What Can You Do If You Fear Foreclosure?

• • Check your eligibility for assistance under one of several government programs.
• • Negotiate with the lender.
• • Reinstate the existing loan by making up the missed payments, plus costs and interest.
• • Refinance the entire loan.
• • Arrange a short sale or deed in lieu of foreclosure.
• • Arrange a reverse mortgage if you have enough equity and are 62 or over.
• • Delay the foreclosure sale by filing for Chapter 7 or Chapter 13 bankruptcy.
• • Fight the foreclosure in court and either stop or delay it.
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Reinstate Your Mortgage

If you have enough cash, you can “reinstate” your mortgage by making up all the missed payments plus fees and interest the lender charges you.  In New York, you will have between 20 and 30 days, after the lender gives you notice that the foreclosure is beginning, in which you have a legal right to reinstate the loan. 

If you have enough money to be considering reinstatement, you can probably also negotiate something with the lender.  Keep in mind that most lenders don’t want to foreclose – it’s a hassle for them, especially these days when house prices have fallen and banks don’t want to be saddled with real estate that may be hard to sell.

Negotiate a Workout

You may be able to get:

• • Temporary relief form having to make your monthly payments (forbearance)
• • A plan to make up your missed payments (at the end of your mortgage or on top of your current payments within a specified period of time)
• • A lower interest rate – and as a result, lower monthly payments, or
• • A reduction in your principal loan balance.
• You may have even more workout options available to you if your loan is owned, insured, or guaranteed by a government agency such as Freddie Mac, Fannie Mae, Federal Housing Administration, HUD, VA, or the Rural Housing Service. 
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  Refinance
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• If you can refinance at a better rate and pay off your old loan, you can start fresh.  Unfortunately, refinancing is tough these days unless you have equity in your house and the home value curve in your community is trending up rather than down.  Of course, if your mortgage is owned or controlled (through securitization) by Fannie Mae or Freddie Mac and you qualify for a refinance under the Home Affordable Refinance program, your refinancing worries are over. 
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  The Hope for Homeowners Act of 200 provided massive funding for the purpose of converting eligible variable-rate mortgages into 30-year fixed loans insured by the Federal Housing Administration.  However, whether or not you will be able to refinance your loan under this program will depend on your lender – for whom the program is completely voluntary.  And there’s the rub.  In order for you to get refinancing under this program, your lender must agree to cash out the existing loan at 90% of the home’s current appraised value.  For example, if your loan is for $300,000 and an appraisal puts the home’s value at $200,000, your lender must agree to cash out the loan for $180,000 (90% of the value).
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  Why would a lender voluntarily reduce the size of the loan? The idea is that the lender will be better off cashing out your loan at 90% of the its appraised value rather than having to go through the foreclosure process, which may in the end generate even a larger loss.  Also, an amendment to the Making Home Affordable program and legislation pending in Congress would both provide incentives for lenders to participate in the this program. 
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  File for Chapter 13 Bankruptcy
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  In this kind of bankruptcy, you come up with a plan for making your regular monthly payments and paying off the arrears.  If the bankruptcy court approves your plan, you’ll have three to five years to make the payments.  Chapter 13 bankruptcy also reduces or eliminates your total debt load, making your mortgage more affordable in terms of your overall budget.  In some situations, you can get rid of a second or third mortgage entirely, reduce a first mortgage on a vacation or rental home to the market value of the house, and even reduce its interest rate on your first mortgage to 1.5 points above primate rate. 
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  File for Chapter 7 Bankruptcy
  
