Foreclosure Alternatives Provided By Federal Law

Flagstaff homeowners facing foreclosure, or just struggling with high home loan payments have alternatives now. The $700 billion Emergency Economic Stabilization Act of 2008 became law on October 3, but how it will be implemented to help homeowners is not fully clear yet (even though I heard on the news this morning that nearly $250 billion of that $700 billion has already been used.) When it comes to help for distressed homeowners, the lesser $300 billion Housing and Economic Recovery Act of 2008 which was passed in July provides more immediate relief. The $300 billion recovery act has both a mandated mortgage modifying provision and a voluntary Hope For Homeowners or "H4H," refinance program. Of course, there are qualifications.

Mortgage Modifying     

The earlier law mandated that mortgage servicers modify loans for certain homeowners to help them avoid foreclosure as long as three requirements are met:

• A default on the mortgage either has already happened or is "reasonably foreseeable."
• The homeowner lives in the property as his or her primary residence.
• The lender is likely to recover more through the loan modification or workout than by forcing the homeowner into foreclosure.

The homeowner must prove, in writing, his or her case to the lender. That could mean some tough negotiating, or even legal wrangling. It certainly means as much paperwork and patience as the homeowner went through in originally applying for the mortgage loan – and probably more. An accredited mortgage, banker and broker certifier, CMPS Institute offers a sample letter and tips to help homeowners negotiate a loan modification.

      The CMPS Institute further advises:

1. Your hardship letter should demonstrate job loss, a serious health condition, an ensuing balloon payment, a coming adjustable rate reset or some other financial calamity that will preclude you from making your mortgage payments as scheduled.
2. Send the letter along with documented evidence -- your financial statements, employment records, tax returns and bank statements and other evidence that demonstrates how you can afford a modified loan under your present financial circumstances.
3.  Deal directly with a representative of the lender's "loss mitigation" or workout department -- not a broker, loan originator or other mortgage staffer. And don't deal with the collection department -- they have entirely different instructions and incentives.

H4H

Thanks to provisions of the law effective Oct. 1, 2008, troubled mortgage holders may avoid foreclosure by refinancing into smaller, more affordable, Federal Housing Administration (FHA)-backed mortgages. There is a catch: The government gets a share of any equity-growth. Also, the lender must voluntarily agree to the deal, which includes writing down or reducing loan balances. Here are some more details:

• The H4H program is for owner-occupants only.
• The existing mortgage must have been originated on or before January 1, 2008, and the owner must have made at least six payments.
• Banks can volunteer to write down an existing mortgage to 90 percent of the new appraised value of the home. Any holders of existing mortgage liens must release the liens and waive all prepayment penalties and late payment fees. The existing first mortgage holder has to accept the H4H loan as full settlement of all outstanding indebtedness.
• As of March 2008, the homeowner's total monthly mortgage payments due must be more than 31 percent of the household's gross monthly income.
• The loan amount on the new H4H mortgage cannot exceed $550,440. The amount can include a financed 3 percent mortgage insurance premium and other loan costs. The homeowner must also pay a 1.5 percent annual mortgage insurance premium.
• The homeowner cannot take out a second mortgage for the first five years of the new loan, except under certain emergency conditions.
• The homeowner must agree to share equity with the FHA, both the equity created at the beginning of the new mortgage and future appreciation in the value of the home. If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years.

Homeowners may contact either their existing lender or a new lender to discuss how the H4H program may help them. The U.S. Department of Housing and Urban Affairs website maintains what is currently a 38-page list of lenders participating in the program. The list is updated weekly.

If your Flagstaff home is a burden, it may take some work, patience, and research to keep it, but there is hope. Try working with your lender, or another lender on the list provided here.