Northern Nevadans are in desperate straits in this foreclosure crisis. Here’s how to make the best of a heartbreaking situation. And it ain’t pretty.
You might be like a lot of people in Northern Nevada right now—you own a home and are struggling to make the mortgage payments. Maybe you’ve lost your job, you’re divorcing, you need to move to find work, your mortgage has adjusted with higher payments, or you’re in financial distress for some other reason.
Your house weighs you down like a boat anchor around your neck. You can’t sell it, because it’s worth less than you owe. You can’t refinance it, because you owe more than it’s worth, or your credit has been hit with missed or late payments. You can’t even rent it, because you can’t afford to make up the difference in the mortgage and rent another home.
So, you call your bank, hoping to get some help in making your payments. You dial the 800 number, and after an hour on hold, someone finally picks up. You explain that you are having trouble making your payments and ask what you can do. The heavily accented person on the other end says, “Call us back when you’re late.” “Click.” The line goes dead.
The housing crisis is particularly intense in Nevada. According to foreclosure-tracking company Realty Trac Inc., 48 percent of all homes in Nevada are worth less than the face value of the mortgage, and one in 74 homes in Nevada received a notice of default in October.
You’re living in a cul-de-sac on Foreclosure Road. Unfortunately, you have a lot of unhappy neighbors.
The 1-800 call center that you reached—not in the United States, most likely—is part of the bank’s billing department. While you were on the phone or on hold, they checked your account, saw you paid by the 15th, and hung up on you. The center will document your call, which is required by law. You will never reach the same person twice. You will usually be put on hold for a minimum of 45 minutes. No one that you reach has any authority to help you. In fact, calling the bank hurts you, since you’ve told them that you might default. They may bump up your interest rate and make your payments even higher, and the more you call, the more likely this is. Once you’re late, a different department will call you—again not the one you need. But the bank won’t tell you this. So, calling the bank and asking for help is pretty much useless.Dirty Secret No. 1: Banks will not even talk to you until after you are late.
So, let’s say that you didn’t make your March 1 payment. Since there is a 15-day grace period, the bank does not consider the payment late until March 16, when the automated calls start: “We haven’t received your payment this month; we haven’t received your payment this month; we haven’t received your payment this month.” Now when you call, you’re going right to collections.
This department’s job is to try to get money out of you: “Well, if you can’t pay $2,600, how about $1,500?” That’s it. This partial payment will not bring you current or buy you any credit with the bank. Nothing short of full payment plus all interest and late fees will. The bank won’t tell you this. There are no other solutions offered to the homeowner at this time, and the bank continues to call repeatedly trying to harass a bit more money out of you. And it’s still 45 minutes or more on hold every time you call and try to reason with the bank.
Finally, after an additional 60 days of non-payment (May 16), or when the collections department decides they won’t get any more money out of you, your loan file is booted to the loss-mitigation department. This is the department that matters. This is the first time that the homeowner is able to reach someone who actually has the authority and knowledge to offer any solutions. The bank assigns the loan to a loss-mitigation officer, and the question of whether the homeowner wants to keep or sell the house is asked.Dirty Secret No. 2: No one around here is going to get their mortgage modified
If the homeowner decides to try to keep the house, then the button is pushed for a loan modification and bing! you’re back off to the Indian call center. That’s because to qualify for a loan modification under the federal “HOPE Now” program approved in October 2007, you have to be 90 days late on every bill, and the house has to be appraised for the remaining value of the loan. If you are substantially upside-down on a house in today’s market, you can’t get a loan modification—by law! Today, no house in the West is going to appraise for more than 2002 values, maybe less. Even the $75 billion foreclosure relief proposed last week won’t cover this much of a loss in most cases. The bank doesn’t care, because they can always foreclose on your house, so they’re still good at this point. Even if you entered this downturn with enough equity to cover the loss, your credit is shot from all of the 90-day-late payments. Loan modification is supposed to rewrite 90 percent of the loan at a rate and term the homeowner can afford. That “rewrite” means all your years of payments are wiped out, and a new 30-year term is imposed. Plus, that 10 percent deferred value is tacked onto the back of the new loan. When you sell the house, you still owe the money.
