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The challenge for real estate professionals is accurately replying to the host of questions associated with a client asking; “Should I continue to make my mortgage payments”?

 

A prudent response should be immediately followed.   The prospect should then be guided on how to best execute your recommendations.

 

“Answered” questions from part 1 of  2:

 

1)      Should Mrs. Jones give up the “stay at home mom” gig and start looking for work?

 

Quite obviously this is a personal decision.   Raising it as point of discussion however may unveil the Jones’s motivation to attempt to keep their home or pursue other strategies.

 

2)      Even if this boosts their income up enough to make their mortgage payments, should they stay boarded on a sinking ship?

 

If they can affordably “stay” in their existing home then they should regardless of what property values are doing. And most homeowners will tell you the same thing. The alternative is renting. 

 

3)      The Jones’s can rent a home similar to theirs for $1600 per month (almost as nice). That would be a monthly savings of $1700. Should they walk away and rent?

 

At this stage of the Jones’s problem, there is no reason to walk away and rent. All remedies are best approached while they are still living in the property. They stand a good chance of modifying their existing loan making the mortgage payment comparable to what renting an inferior home would be.

 

4)      They could live in their home for “free” for roughly 9 months before the bank forecloses; avoiding roughly $30,000 in mortgage payments.  Is this an option?

 

This is an option that not enough homeowners do. Often times they are vacating their properties months before the foreclosure sale. Certainly the $30,000 in savings would provide them some working capital to start over. None the less, they may be able to keep their existing home for the same amount as renting another.

 

5)      Is just giving the home back to Wells Fargo (the 1st lien holder) via a Deed in Lieu of foreclosure an option? This would certainly avoid foreclosure, marginally save their credit rating and possibly avoid a deficiency tax liability. BUT will the 2^nd mortgagor ever go for this?
 

It is. Lenders are becoming increasingly responsive to the idea. Because the Jones’s live in the property and use it as their primary residence they will be precluded from tax liability as the result of HR 3648 or The Mortgage Debt Relief Act. (note: no relief is available for cash-out mortgages whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement. Exception:  If the cash-out was specifically used to improve the home and the homeowner has adequate records to prove it). The 2^nd note holders recourse for their deficiency is negligible. 
 

6)      Is selling their home as a short sale an option?

 

It is. However a short sale only makes sense with people like the Jones’s after all other alternatives have been exhausted. 

 

7)      Joe can apply for loan modification(s) with his lender(s) but what are the factors in getting approved? 

 

If the loan(s) is backed by Freddie/Fannie the general guidelines per the governments “Making Home Affordable” plan are: (a) the loan amount is under $729k (b) you are having trouble making your payments (c) your loan was taken out after Jan 2009 and (d) is the payment of the 1^st mortgage more than 31% of your gross monthly income.

 

You can check to see if any loan is Freddie/Fannie backed by going to:
 

 

 

Non Freddie/Fannie loan servicers have their own criteria for approving loan modification. In general the criteria for approval will be similar from servicer to servicer.   The Making Home Affordable plan is providing financial incentives to companies approving loan modifications.

 

(It is important to note that the Making Home Affordable plan has a provision for a total refinance as well. Refinance criteria is you must be (a) owner occupied in a 1-4 unit building (b) no late payments in last 12 months (b) refinance amount cannot exceed 125% of your 1^st mortgage).

 

8)      If Joe is going to pursue a loan mod should he stop making his payments first?

 

It won’t hurt and will increase the chances of getting some attention. (The Making Home Affordable Plan requires the homeowner to be at least 30 days late before they will pay out an incentive for the loan mod).   It will obviously ding their credit score, but that is probably the least of their concern. 

  

9)      If yes, does he stop making payments on both his 1^st and 2^nd Notes?

 

Believe it or not, it’s common for homeowners to stop paying the first (because they can’t) and continue to pay their second. The obvious fatal flaw here is paying on the second will not stop the first from foreclosing. And yes, if the Jones’s are going to stop paying, have them stop paying both. 

 

10) What will happen if Joe stops making the payments on just his 2^nd? Will the 2^nd foreclose?

 

You hear all kinds of answers for this one but only one makes sense. The Jones’s owe the roughly $64,000 on their 2^nd and $361,000 on their first. The current value of the home is $275,000. In order to foreclose the 2^nd will have to pay off the 1^st. What would you do? The 2^nd will remain in junior position and prey for values to sky-rocket. 

 

 

 

There is an overwhelming demand for qualified and competent foreclosure related services.   Unfortunately the number of professionals that have educated themselves on how to address these emerging markets has fallen dismally short.   

 

This is a big problem. The scope of services required in almost all foreclosure related scenarios are best suited for a real estate agents service. However agents have by-in-large been AWOL. 

 

In today’s market the most apt source for qualified foreclosure assistance has been a tiny sliver of attorneys that have chosen to re-tool their service portfolio. These lawyers are carving out a strong niche by offering a variety of pre-foreclosure related services. The inherent challenge with attorneys for this specific target market is….they cost too much. The VAST majority of people facing torqued financial stress cannot afford the service of most lawyers.

 

Certainly real estate agents are “catching on” to selling pre-foreclosure properties via short sales. But there is a lot more to learn and much more to offer these prospective clients.