If you do not qualify for a loan modification, and foreclosure seems unavoidable, there are steps you can take to make the most of a bad situation. One of these options is arranging with your lender for a Deed in Lieu of Foreclosure.
What does this mean?
It means you hand over the deed, or ownership, of your house to the lender in exchange of clearing your debt. The homeowner loses his home but is left without a debt while the lender takes immediate control of the house.
What advantages does this option have?
In certain circumstances a Deed in Lieu of Foreclosure can have significant advantages for both the lender and the buyer.
1) The lender can take immediate control over the property. A much more efficient method than foreclosure proceedings that can take years to finish.
2) The borrower foregoes his home but is left without any debt.
3) Lenders can save themselves a lot of money in court expenses, time and other complications if they avoid a typical repossession procedure.
4) Borrowers that avoid a foreclosure will remove the stain on their record and in some cases avoid bankruptcy.
What are the requirements for a Deed in Lieu of Foreclosure to be carried out?
1) The market value of the home must be less than the current balance of the mortgage.
2) There must be no third party credits secured by the home, like a second mortgage or a secured car loan.
Although it might seem counterintuitive for a homeowner to let his home, probably his largest investment, go without anything to show for it, it can be a much better alternative than a long and painful foreclosure. Borrowers don’t have to see their credit score hurt and can start again elsewhere, while lenders can cut their losses and try to make the most of a bad loan without having to continue spending money and resources.
In what circumstances should a homeowner think about handing a Deed in Lieu of Foreclosure?
Obviously, homeowners that are going through financial difficulties and cannot afford their monthly mortgage payments. However if they still have some sort of income then they may well qualify for a home modification or some other option. This path is more suited for homeowners that either cannot afford any kind of loan modification or feel that their home is too underwater, worth less than the mortgage balance, to be worth saving.
How is it done?
Both parties must agree to sign an Agreement in Lieu of Foreclosure. This document transfers ownership to the lender. In some cases the homeowner might pay a certain amount of money to reduce the loan and make sure her credit score is not affected. Once the document is signed the lender will issue a waiver to deficiency judgment, which will be used if the sale of the house is below the value of the mortgage. After this an escrow service executes the agreement; releasing both the lender and the borrower from their mortgage contract.
Related posts:
The Mortgage Crisis or Credit Crisis as many are more accurately describing it has left millions of Americans (and Earthlings worldwide for that matter) in or at the brink of foreclosure. Banks and Government have launched an ongoing set of increasingly aggressive programs to solve this terrible problem.
Not all the help is coming from the Government either. One association of banks which call themselves the Hope Now Alliance assures they have helped keep over 2 million troubled borrowers in their homes by changing the terms of their loans.
Similarly the Government is proud to say they have surpassed their short term goal of 500,000 trial loan modifications nearly a month before schedule. If you hear the sales spiel for these loan modifications it sounds like mortgage paradise; reduced interest rates to zero, whole chunks of the principal balance wiped out and it goes on and on. To be fair some borrowers have enjoyed these excellent deals . What is also true is that many loan modifications simply moved payments to the end of the loan which provided a kick the can down the road solution. Regulators report that half of these loan modifications are defaulting six months later.
The trouble with loan modifications is that it is not easy to qualify to them. The paperwork is enough to drive you crazy and the red tape is so slow you want to scream, especially when foreclosure proceedings continue despite your loan modification is being in process.
Why are loan modifications so slow?
Well there are many answers to this question. We are going to look at three basic answers to this question.
1) Mortgages are not always owned by the bank or institution you bought them from. Banks often simply work as middle men, servicing mortgages for investors. They sell the product, collect payments and answer any questions. IndyMac for instance manages 650,000 loans but only owns 7% of them. The other 93% is owned by a variety of investors ranging from private individuals to pension funds.
This means that when banks don’t own a loan they must ask the investors that own them if they are willing to modify the loan. It is easy to imagine how much paperwork and time dealing with the borrower, getting their details, studying each specific case, then finding the real owner of the loan and asking them if they mind losing some money on their loan is going to take.
2) Banks aren’t designed to modify loans but to sell them. Banks make money by selling loans and mortgages. Modifying them is, as we mentioned above, a slow and time consuming process that doesn’t make money. The government has started to fund the loan modification process which has helped to speed things up, but banks still have to redesign themselves to deal appropriately with the millions of borrowers in trouble.
3) Foreclosures are often a better deal for the lenders. Loan modifications are a hard bullet to bite for lenders. You are asking them to accept a certain loss if they modify the loan by reducing interest rates or “forgiving” a chunk of the balance when they can also take their chances with a foreclosure which might actually make them a profit. In some cases loan modifications are profitable for both the lender and the borrower and in those cases paperwork does seem to go faster.