So while the homeowner is on hold to India, trying to get his or her loan modified, the bank notifies the state that the loan is in default. A certified letter is sent to you that a Notice of Default has been filed against the property. The letter gives the owner 30 days to “cure” the default, which consists of the unpaid mortgage, all of the late fees, and may include attorney’s charges as well. Remember, only full payment is accepted, partial payments are given to collections.
If you don’t send the full amount in 30 days, the clock starts ticking. Now it’s 120 days until the auction where you will lose your house. And, the bank keeps a record of the debt, which now includes the original balance, late fees, attorney fees, penalties and foreclosure fees, which add up easily to another $20,000. Then the house is auctioned off, another six months pass, and there are additional expenses—clearing title, cleaning out the house, changing locks, hiring an agent to get the property on the market. Plus, the market has continued its decline, and now the house, which was worth say, $200,000, is only worth $170,000. The original note was for $300,000, and the fees added up to $325,000. The bank now files a deficiency judgment against the homeowner for the difference, which in this example is $155,000.Dirty Secret No. 3: A foreclosure incurs permanent debt
A deficiency judgment is personal debt, whereas your mortgage was secured debt. Personal debt is attached to your Social Security number. The bank can garnish your wages, or even put liens on any asset you own to satisfy the judgment. Personal debt doesn’t go away, and after foreclosure it can be more money than your original note.
One of the biggest mistakes a homeowner in trouble can make is to panic and think they will be evicted tomorrow—then use their credit cards to make their mortgage payments. It is a short-term fix that quickly turns into a nightmare. Mortgage liens are property specific. Banks can make you sell your property, or take your property, sell it, and take the money. But they can’t haunt you for life to get the money they didn’t get from the mortgage, unless you turn it into personal debt.
The first thing you really need to do when you can’t pay your bills is to stop paying the mortgage, and let the house go! Take that money and redirect it to whatever personal or credit card debt you owe.
Credit card debt is personal debt. As I said, the wrong thing to do is to borrow the money on your credit card to pay the mortgage for six more months. What happens in reality is that borrowing from your credit card to make mortgage payments only works for a short time. You max out your credit cards and go into foreclosure anyway. Once you are 30-60 days late on your mortgage, this is reported to the credit reporting agencies, and the 9 percent rate on your cards is now raised to 16 percent, 22 percent, 30 percent, and your new credit line is cut to what you owe. So now you are completely without credit, and you’re going to be paying 30 percent or more interest to every bank.Dirty Secret No. 4: A short sale is your only way out
What the bank’s loss mitigation officer didn’t tell you is this—the correct answer was that you wanted to sell your home. The bank didn’t tell you that you could have hired a real estate agent certified as a default resolution specialist and walked away from all that mortgage debt without it ever coming back to haunt you. That’s right. Because of the Mortgage Forgiveness Debt Relief Act of December 2007, homeowners can walk away from substantial debt, which is particularly pertinent here in Nevada and California.
Why didn’t your bank tell you this? Because you said you wanted to keep your house, and it was the wrong answer. But, hey! Loan modification and loss mitigation sound pretty much alike—you hear about loan modification on the radio all the time, from scammers trying to get you to pay them for something which doesn’t even exist! No wonder consumers get tripped up—and so do the non-English speaking folks at the call center—one wrong button, and your file is closed tight. But don’t take all the blame yourself, since the average real estate agent doesn’t know there is a difference between loan modification and loss mitigation, either.
The fact is, only a few specialists in the entire country know how to successfully short sell a property.
Secret to the Short Sale: the certified default resolution specialist
Selling properties for less than the loan value was invented in the early ’70s during the last big downturn. But now, the brokers who knew about short sales have retired. Today’s agents have never seen a declining real estate market, and most have never dealt personally with a short sale. There are only seven certified default resolution specialist real estate agents in the country, and you need one of them to represent your interests through the silent minefield of the bank’s requirements.
Leslie Henderson of Chase International, www.nvshortsaleexpert.com, is Reno/Sparks’ only certified default resolution specialist. Short sales are such a specialized branch of practice that most agents without this specific training and experience fail in their attempts at short sales. Henderson interned under one of the “old timers” and learned the ropes the hard way by handling the messy and tough deals no one else wanted.
