Loan Modification Still the Best Option for Avoiding Foreclosure

According to the latest data coming out of the US housing market, foreclosures have risen to record figures in the first quarter of 2009. More than 800,000 properties received a default or auction notice which is a 24% rise from last year. With industry watchers saying foreclosures have not peaked as yet in the nation, more and more lenders are likely to file foreclosure notices in the coming months.
The numbers are extremely disturbing especially since a number of steps had been announced by the Obama administration since the start of the year including the much awaited mortgage stimulus plan announced in March of this year.
It would seem though that the measures so far have not been able to stem the number of foreclosures being filed every month. The main concern for homeowners has been the uncertainty they face on the job front.
Most mortgage borrowers feel that job security is the number one priority for them as without that, they would not be able to pay their monthly mortgages on time. A lot of people are ready to take a pay cut in their respective jobs rather than losing the job completely. In the given scenario, most analysts believe that a home loan modification still remains the best option for homeowners in order to avoid foreclosure.
As long as the homeowner still has a job, they should immediately contact a loan modification consultant and apply to get their mortgages modified before it is too late. If the homeowner has indeed been given a pay cut in their jobs, then it is even more important you apply for a loan modification as it would be easier to convince the banks about the difficulty to pay the monthly mortgage payments. At the same time, the fact that the homeowner still has a job, despite a pay cut, would mean the banks are more likely to modify their existing mortgages as the homeowner would be in a position to pay the monthly mortgages under the new payment plan.

The two main criteria for the mortgage lenders to approve a loan modification is whether there is a genuine difficulty or hardship in meeting the current payment plans and also the ability to pay the modified mortgage payment.
Banks are extremely cautious to make sure the homeowners would be able to meet the new mortgage payments if they approve their loan modification application.
That is the reason why homeowners must make sure they apply right away especially if they are at risk of losing their jobs.
Of course, in special cases, even borrowers who have lost their jobs and are collecting unemployment income can get their loan modified. For this you need to make sure you contact an experienced loan modification consultant who can negotiate with the bank on your behalf. The important thing though is you act fast if you really want to save your home from foreclosure.

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How Does a "Deed in Lieu of Foreclosure" Work?

A "Deed in Lieu of Foreclosure" is when a lender accepts a deed to the homeowner's property in foreclosure instead of continuing the foreclosure process and incurring more expenses to get the deed anyway. However, this does not mean the homeowner is no longer responsible for a loan deficit if the lender sells the home for less money than is owed.

This legal transaction starts after the homeowner has fallen behind on his loan payments and is in foreclosure. Even if the foreclosure has not started yet, the lender can be approached and asked if they will accept a "deed in lieu of" continuing into the foreclosure process.
Sometimes the lenders regulations require the homeowner to be behind on his payments before they will consider accepting the deed, usually 90 days in judicial foreclosure states and 30 days in non-judicial states.
Unfortunately the homeowner is, or shortly will be inundated by people trying to help with his foreclosure because he has become part of the public record and usually he is getting information from well-meaning but uninformed people.
However, he will be set upon by professionals looking to sell him foreclosure services or take the equity from his home by buying his home very inexpensively.
As soon as the homeowner notifies the lender of his impending problem or when he is 30 days late on his mortgage payment, the lender orders a BPO (Broker's Price Opinion) to determine its market value.
With this information the lender can immediately determine if he wants to take the home at the foreclosure auction, take a "deed in lieu of" or work with a loan modification or forbearance agreement to stop the pending foreclosure.
The lender will make a purely financial determination about what is best for the lender, not the homeowner. By taking the home back though the foreclosure sale, there are higher legal costs, extended loss of interest on the loan, real estate market risk, carrying and closing costs, and increased reserve requirements for the Federal Reserve.
However, if there are other open liens on the property, the lender will have to get the junior liens to assign them to the primary lender or extinguish them so they don't become the burden of the first mortgage lender.
In many cases it is simpler to go through the foreclosure process to extinguish these junior liens. The lender determines if it is quicker to accept the "deed in lieu of" or continue with the foreclosure and sale.
The lender may take the deed from the homeowner and continue the foreclosure anyway for the reasons mentioned above. In this case there is no advantage for the homeowner to give the lender the deed, especially if the lender requires the homeowner to sign a personal note for the potential deficit that the lender may incur when he sells the property.
It is not entirely uncommon for a homeowner to have junior liens that are larger than the first mortgage and in these cases, the primary lender must continue the foreclosure so the junior liens either buy him out or have their interest in the property extinguished at the auction.
If the lender agrees to accept a deed in lieu of foreclosure, the responsibility for the mortgage deficit is not finished.
The lender generally has the homeowner sign an Acceptance Agreement as well as a new deed. This agreement will stipulate that if the lender sells or transfers the property for less than what is owed on the loan (including all penalties, interest, and attorneys' fees), the guarantor of the loan (usually the homeowner) will owe any deficiency.
This deficiency amount can then be pursued in the courts as a deficiency judgment or the lender can issue the homeowner an IRS Form 1099. In this latter case the deficit becomes "Phantom Income" to the homeowner.
Federal legislation enacted in December 2007 now allows the homeowner to avoid income taxes on this phantom income under certain strict circumstances.
So is a "deed in lieu of" an ideal solution for a homeowner in foreclosure?
The answer is clearly "no" since very little is accomplished by the deed transfer because the homeowner or guarantor, is still responsible for any loan deficiency after the sale. If the homeowner does nothing, he will not have to sign the Acceptance Agreement.
By not signing this agreement, the homeowner will not be opening himself to even further liability.
The terms of the Acceptance Agreement should release the homeowner (guarantor) from future liability (i.e. deficiency amount).
The bottom line is that if the "deed in lieu of" isn't a better solution for the lender, the lender has no motivation to take back the deed.
If the lender readily takes back the deed, the homeowner should be concerned there may be substantial equity in the property that the lender will receive "free and clear".
If there are additional liens on the home, the lender does not need the deed since he has to complete the foreclosure action to extinguish them.
In summary, it is a best questionable whether it makes economic sense to give back a "deed in lieu of" unless the Acceptance Agreement clearly stipulates that the homeowner does not have an obligation for the deficiency amount.
You should not sign any documents from the lender or anyone else without having an attorney review and approve your signing.

Author: Dave Dinkel

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