Related posts:
Last Thursday the big news was Obama’s Loan Modification program, Making Home Affordable. The first target the program set out for itself, reaching 500,000 trial loan modifications by November was reached nearly a month early.
Critics stated that the target was of little importance in the big picture of things with foreclosures continuing to affect more and more homeowners. Mark Zandi, chief economist for Moody’s Economy.com said the help provided by HAMP was a help on the margin. “But it is not going to end the foreclosure crisis”.
So what should we think of Obama’s HAMP? Is it a success or failure story?
The Good.
Reaching the target was no mean feat. The first months were painfully slow in reaping loan modifications and many did not think even this first target would be met. The fact that it was is proof of Obama’s administration skill at cajoling and bullying banks and providers into meeting their expectations.
Whatever we think of the “Big Picture” 500,000 families have lower monthly mortgage payments, that has to be good news, right?
According to Timothy F. Geithner mortgage payments are now being lowered faster than homes are being sold in foreclosure proceedings and 40 percent of eligible homeowners (1.2 million of them) have been helped. Here the figures vary, other put this figure at 16% of eligible homeowners, but that just represents differences on the definition of what an eligible homeowner it.
The Bad.
Economists say the program and its current success will not be enough to prevent many millions from losing their homes before the Great Recession ends.
By Mr. Zandi’s calculations from this year to the next over 4 million households will go through foreclosure or short sales.
The 500,000 loan modifications are only trial loan modifications. If the homeowners fail to pay one of the first 3 months in the trial, the modification is void. Even if the homeowner completes the trial period they then have to supply more paperwork which opens the doors for loans not being modified due to bureaucratic slips.
We don’t know how many of the loan modifications actually modified the principal balance of the loan and how many simply lengthened the loan or reduced the interest rate to reduce mortgage payments. Reducing the principle is an important factor if you want to reduce the rates of re-default on mortgage payments.
The problem HAMP was designed to attack, subprime mortgages that cannot benefit from current low interest rates because the value of the home has dropped is no longer the main type of mortgage going through foreclosure. It is not only subprime mortgage that are suffering now. Prime mortgages with 30 year fixed interest at low interest rates are also defaulting because of the increase in unemployment. Loan modifications cannot help much on good mortgages with owners that cannot afford any payment because they are out of work.
So whatever your view is, this issue is still far from being solved and playing with loans is just not going to fix it. The question is do you try to use tax dollars to bail people out of the mess or just let the economy weed itself out of bad loans?
Related posts:
An increasingly popular alternative to foreclosure is the loan modification, an agreement where the bank and borrowers reduce the cost of the loan for a period of time to allow payments to be made on time. A loan modification is much like a mortgage refinance in that the objective is to find you a more affordable mortgage payment for your financial situation. Refinancing your existing mortgage to obtain a more affordable mortgage payment could still be an option. However loan modification is often the best solution for the homeowner that has incurred a financial hardship that prevents other mortgage financing or payment options. The purpose of a loan modification is to help make the loan more affordable to the borrower.
A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford. Loan modification is a relatively new term for most people, but with the current market conditions and mortgage crisis, it is becoming increasingly popular. When possible, loan modification is a preferable alternative to bankruptcy. Additionally, loan modification is a more fiscally attractive solution for any lender.
Loan modification programs are typically designed for homeowners who are having difficulty making their mortgage payment, but who can’t qualify to refinance their mortgage. Loan modification may include reducing the interest rate, extending the term of the loan from 30 to 40 years, or adding missed payments to loan balance. Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances. Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are being modified.
The lenders motivation in modifying a loan is that this is a better alternative to foreclosure. However, homeowners today are under the false impression that they cannot apply for a home loan modification if they are not in foreclosure. A loan modification allows the lender to transform a non-performing asset into a performing one and avoid the cost of foreclosure. The bottom line is that a loan modification is intended to reduce the payments for the borrower, make it more affordable, and reduce the risk that the homeowner will default on the loan.
So here again, loan modification is preferable, in that a renegotiated loan agreement allows you to keep paying down your monthly mortgage while maintaining your credit rating. Whether it’s reducing the borrower’s note rate or monthly payment, or extending the maturity date, a loan modification is a possible option for a borrower in default.
Understanding the plight facing homeowners today and the very real threat of foreclosure, assistance during the process of applying for a loan modification is essential. It is important to make the lender work with the homeowner to provide the best possible solution before it is too late. In the final analysis, loan modification is usually preferable to filing for bankruptcy and is a fundamentally sounder strategy than defaulting on the entire mortgage and creating costly foreclosure proceedings.
