Caught In A Riptide Of Mortgage Debt With Rising Monthly Payments
When the nightly main stream television news leads with stories regarding mortgage foreclosures and down turning markets a viewer knows a trend has arrived. This is all backed up with data indicating the surge of properties on the market with mortgage foreclosures trending up as well. Various areas are experiencing more downside moves than others are; however, the overall is down at the current moment.
Moving forward, if a seller is setting on a mountain of debt and just happened to have an ARM mortgage with negative amortization building up to 115% of the original mortgage this could be a bad thing. Then simultaneously the property values have dipped then the owners may find themselves upside down in the property where the mortgage is larger than the value. Some areas have had employment downturns as well to further complicate the affected familyís financial stability. This is all with a backdrop of a rising economy that gives hope in the long-term scope of things. Historically, real estate, much like other investments rolls out in cycles. Right now, there is some question whether the bottom is in sight. Lower priced properties will spur some activity along with seller concessions. Buyers are now enjoying the comfortable shoes and benefits of sellerís past. Interest rates are still at a reasonable level compared with say 20 to 30 years ago. Thus a good price with terms and concessions will garner interest from buyers. Enter the lender-stage right.
The phone was ringing night and day with bill collectors. The power had been shut off recently, now back on. The latest notice of payment increase from the lender had been received and the payments were going to go up $300/month on their Adjustable Rate Mortgage (that has a negative amortization feature) starting in two weeks. Terry and Lynne were up against it. With three children the family budget was in the process of blowing up. Three years ago, while competing against five other buyers, Terry and Lynne bid $15,000.00 above the list price to get an accepted offer. Now the prices in the neighborhood have fallen back. If they were to sell using a Realtor plus other costs there would not be enough to cover the mortgage, they would have to bring money to the closing table in order to close the deal. This was not a good prospect. With savings tapped out there just wasnít any cash available. Terry and Lynne quickly recognized that they had to do something immediately or their home would be falling into foreclosure. In the short term, they got rid of their cars along with the big payments and bought some high mile but reliable automobiles for transportation. That was still not enough. To keep things going, all the credit cards had been maxed out and there just wasnít one extra dollar to pay the minimum payments. Macaroni and cheese was getting pretty old.
Terry and Lynne decided to sell the house and move into something smaller and less expensive. Recently the taxes and insurance had gone up as well on the property. Hits were coming from all sides. Terry and Lynne contacted the Realtor who had sold them the house. They had been getting her monthly newsletters since they had bought the home. In a recent newsletter, there was an article regarding a Short Sale. Terry called Nancy, the Realtor, to find out if that might work for them. Nancy explained with a bona fide contract on the table and a financing approval letter for the buyer, the lender MIGHT consider a Short Sale. Comparables were pulled at it looked like the value was about $30,000 less than what was owed. Terry and Lynne gave Nancy a Signed Authorization to discuss the mortgage status and the possibility of lender assistance. Nancy made the contact to the lender and discussed the fact that Terry and Lynne had to move as they were out of cash. It turns out that even at the lower payment before adjustment, Terry and Lynne had been 30 days or more late every month called in the mortgage trade a rolling thirty. The lender was aware of their struggles at least as far as their mortgage pay history was concerned. This was one of the top lenders of the country and this was not unusual with their current portfolio to hear the same recurring story. Times were tough. If a foreclosure was to take place over a six-month period, the losses could be in the $50,000 to $60,000 range or more per trade numbers. Nancy explained that the lender had the right to go after a Deficiency Judgement against Terry and Lynne for any monies not satisfied at closing and that they should consult an attorney for legal advice. There likewise could be taxable income to Terry and Lynne for the shortfall amount. An accountant needed to be consulted. The attorney shared that they could do a Deed In Lieu Of Foreclosure, but it would be on their credit. The Short Sale may save the lender some money over going to a full foreclosure. Terry and Lynne decided to give the sale aspect a shot. At the same time, the attorney explained the benefits of seeking some protection through a Chapter 13 Wage Earner Bankruptcy Plan. A plan would be submitted to the Bankruptcy court and if the creditors agreed their overall payments could be reduced by at least a $1,000/month. This was the kind of relief Terry and Lynne were looking for.
It took three months to get an offer where the seller was being asked to pay $9,000.00 of the closing costs and prepaids. The offer was subject to lender approval on the Short Sale. The offer, pre-approval letter on the buyer together with the seller concessions and all addendum together with the facts that Terry and Lynne had filed a Chapter 13 and had excluded and exempted the mortgage from the petition was all shared with the mortgage holder. It was unclear whether the Bankruptcy Trustee was required to approve the sale. Their attorney was to follow up. Bottom line, the lender was being asked to take a $43,000.00 hit at closing. The lender took a week to answer. The contract was structured to allow for time on a lender answer. The phone rang and Terry picked up the phone. It was Nancy, the lender had accepted the terms on the condition that they received zero money at closing. They would take their furniture and turn over the keys and that was it.
Terry and Lynne felt like a boxcar had been lifted off their shoulders. After closing, they vowed to did out of this hole and take some family budget course and set on a strong savings regimen. With the monthly housing savings, Terry and Lynne were able to put a first and last months rent down on a large three-bedroom townhouse rental in the kids same school district and were now considerably below their former housing payment by $900/month. With the savings from the Chapter 13 Wage Earner Repayment Plan Terry and Lynne were now able to breathe and maintain a family budget with savings. With on time payments of the Chapter 13 Repayment Plan, over time, their credit should improve. The once per year free credit reports from the three bureaus will help track their progress. They planned now to accelerate the payback plan by $400/month and reduce the pay out term to 36 months. Terry and Lynne could see the light at the end of the tunnel and it was not an oncoming train.
In this case, the Short Sale was the answer for this couple. Itís not for everyone. Some lenders will not even consider it. It is a tool that can be used to solve an otherwise impossible situation.
Many lenders do not pursue the Deficiency Judgement, some do. It would be prudent to determine the lenderís intentions. An attorney at the ready is a good idea to work out a plan.
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ABOUT THE AUTHOR
Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.