Protection for Your Home During the Financial Crisis
By: Alex M. Rechenmacher

With an economy that is as difficult as it is unpredictable, many have found themselves under great financial strain the last two years. While many families may be often overwhelmed by debt, it is important to understand your options, and to react quickly to the problems that can face your own budget.

Understand Your Options to Prevent Foreclosure or Judgment

Paying off and reinstating your mortgage might not be the only way out of having missed payments on a mortgage. The financial crisis isn’t just hurting consumers; it is also hurting the lenders, who have shifted a large amount of their resources from collection efforts to simply mitigating their losses. This is truly a change in the marketplace. During this unprecedented crisis, lenders have developed new responses to reduce their losses and remove bad accounts from their records. Pursuing a foreclosure costs unrecoverable money and time.

Keeping Your Home – “Retention” Options

Homeowners worried about their making their mortgage payments, but truly want to keep their home have three options generally open to them. First, the bank or servicing agent may be willing to work out a repayment plan on the deficiency that is practical for the homeowner and acceptable to the bank. Second, the two sides can enter into a written agreement (known as “forbearance”) which reduces or suspends payments for a period of time, then resumes payment at a “catch up” rate later. Loan modification is the third option, where the bank or servicer agrees to change the terms of the loan itself (such as interest rate, structure or principal), and is most preferable if financial hardship is expected to be long-term. Each of these options depends upon the homeowner’s financial situation and the bank’s willingness to negotiate, but all three options should be considered by homeowners serious about keeping their homes and who can truly meet the terms of the agreement they work out.

The “Non-Retention” Options – Letting Go of Your Home

Three more options might be available if a homeowner is willing to lose their home during the process of eliminating their mortgage debts. First, a pre-foreclosure sale of the home is the most preferable for a homeowner interested in maintaining a good credit score. Homeowners can sell their home and use the proceeds to pay off the bank. Second, homeowners who are “upside down” on their mortgage (the outstanding principal is more than the value of the home) have been on the rise with the drop in real estate value, and consequently many more banks are seeing requests for a “short sale”. Like the pre-foreclosure sale, a short sale allows the sale of a home to satisfy your debt to the bank, but the bank absorbs a loss as a result. Finally, the bank may accept a “deed-in-lieu” of foreclosure, simply accepting the title to the home in exchange for forgiving the remaining owed on the mortgage and the deficiency. Both the deed-in-lieu and the short sale require your lender’s approval and the best case for each homeowner depends on their situation.

Many Options are Available!

During this extraordinary time, even the government has devised plans intended to help. The Home Affordable Refinance Program gives between 4 and 5 million homeowners (with Fannie Mae or Freddie Mac loans) an opportunity to refinance into more affordable monthly payments. The Home Affordable Modification Program commits $75 billion to helping homeowners restructure their loans to affordable rates.

In order to fully consider all available options, consumers should consult an attorney, who can assist by reviewing your lending documents, explaining all of the options (both in and out of court) to relieve the debt and work with you to develop a plan to keep you out of the red.