Sunday, January 31, 2010

Foreclosure defense preparations

Half million dollar house in Salinas, Californ...Image via Wikipedia

Before you can even plan your foreclosure defense, you need to tabulate your assets, your strengths, your weaknesses, and decide on the goal of your defense.

First, what stage of the foreclosure process are you at? (See Six stages of Foreclosure Process) The earlier you are, the better. Preferably, you're still at stage 1, or the hypothetical stage 0, where you know you will not be able to pay the next payment, but it's NOT late yet. The later you are, the worse your options. Here are the stages again:

0) Normal, all payments up to date
1) Pre-foreclosure, some payments are late
2) Foreclosure notice, or "notice of default". Now clock starts ticking
3) Reinstatement period, catch up on payments and penalties and all is forgiven
4) Auction / Sale, house is no longer yours, and you are really in deep trouble
5) Redemption period, pay off the entire loan and you can still have the house back
6) Eviction, where you get tossed out to the sidewalk with all of your belongings

Second, gather every single piece of related documents you have related to your property and the lender. Some of them are as follows:

* mortage, deed of trust, contract for deed, and actual deed, and all related documents
* any modifcaitons to mortgage or promissory note
* every bit of correspondence btween you and the lender (or their reps, such as attorneys)
* actual notice of deault, AND copies of the publication in local papers, as per your local laws
* if already sold, copy of sheriff's deed or trustee's deed (you need to know the terms and redemption period, if any)
* cancelled checks and/or bank statements (proves your payments did go out, and got cashed)
* if you try to sell the property, get listing agreement, actual copy of listing, marketing material, and other stuff related to attempts to sell your house (including log sheet of your agent trying to show your house to prospective buyers)
* current appraisal, even if you don't really plan to sell (you can use this to negotiate loan mod and short sale)
* phone log of calls between you and the lender's reps, put down date/time, and topic at the minimum

Third, knowing what options you have:

* you can borrow from friends and relatives and retirement accounts to catch up on your payments and penalties, and get the loan reinstated (takes time)
* you can declare bankruptcy, but it only buys you time, and unless you have a good bankruptcy attorney it may not buy much time at all (buys some time)
* you can negotiate for forbearance, which basically is reinstatement, but as install payment instead of lump sum (takes time)
* you can negotiate for a loan modification, to reduce the principal owed and interest rates, thus lowering monthly payments (takes time)
* you can refinance the house, which is basically get a NEW loan to pay off the old one, and hopefully the new loan you can live with (takes time)
* you can get a reverse mortgage if you have a LOT of equity in the house and don't plan to pass it on to others (takes a little time)
* you can sell the house, if you have enough equity (takes time, and finding a good agent)
* you can short-sell the house, if you're "underwater" in the loan (i.e. you owe more than the house is worth) (also takes time)
* you can deed the house back to the bank, if they will take it, in lieu of the mortgage (takes time as they need to evaluate proposal)
* finally, you can just "walk away", live for free, and move out before eviction (your credit is pretty much ruined)

As you can see, everything here takes time. So next step is, how much time do you have left?

Fourth, how much time do you really have for these options?

* does your jurisdiction have a reinstatement period? if so, how long? (i.e. how much time after notice of default, but before the foreclosure auction/sale do you have, to catch up with your loan and penalties to get the loan reinstated)

* does your jurisdiction have a redemption period? if so, how long? (i.e. how much time AFTER the auction/sale do you have to redeem the loan and keep the house?)

* how long after the sale do you have to move out? This is important in areas with NO redemption period at all. Will the new owner be able to evict you the next day, or do you have some time to move out?

You may want to put down all the important dates, such as the date of the foreclosure notice, and the dates you see above, on a calendar. These are very important deadlines, as time limits your available options.

Fifth, what delaying tactics can you use to buy more time? IGNORING the problem is NOT an option.

* Did the lender notify you of foreclosure through all the ways as spelled out in the mortgage / promissory note, and applicable laws? If they did not, you may be able to file a suit to slow them down.

* Ask the lender to "produce the note". If they can't produce the note, and remember, notes are often traded between lenders and banks, so the current collector may not be the company you started with, and they may not actually have the note, thus they can't really collect/foreclose without it. This may buy you a few days, even a few weeks.

* go over every single bit of your foreclosure notice and paperwork, and compare it against local laws. Any mistake can be capitalized upon.

One example given in "Foreclosure Defense for Dummies" was a case in Michigan: The couple was about to move out in advance of eviction at the end of 6 month redemption period, when they found out the foreclosure process was invalid, because their property was 3.3 acres, and redemption period for properties larger than 3 acres is TWELVE months, not SIX! So the forecloser would have to start ALL OVER, refile the paperwork, and restart the clock at ZERO for 12 months. They would not have found out had not someone else looked over their paperwork! Eventually the lender accepted a short sale.

* Negotiate with the representative at your lender, local office. You may be able to get a payment plan in place for forebearance, or just a few days to a few weeks before they actually file the notice of default.

Knowing your options is very important, as it determines what you can do. Now that you've gathered all your information, and evaluated your strength and weaknesses, you have to decide on whether to keep the house, delay and buy time for something else, or just forget it. So what should you choose? Let's discuss each one. Keep in mind that, that for most people in selling the house is the best option. By trading down, or even go rent instead of own, you may be able to live within your means.

* If your financial setback is temporary, and you can very soon get back to making payments, then you should go for loan modification, reinstatement, or forbearance. You should also borrow from friends and family for the payment and pay them back when possible, as that's the quickest way to raise money without resorting to high-interest loans and such.

* If you have a decent amount of equity in the house, and you can no longer afford the monthly mortage payments (perhaps you lost your job) and you can't refinance or get a loan mod low enough, or you don't qualify for any, then you should sell the house, and use the money to pick up a smaller house that you CAN afford making the montly payments. If you are older (over 65, generally), you may consider a reverse mortgage.

* If you have little or zero or NEGATIVE equity in the house, you really have a problem. You have to find out whether your jurisfiction allows for "deficiency judgments". Basically, you stop making payments, and live in the house for free until just before they evict you. The money you don't pay stays in the bank and will be used for other things. Deficiency judgment means if the house did not sell for enough to pay off the lien against it, the lender can come after you for the difference. So don't do that if your jurisdiction have it, and go for a short sale or deed back instead.

* If you are simply unsure of your situation, then you need to buy time with the delaying tactics available. Just remember, stay on the LEGAL side. Hiding will NOT help, as they really just need to prove that they had ATTEMPTED to notify you, such as register mail and such. If you refuse to pick up the letter, that's YOUR problem.

* Ultimately, you can declare bankruptcy, chapter 7 (liquidation), and walk away from it all. However, that has VERY drastic consequences and only consider that as your FINAL option.

Again, you should consult a foreclosure specialist / attorney in your area who can help you evaluate your options. Spend a few hours and several hundred dollars to evaluate your situation and your options with a true professional. Just don't pay any one who promises to "help".

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