Foreclosures, Loan Modifications, Short Sales and Deeds in Lieu of Foreclosure
Foreclosures, loan modifications, short sales and deeds in lieu of foreclosure are big business today. New laws are constantly being enacted to address the recent downturn in the real estate market. For example, new federal loan programs such has HAMP (enacted pursuant to the Making Homes Affordable Act) are making more loans available to people who reside in their homes and meet certain income and expense requirements. Courts are enacting new procedures to deal with foreclosures because their numbers have increased so significantly. Also, laws have recently been passed to protect homeowners from non-lawyers who promise to secure modifications or help them avoid foreclosure. Now homeowners have the right to know the charges for these services up front and only have to pay for these services once they accept a loan modification.
Distressed property owners have many options. The five main choices are foreclosure, loan modification, short sale, deed in lieu of foreclosure and bankruptcy.
1. Foreclosures: If you are served with a Foreclosure Action, you generally have twenty days to respond to the foreclosure complaint. You should contact an attorney immediately so they can discuss your options and formulate a strategy to minimize your exposure to liability. An attorney can also evaluate the foreclosure complaint for any defects in the lender’s pleadings. Many counties in Florida now require that before a residential property can be sold, the parties must participate in mediation. Often, financial counseling is required before the mediation can take place. The best chance of negotiating a settlement at mediation is to make sure your lender has ALL of the documentation it will require to determine if you quality for a modification of your existing loan. Often, it is helpful to have an attorney attend mediation with you so that you can get the most benefit from the process.
2. Loan Modifications: You do not need to wait until you are behind in your mortgage to submit a request for a loan modification. You should submit such a request as soon as you determine that you may not be able to make your scheduled payments. The loan modification process often takes time. Sometimes lenders start foreclosure proceedings while modification requests are still pending. This is because of the compartmentalization of the lender, i.e. one department may not know what the other is doing. Do not make the mistake of thinking that you need not respond to a foreclosure because you have a pending loan modification request. That mistake has been extremely costly to many people.
3. Short Sale: A short sale is when an owner sells a property for less than the total amount of the outstanding mortgages on the property. To do this, all mortgage holders must approve the sale because they will be getting less at closing than what they are owed to satisfy the mortgage. Like the deed in lieu of foreclosure discussed below, if you are going through the short sale process, you need to protect yourself from the lender pursing you for the difference between the money it receives at closing and the total amount due under the note. Buyers and sellers of short sale properties should retain attorneys to represent them at closing. Sellers need to protect themselves from liability and Buyers need to insure they are getting clear title. Issues are often overlooked when an attorney is not retained to investigate other looming liabilities, such as past due real estate property taxes and Homeowners’ Association dues. Many people do not realize that a closing agent does not represent either party and is not able to give legal advise regarding these issues.
4. Deed in Lieu of Foreclosure: A deed in lieu of foreclosure simply means that the lender agrees to take back title to the property without going through a foreclosure. A deed in lieu of foreclosure can be an alternative to foreclosure for many distressed property owners. It may not be a viable alternative, however, if there is a second mortgage on the property by a lender different from the lender holding the first mortgage. This is because a deed in lieu of foreclosure does not wipe out the second mortgage the same way a foreclosure does. A deed in lieu of foreclosure can be a complicated process to navigate. There also are risks to consider and steps to take when pursuing a deed in lieu of foreclosure. For example, you want to negotiate a waiver of any shortage or deficiency, if you can. This means that the lender will not be able to hold you liable for the difference between the sales price and the price the lender sells the property for after it takes back title. Such a waiver should be contained within the terms of a settlement agreement between the lender and the property owner. This settlement agreement resolves the issues pertaining to liability and the debt.
5. Bankruptcy: Bankruptcy may be the best option if you have other substantial debt and cannot keep up with the monthly payments on that debt. An attorney should look at bankruptcy as the last resort. Many times there are ways to resolve your financial issues without having to file bankruptcy. An attorney should work with you to explore all the other possible alternatives before pursuing bankruptcy. However, in some circumstances, bankruptcy is the best option for certain individuals.