This is a subject that has hit quite close to home for me. Recently, my parents underwent a financial hardship and subsequently lost their house this past year. They tried all available avenues to them to renegotiate the note, but they kept finding themselves in a Catch 22. Ultimately, after 2 years of trying to refinance, sell and proceed with so-called “work out plans” I helped them negotiate a deed in lieu of foreclosure just before a sell date was scheduled by the bank for their home in a full foreclosure.
The solution would have been a simple one, but one the bank was not willing to entertain. It seems the largest hurdle homeowner’s are struggling with is the past due deficiency that begins the foreclosure process. Lenders have a requirement that this past due balance on a mortgage is to be made whole in one payment, before they will accept any regular mortgage payments, which increases the balance overdue and the delinquency. More often than not this alone prevents homeowners from becoming current. To make smaller payments to the deficiency would result in some progress towards correcting any default by the homeowner, but this alone won’t fix the situation they may be in.
Many times the interest rate has become so formidable that what was once supposed to be an American dream has turned into a nightmare. It is common knowledge that sub prime lending has resulted in many of the foreclosures we see today. The families living in these homes simply can’t keep up with the rates their mortgage sometimes increases to. It is not without saying some responsibility does fall on the borrower, although we cannot expect them to refinance or participate in loan modifications if they could not qualify for a conventional loan in the first place. If they had questionable credit before they purchased the home, think what it looks like after several months of late payments. This disqualifies many owners from any type of loan restructuring.
What I propose is a plan that keeps the bank’s portfolio whole, while still keeping these homes occupied and out of foreclosure. A bank owned vacant house brings less money at auction than an occupied house by a private seller would on the MLS. First, we have to get away from the “all or none” standard the bank has toward past due payments. This will give many homeowners a fighting chance to restructure their lives to become and stay current. I’m not saying the bank should forgive these debts, because in life there are no handouts. Instead, they should defer the payments to the back of the note should a homeowner show real effort to correct any shortfalls. After the arrears have been addressed, we need to turn our attention to the interest rates. To protect their portfolio, banks often foreclose on non-performing loans without giving the opportunity to renegotiate new terms. The goal is to turn a noncompliant loan into a performing one. Let’s say a homeowner has a $150,000 note at an 8.75% rate. Their payment is...