“Those older brokers are retired and gone from the business,” says Henderson. “Agents who entered the business in the ’90s have never seen a market like the ’70s until now.”
Now that foreclosures are an epidemic in Reno and Sparks, her services are in demand. “I am closing on a short sale this month for clients who came to me nine days before their foreclosure sale date,” says Henderson. “Each bank and each type of loan, FHA, VA, jumbo, etc., has its own set of guidelines for loss mitigation. If the short-sale package is not submitted with the right information on the right forms and in the right order, it goes onto the tall stack of 100-plus files that are never going to get looked at or touched.”
If that happens, you are back on Foreclosure Road. The loss-mitigation officer’s job is a revolving door—90 days is the average term—and in the short stack are the few packages from the certified default resolution specialists that are turning over every 30 days as the properties are sold. So, in order to make his bonuses, the loss mitigation guy is concentrating on those short-stack files. The files in the tall stack stay there until it’s time for foreclosure—a clerk picks them up, and that’s the only way that stack ever gets smaller.
So what’s the homeowner to do? First, the house must be listed with a real estate licensee. The banks will not consider a short sale by owner—too much potential for fraud. The package includes a letter which allows your agent to negotiate on your behalf directly with the bank and a financial worksheet showing financial hardship. The agent submits a market analysis showing what the property is currently worth. All of this has to be combined with a buyer willing and able to buy under the current market conditions. A certified default resolution specialist will have the expertise necessary to keep the deal together and get it closed in short order to keep those buyers. This is why you need a real professional and not someone who is as mystified by the current market as the pundits.
“Once the complete package is reviewed by the bank’s negotiator, the bank sends out an appraiser to confirm the value of the house,” says Henderson. “Provided the real estate agent got everything right and the value is in the right range, the escrow will close in 30 days.”
The bank has a bottom line, and it must be met.Dirty Secret No. 5: You can save your credit
Another thing the banks won’t tell you is that you can survive all of this with your good credit intact. It will cost you, but it is possible. The specialist knows how to protect you from deficiency judgments and can even tell you how to keep your good credit while undergoing a short sale. It’s a matter of making the deadlines work for you instead of against you.
Late mortgage payments are a heavy hit on your FICO score: 30 days late equals 80 points deducted from your credit score; 60 days late equals 160 points; 90 days late equals 270 points. So now your 700 credit score is around 430. There is a silver lining. Once the sale is completed, the loan is reported as satisfied and paid in full. The late payments age off your credit reports at 12 months, so if you get the information you need to do this process with an eye to the future, your credit can recover in a few years.
The default resolution specialist will explain to the homeowner how much time they’ve got in the house, when they’re going to get evicted from the house, and get the house on the market as a short sale. From there, the homeowner will go to a property management company and find a house to rent. The homeowner is going to have the money to rent and move because they won’t have gotten over their heads in credit card debt, and they’re not going to have to declare bankruptcy. Once the house is sold, they’ll be introduced to a specialist loan officer who can reconstruct their credit and get them on a time line of 18 months, 24 months, whatever time frame it takes to put them back into a position to buy. (Hopefully before 2014, when this cycle likely is over, and houses start getting expensive again).
The goal is to sell the $550,000 house (2006 value) and buy the same sized house in the same neighborhood back for $175,000 (2010 value) to keep the cycle of homeownership going. Homeowners need to have a plan, and when they have a plan and are focused, there is real hope.Dirty secret No. 6: The government can’t help
What about the bailout? Fanny Mae and Freddy Mac froze foreclosures, and Congress is spending trillions to unfreeze the credit markets. Why isn’t that going to help?
We don’t know what effect the bailout and new laws will have next year. Most of these efforts are not likely to solve a fraction of the problems they were intended to. What we do know is that if you’re in trouble today, you have likely already exhausted your assets and remaining credit hanging on this long. It’s already too late for the government to help, and you need to act now.
It is time to face facts: Regardless of anything the government does, credit is now much tighter than it has been and will stay that way for the next several years. In the ’70s, we used to say that the only people who could get a loan were the ones who didn’t need one. That’s the new reality.
Once you get on Foreclosure Road, you have only one good choice—and many, many bad ones. The key is to get informed before you act, and then act quickly and pragmatically to preserve your future—even if you lose the house you’re living in.