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New Option For Homeowners Facing Foreclosure

Source: New York Times

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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