of the above if needed, though.
PD
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It’s interesting that you recommend paying the mortgage over paying the credit card bills, given that harrowing choice. From what I’ve read, most people in that situation are doing it the other way around.
My theory on that strange-seeming behavior: even if you’re 90 days arears on your mortgage, that fact still hasn’t trickled through the system as far as your credit score. And you can use that to buy a little time to find a place to rent. After all, if you’re underwater on your mortgage, your next move, if you have to leave your house, will very likely be to rental housing (unless it’s moving back in with your folks). House prices are STILL (even with the huge post-bubble drop) much higher than rents for the same property. In fact, this out-of-whack (in historical terms) ratio was always the most convincing component of the case for why we were seeing a housing bubble, back when some were still questioning that — the ratio has been gravity-defying for over a decade. Any landlord considering you as a tenant is likely to run a generic credit check on you. Once you’ve signed the rental agreement, it matters a lot less that your credit score suddenly goes to hell — you’ve got a new roof over your head. So people paying their credit cards rather than their mortgages might just be exploiting information lag, to keep their options open.
Regarding your Black Monday comment, I think you might be working with outdated figures when you say that banks lose $20,000 on each foreclosure. You have to look at what the bank is going to lose with the workout these days, which is probably a lot more than in the past. We’re really in an unprecedented real estate market here. Look at still-very-high home prices, look at the *accelerating* rate of decline in home prices, look at the unprecedented bailout legislation moving now, much of which is too-little-too-late. Consider the eye-popping numbers when you look at how many homeowners will be underwater if (really, WHEN) home prices return to their historical ratios with rental rates. I’ve seen estimates that 40% of U.S. homeowners will have negative equity in their homes at that point. Back in January, I had quite a falling out with a former banker friend who was insisting that typical home loan workout rates mean that the picture isn’t nearly as bad as it was being painted in the press. And what have we seen since then? Workouts aren’t working out the way they used to.
The workout incentives on the homeowner side are not nearly what they were in times past. Banks know this. At some price level in a given regional housing market, they will stop sifting for the deals where it works out for both the homeowner and for the bank compared to straight foreclosure. What little there is to sift for wouldn’t pay the costs of workout, it would be like panning for gold with a yield in nuggets that doesn’t buy you enough groceries to keep you panning. Banks seeing that situation looming will just foreclose upon default. (It makes sense this would happen in Michigan before anywhere else; if GM’s stock price reflected its pension liabilities, it would be damn near zero, if not actually negative.) It’s not longer about who wins or loses. It’s about losing less than somebody else.
Hi, Michael!
Let me start at the end, and say that your comments on the Black Monday phenomenon are some of the best I’ve gotten, and that I think you’re probably dead right about what banks are seeing when they look at the workout situation. On top of that, there’s also the fact that the too-little-too-late legislation you mention is the *first* thing that’s protected banks from lawsuits by their stockholders for doing workouts! When you factor that in as well, it’s easier to see why they’re being so uncooperative.
I still kinda hate them for it, though. ;)
There’s a problem with your theory about paying credit cards before mortgages, though, and that’s that there *isn’t* a delay before a late payment shows up on your mortgage…usually it’s ding-on, 30 days or less after your first missed payment.
However, I do agree that people who act that way are generally thinking about protecting their credit scores. They’re probably thinking “hmm, I can make one mortgage payment and go late on four (or five or ten) credit-cards…or I can pay the other bills and just have one late, from my mortgage.” Most people don’t realize that a late on your mortgage is worse on your credit than lates on credit-cards, too, though obviously neither are good things.
Most people also, in my opinion, WAY overvalue their credit score. It’s hard to blame them, because they’re taught to — everything you see in the media makes it sound like the be-all and end-all of your moral worth, rather than something which makes getting loans, leases and mortgages easier and doesn’t do much else. I can’t count how many well-meaning older people, especially, who’ve cut their budgets to the bone and half starved themselves to protect their credit score. I’m always like, “FOOD or CREDIT SCORE, gee, lemme think–!”
The important difference between mortgages and credit-cards is that the former is secured and the latter is not. That means two things: 1) you can never lose your home or property to a credit-card. The WORST that can happen is that they can sue you and win, and get a judgment and possibly a garnishment. (If you go to court, the judgment will be for a lot less than you owe, too, which is why I wish more people would actually go to the hearing rather than letting the collections agency decide how much they should pay!) But even if that happens, court judgments are also unsecured, and unsecured debt is *dischargeable in bankruptcy*. So worst comes to worst comes to worst, you can almost always get out of an unsecured debt; there are safety nets for those (and that’s why credit companies are stupid to not be more careful about who they give credit to!). But your mortgage is your HOUSE, and after about 3 missed payments, it’s over, baby; especially in this market, where both selling and refinancing once you’re in trouble are nigh impossible.
So yeah, I say screw the credit cards; your home is a LOT more important!
Thanks and nice to hear from you!