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  If you are current on your mortgage (or can get current in a hurry) but have no room in your budget to continue making your payments, filing for Chapter 7 bankruptcy can make your mortgage more affordable by reducing your total debt load – and so help to prevent foreclosure in the long run.  Chapter 7 bankruptcy is quick (about three months).  Chapter 7 bankruptcy typically will wipe out your unsecured debt – for example, credit cards, personal loans, medical debts, and most money judgments.  This will free up whatever income you were using to pay down those debts so you can put it toward your mortgage payments. 
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  Even if you decided to leave your house, bankruptcy can be of great assistance in keeping you in your home for few extra months free of charge, and giving you a fresh start by wiping out liabilities arising from you mortgages or the foreclosure itself. 
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  Despite these benefits, Chapter 7 bankruptcy may not be appropriate for you.  For example, you may have more equity in your house than you can protect (exempt) in your bankruptcy, which means the bankruptcy would trigger an involuntary sale of your home. 
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  Take Out a Reverse Mortgage
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  A reverse mortgage is a way to tap into the equity of your home without selling the house.  You get money from a lender and generally don’t need to pay it back as long as you live in the house.  The loan must be repaid only if you sell your house or, after your death, when the house is sold and the lender is repaid from the proceeds. 
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  You’ll be able to get a reverse mortgage (also called a home equity conversion mortgage) if you have substantial equity and are over age 62.  These mortgages are heavily regulated by the Federal Trade Commission and can provide a safe approach to preventing foreclosure and preserving your equity for your own needs. 
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  Reverse mortgages, because they take part or all of your equity, leave less value for you to pass on at your death.  Also, it may be harder to obtain a reverse mortgage in a time of rapidly decreasing property values because the reverse mortgage lender, like everyone else, will be uncertain about the amount of equity you have in the property. 
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  Finally, even though you don’t have to make payments on the reverse mortgage, you still may be responsible for paying the property taxes.  This means that people on fixed incomes are at risk of losing their homes under a reverse mortgage that doesn’t provide for payment of the taxes by the reverse mortgage owner.
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  Fight the Foreclosure in Court
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  If you can show that the foreclosing party violated New York’s procedural rules for foreclosures or the terms of your mortgage agreement, you might be able to derail the foreclosure, at least temporarily.  An increasing number of bankruptcy courts are requiring foreclosing parties to present documentary evidence of ownership and authority for bringing the foreclosure action before letting the foreclosure proceed. 
  Because of the way mortgages have been sold and resold in recent years, documentary evidence of ownership is often either missing or not available when the court is reviewing the foreclosure.  Violations of federal fair lending rules and other federal and state laws regarding consumer transactions may also provide protection against foreclosure. 
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  Give Up Your House
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  For some people, it makes economic sense to give up the house and move on.  If so, there are several ways to say goodbye to it; you’ll want to choose the method that causes the least financial and emotional upset to you and your family. 
• Walk Away
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  If you have only a first mortgage, you may want to simply leave.  But you’ll want to do this only if the lender cannot sue you if, after the foreclosure sale, the mortgage still hasn’t been paid off.  However, in New York, a deficiency judgment is allowed if the homeowner is personally served or appears in the lawsuit.  The amount is the amount of the debt less the higher of the fair market value or the sales price. 
  If you have a second or third mortgage, walking away usually won’t get you off the book for those debts – or, in many cases, for the tax on the amount the lender writes off. 
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  Arrange a “Short Sale” Without Foreclosure
• You can arrange with your lender to sell the house, without foreclosure, for less than you owe on the loan.  This is called a short sale.  In New York, which allows the lender to sue you if the house doesn’t sell for a high enough price to pay off your mortgage, a short sale can be a good idea, but only if you get your lender to agree (in writing) to let you off the hook.
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  If you have a second or third mortgage, you’ll also have to get those lenders’ permission, which may be next to impossible given that they won’t get anything form the sale.  Without permission from these additional mortgage holders, a sale of any kind won’t be possible in nearly all cases because these unpaid liens would remain on the title. 
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  Some people prefer short sales to foreclosures (and to bankruptcy) because the of conventional wisdom that a short sale will have a less negative impact on your credit score. 
  
• Hand Over the House Without Foreclosure
  
• You may be able to get your lender to let you deed the property over so that no foreclosure is necessary; this is called signing a “deed in lieu of foreclosure.” But before you go this route, you’ll want to have an agreement (in writing) that the lender won’t go after you for any deficiency that remains after the house is sold.  And once again, this remedy probably won’t be available if there are second or third mortgages.  As with short sales, some believe that a deed in lieu of foreclosure will be better for your credit than a foreclosure or bankruptcy.