Source:

Cash-strapped homeowners facing foreclosure may seek a short sale as a way out from under an otherwise bad financial situation, in which their homes are sold for less than the mortgage amount, with the balance typically forgiven by the lender.

But with short sales beyond the reach of some homeowners — they typically won’t qualify if they have a second mortgage on the home — another foreclosure alternative is emerging: “deeds in lieu of foreclosure.”

In this transaction, a homeowner simply relinquishes the property, turning over the deed to the bank, in exchange for the lender’s promise not to foreclose.  In a straight foreclosure, a lender takes legal control of the property and evicts the occupants; in deeds-in-lieu transactions, the homeowner is typically allowed to remain in the home for a short period of time after the agreement.

More borrowers will at least have the chance to consider this strategy in the coming months, as CitiMortgage, one of the nation’s biggest mortgage lenders, tests a new program in New Jersey, Texas, Florida, Illinois, Michigan and Ohio.

Citi recently agreed to give qualified borrowers six months in their homes before it takes them over. It will offer these homeowners $1,000 or more in relocation assistance, provided the property is in good condition. Previously, the bank had no formal process for serving borrowers who failed to qualify for Citi’s other foreclosure-avoidance programs like loan modification.

Citi’s new policy is similar to one announced last fall by Fannie Mae, the government-controlled mortgage company. Fannie is allowing homeowners to return the deed to their properties, then rent them back at market rates.

To qualify for the new program, Citi’s borrowers must be at least 90 days late on their mortgages and must not have a second lien on the home.

That policy may be a significant obstacle for borrowers, since many of the people facing foreclosure originally financed their homes with second mortgages — called “piggyback loans” — or borrowed against the homes’ equity after buying them.

Partly for that reason, Elizabeth Fogarty, a spokeswoman for Citi, said that the bank had only modest expectations for the test. Roughly 20,000 Citi mortgage customers in the pilot states will be eligible for a deed-in-lieu agreement, she said, and of those, about 1,000 will most likely complete the process.

As is often the case with deed-in-lieu settlements, Citi will release the borrower from all legal obligations to repay the loan.

In some states, like New York, New Jersey and Connecticut, banks can legally retain the right to pursue borrowers for the balance of the loan after a foreclosure, a short sale or a deed-in-lieu of foreclosure. That is one reason why housing advocates say borrowers should carefully weigh these transactions with the help of a lawyer or nonprofit housing counselor before proceeding.

Avoiding Bankruptcy
A key motivator for turning over a deed is to avoid having a foreclosure on your credit report.  Foreclosure says to lenders that you are a risk and make it very difficult to qualify for a mortgage loan down the road.  As is the case with a bankruptcy, you want to avoid this form of financial surrender at all costs if and wherever possible.  As an bankruptcy lawyer about the long-term ramifications of a filing on your credit report, and his or her answers will most certainly match those from any other state bankruptcy attorney: prepare for a long road back to financial stability and forget about credit for the next seven to 10 years.

Ms. Fogarty said Citi had no specific timetable for rolling out the program nationally.

Among the other major lenders, there is no formalized program for deeds-in-lieu. Bank of America, JPMorgan Chase and Wells Fargo, for instance, generally require borrowers to try a short sale before considering a deed-in-lieu transaction.

A deed-in-lieu is better for banks than a foreclosure because it reduces the company’s legal costs, and it is better for the homeowners because it is less damaging to their credit score.

Banks may also end up with homes in better condition.

J. K. Huey, a senior vice president at Wells Fargo, says his bank usually offers relocation assistance — often $1,000 to $2,500 — as long as the borrower leaves the property in move-in condition after a deed-in-lieu transaction.

“The idea is to help them transition in a way where they can keep their family intact while looking for another place to live,” Mr. Huey said. “This way, they only have to move once, as opposed to getting evicted.”

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My Take: Foreclosures from Los Angeles to New Jersey are rampant and I believe they are expected to get worse.  Every sector of the economy, from sellers of used copiers to the highest paid sex crimes lawyer, has been hammered by the economic fallout that can be directly tied to the wild and wooly days of no-doc mortgage loan approvals.  Even expensive personal injury attorneys are feeling the pinch of the ongoing crisis, and, like many small business owners out there, they are having to opt for buying used digital copier instead of that brand new Cannon imagerunner, as well as foregoing other tech upgrades in order to stay afloat.

I would imagine that if you are a divorce mediator chances are likely that you are pretty busy.  Ditto for any divorce lawyer, as foreclosures in the Garden State are also very high and reports are suggesting more couples are facing divorce over financial trauma right now more than any other issue including infidelity.

