Last Updated: July 21, 2009
The housing crisis took a breather for a bit. President Barack Obama had asked for a suspension on foreclosures. And, he got it — from November till April. But now, foreclosures are on the rise, again.
A total of 1,905,723 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,528,364 U.S. properties in the first six months of 2009, a nine percent increase in total properties from the previous six months and a nearly 15 percent increase in total properties from the first six months of 2008, according to RealtyTrac's Midyear 2009 U.S. Foreclosure Market Report. That report also showed that 1.19 percent of all U.S. housing units (one in 84) received at least one foreclosure filing in the first half of the year. Learn more about RealtyTrac's Midyear 2009 U.S Foreclosure Market Report.
"In spite of the industry-wide moratorium earlier this year, along with local, state and national legislative action and increased levels of loan modification activity, foreclosure activity continues to increase to record levels," James J. Saccacio, chief executive officer of RealtyTrac said in a statement. Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes' represent a potentially significant future risk."
If you are among those affected by the current economic crisis — perhaps you've lost your job and you're having trouble paying your bills and mortgage or perhaps you may owe more on your mortgage than your house is worth — these are anxious times. No doubt your mind is filled with questions: Can you refinance? Should you walk away from your home or should you dip into your rainy day and retirement accounts to help make ends meet? What should you do?
According to financial planning and mortgage experts the first two steps are these: Stay calm and seek qualified help. "Often homeowners are too close to the problem emotionally and do irrational things to try to save their homes," said FPA member Drew Sygit, CMPS, CMC, CRMS, CMLO, CALO, MBA, of The Lending Edge Team. "A financial planner could be a good voice of reason to counteract this issue. You want to consult with someone who will challenge your thought process and by doing so, help you come up with a better decision. Desperate times require thinking outside the box, not desperate measures."
In advance of consulting with a financial planner, Sygit says you might consider the following options.
If your home is worth less than what you owe on the mortgage, "underwater" or "upside down" as experts describe it, and you want to stay in your home, you might be eligible to refinance your loan, according to Sygit. Under President Obama's "Making Home Affordable" program, there are two options: a 125 percent refinance program (recently upped from 105 percent) and a loan modification program. With the 125 percent option, Sygit says banks will — if certain conditions are met — refinance up to 125 percent of the current appraised value of your home. This option, which is part of the Homeowner Affordability & Stabilization Program (HASP) announced February 18, 2009, requires that you have good credit, income and assets.
In addition, Sygit said your mortgage must be a "conforming" loan; it must be owned by Fannie Mae or Freddie Mac.
Sygit also noted that this option also applies to second homes and investment properties. However, no second mortgages or other debts can be rolled into this refinance program. In addition, as of May 1, 2009, lenders must abide by the Home Valuation Code of Conduct. That code is designed to enhance the independence and accuracy of the appraisal process, and provide added protections for homebuyers, mortgage investors and the housing market, according to Freddie Mac.
"Instead of refinancing under President Obama's Making Home Affordable program, you could modify your loan," Sygit said. But be forewarned, it's not always easy to do. Under this option, which is also part of HASP, the loan must have closed prior to January 1, 2009. Only your primary residence is eligible, and you must demonstrate financial hardship; however, you don't have to be behind on your mortgage payments, he said.
In addition, Sygit said your property's loan-to-value ratio doesn't matter, neither does your credit rating. The goal of a modification is to get your housing expenses — mortgage principal and interest, property taxes and property insurance (PITI) — down to 31 percent of your gross monthly income. Lenders will seek to lower your mortgage payment by reducing your interest rate in 1/8 percent increments, to a floor of 2 percent, then by extending the term of your mortgage by up to 40 years, and then by deferring part of your principal and corresponding payments for five years.
This only applies to conforming loans, those owned by Fannie Mae and Freddie Mac. Federal Housing Authority and the Veteran's Administration have their own requirements. For non-conforming loans, such as jumbo mortgages, he said lenders typically try to modify mortgages to reduce the monthly PITI as a percent of net monthly income to 50 percent or less. A detailed monthly budget with all expenses will be required.
Sygit suggests that you work with a qualified financial professional who can help you review your budget and cash flow in advance of applying to refinance or modify your loan so as to improve your odds of getting approved. "You have to present your information correctly to have a decent chance of refinancing or modifying your loan. And right now, he said banks are understaffed, undertrained and looking for reasons to turn down applicants," he said.
Sadly, there are plenty of firms taking advantage of Americans desperate to save their homes. So, before applying to refinance or modify your loan, Sygit recommends that you visit FinCEN.gov, FreddieMac.com and the U.S. Department of Housing and Urban Development websites. Those sites can help you avoid falling victim to mortgage fraud. Learn more about the government's Making Home Affordable program.
Tap Your Emergency Funds and Retirement Accounts
No doubt, in your efforts to "save your home," you'll likely consider whether to tap your rainy day fund and other accounts, including your individual retirement account (IRA) and 401(k) plans. According to Sygit, before you tap such funds, be sure to determine your "burn rate" — how much more you're spending each month than taking in. If it appears that you would exhaust all your rainy day funds within a short period of time, it might make more sense to let your home go to foreclosure. If, however, it appears that you have enough funds to cover several months of expenses comfortably, you could justify liquidating your assets to save your home. The biggest challenge in this decision process is rationally evaluating your chances of increasing your income or reducing your expenses so that your burn-rate goes to zero. Of course, you should crunch these numbers with the help of a team of financial professionals. Financial planners can help you determine the most tax-efficient way to tap your assets to create income.
According to Sygit, if you aren't eligible for the Making Home Affordable program, or your home is underwater, and you simply can't make ends meet, you will have to consider the following options: a short sale, a deed-in-lieu of foreclosure or a foreclosure. With a short sale, the lender agrees to accept less than what is owed on the house. With a deed-in-lieu of foreclosure, you would deed your property over to a bank instead of going through the foreclosure process. Of note, a foreclosure is reported on your credit report for up to 10 years and it could take up to five years before a lender might approve another mortgage for you, Sygit said. These should also be discussed with a team of professionals as there may be deficiency judgment and/or tax consequences. A financial planner is a good place to start.
As part of the evaluation process of saving your home or letting it go, Sygit recommends you evaluate your alternative housing options as soon as possible. You may find out that rent in your area is the same as your current mortgage payment. This could be another way to save your home.