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Source: Reuters

More consumers are opting to keep their credit card payments current and let mortgage payments fall behind in an effort to create cash flow as the worst recession in decades slowly wanes, new statistic show.

The percentage of consumers delinquent on mortgages, but current on credit cards rose to 6.6 percent in the third quarter of 2009 from 6.3 percent in the previous quarter and 4.9 percent in the same quarter a year earlier, a new study developed by TransUnion showed.

The trend first emerged in the first quarter of 2008 when it was at 4.3 percent, Chicago-based TransUnion said.

Less emphasis on mortgage payments could portend higher delinquency rates and perhaps even more foreclosures. That does not bode well for the hard-hit housing market, which remains highly vulnerable to setbacks.

“This goes against conventional wisdom and that has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages,” Sean Reardon, the author of the study and a consultant in TransUnion’s analytics and decisioning services business unit, said in an interview.

By making a minimum payment on a credit card before a full mortgage payment it gives consumers monetary leeway to go about their daily activities, especially if they have lost a job.

“You cannot buy groceries with your house,” he said.

Cash is king

As more homeowners recognize falling interest rates on mortgages coupled with ongoing refinancing and mortgage modification activity, they are squeezing the life out of their Visa platinum cars and letting their South Nyack real estate mortgages lag.  That’s not the pattern of debt management traditionally recommended by financial experts who say regardless of whether you own a one-bedroom condo in Dallas or a seven acre slice of Palisades real estate, you take care of your mortgage and pay the card with the highest interest first.

The study, obtained exclusively by Reuters prior to its scheduled release, was conducted on consumers that had at least one credit card and one mortgage, and examined 30-day credit card and mortgage delinquency data between the second quarter of 2008 and the third quarter of 2009.

Conversely, the percentage of consumers who were delinquent on their credit cards and current on their mortgages decreased to 3.6 percent in the third quarter of 2009 from 4.1 percent in the first quarter of 2008.

“The ‘flip’ in payment hierarchy in the lowest scoring segment was evident earlier during the fourth quarter of 2007, compared to the first quarter of 2008 for the total market,” Reardon said.

The delinquency rate for consumers with the lowest credit scores who were delinquent on their mortgages, but current on credit cards during fourth quarter of 2007 was 19.1 percent, and rose to 29 percent in the third quarter of 2009.

In a trend similar to that of the total market, the percentage of consumers delinquent on credit cards, but current on mortgages decreased from 18.1 percent in the first quarter of 2008 to 14.5 percent in the third quarter.

Consumer caught in a conundrum

“The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market came together and redefined how consumers are managing their finances and meeting or not meeting their credit obligations,” Ezra Becker, director of consulting and strategy in TransUnion’s financial services business unit, said in the interview.

The analysis shows changing consumer preferences, he said.

“The financial services industry must recognize and adjust to the payment hierarchy shift,” he said.

In California, the percentage of consumers delinquent on mortgages, but current on their credit cards increased from 3.5 percent in the third quarter of 2007 to 10.2 percent in the third quarter of 2009. In Florida, this same variable increased from 5.1 percent to 12.4 percent.

In this same time frame, the United States increased from 4.0 percent to 6.6 percent.

In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in the third quarter of 2007 to 2.7 percent in the third quarter of 2009. In Florida, this variable declined from 5.0 percent to 3.9 percent, the report showed.

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My Take: I’m not surprised to hear more homeowners are opting to let their mortgages fall behind and keep up with credit card payments instead.  After all, under the governments ongoing mortgage modification plans there is help for homeowners struggling to make their monthly payments, but so far, despite having received federal bail outs, the banks nor the credit card companies have yet to offer homeowners a credit card payment “do over.”

The days are long gone when you can walk into a bank and lay out your mortgage equity for cash.  Spending on upgrades, like a new mahogany front entry door or a bathroom remodel have had to hold for many homeowners in trouble.  Buying new windows, wood entry doors, putting a new roof on, even fixing leaking pipes have all been considered luxury expenses throughout this housing crisis, and there is little real relief insight given the state of the country’s unemployment rates.  Strapped homeowners also have had to do some crafty shopping around for a cheaper car insurance quote in these hard times, opting in many cases for the minimum coverage to get a hold of a few extra bucks each month.

That reminds me, I love the fact that there are now so many Web sites out there that make it easier than ever to get an instant car insurance quote right over the Internet with a lot of comparables to consider.

You may not want to buy a house after all the real estate drama we’ve seen over the last three years.  And, if you have a home that’s been on the market and not selling, it’s too soon to tell whether the wiser move would be to offer those homes for rent or start lowering the price.

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Legal Links

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