Why are so many homeowners facing foreclosure? There are many different causes or reasons why a homeowner may be delinquent on their mortgage and heading toward foreclosure. Consumers report job loss, cut in pay, health problems and unexpected expenses. True enough these are the reasons so many homeowners are facing foreclosure but such reasons are more like the final straw that broke the camels back.
The epidemic rates of foreclosure taking place across the nation, throughout Minnesota, in Minneapolis, and even closer to home…concentrated on the Northside, is more a result of “a perfect storm.” What is this perfect storm?” It’s a combination of three main factors: a rapid decline in interest rates and increased property values coupled with a surge in sub prime lending industry with too many unregulated brokers and appraisers willing to take advantage of many vulnerable homeowners and the investors willing to buy back the products offering broker kickback incentives commonly referred to as “yield spread premiums.”
Equity-rich but cash-poor borrowers are preyed upon by aggressive brokers with targeted high pressure sales tactics - lured by the idea of a reduced monthly mortgage payment or getting some cash out to “pay bills.” Often times when folks are denied financing through traditional sources; the broker says ‘yes’ and gets the loan closed and is viewed as the person who actually “helped” them out.
Sub prime lending is lending to those who are considered to be a high credit risk. As a result of this higher credit risk, the consumer pays more in rates and fees both initially and over the life of the loan. Many sub prime borrowers also take advantage of low interest rates and actually lowered borrower’s interest rates through the refinance transaction. However this is a short term solution that typically prompts another refinance in two or three years.
A typical scenario…
Homeowner purchased home in 1990s for $80,000 at 9.5% fixed rate of interest. Monthly payment was around $872 including an escrow payment for property taxes and homeowners insurance. Property value increases and interest rates reach historic lows. Homeowner is suddenly heavily solicited; numerous offers in the mail and random phone calls from brokers and loan officers.
Homeowner responds to phone solicitor and refinances their mortgage. The refinance transaction takes place in the sub prime market. New loan amount is $120,000 at a 7.5% Adjustable Rate Mortgage (ARM) and the new monthly payment is $839 but does not include an escrow payment for property taxes and homeowners insurance. In addition, this loan also has a 36 month prepayment penalty and a mandatory arbitration clause.
Here’s the problem…
First, although in this scenario the rate lowered by 2 points, it went from a fixed rate to an ARM. Most ARMs in the sub prime market are fixed for the first two years and then adjust every six months thereafter. Once the rate starts to adjust, the monthly payment increases.
Second, the $839 payment did not include an escrow payment. When calculating the property taxes and homeowners insurance into the equation, the monthly payment is actually $1039 and is higher than before the refinance transaction took place. Most borrowers are unaware that they did not re-establish an escrow until they receive a past due bill for their taxes or insurance, or the lender force places their insurance thereby increasing the monthly payment.
Further, the prepayment penalty locks the borrower into the loan for the first three years. If the loan is paid off within this timeframe, the borrower pays a penalty for paying off the loan. This means that the borrower either has to be able to keep up the increased monthly payments while the ARM adjusts until the prepayment penalty expires or pay the fee.
Finally, the “cash out” received by the borrower was either less than expected, used to pay closing costs and unsecured debts, or to actually pay the increased mortgage payment. The increased loan amount also decreased the borrower’s equitable position by $40,000. To rebuild the equity, the property has to appreciate over time or through home improvements and repairs.
This homeowner is now faced with a difficult decision. The payment has increased and will continue to increase with each ARM adjustment, while their income has remained the same. Struggling to keep up with the mortgage payments, they receive notice that their employer announced company lay-offs, or the car broke down, the furnace went out, or they missed work to take care of a sick child - essentially the straws that broke the camel’s back.
Foreclosure is the legal means for which a lender repossesses a property when a borrower defaults on the loan. This process is set by state law and therefore varies state by state. Each lender may commence foreclosure proceedings at a different stage of delinquency. The exact foreclosure timeframe is set by the investor guidelines. Typically, in the sub prime market, this takes place at the second or third month of delinquency.
However, before a loan goes into foreclosure, the collections process begins at the onset of default or first missed payment. The lender will send a series of collection letters and places multiple phone calls to the borrower in attempts to establish a repayment plan before the account falls any further past due.
If an agreement is not established through collections, the account is referred to foreclosure. The lender will issue an official default letter or Notice of Intent to Foreclose (NOI). This is the first legal step the lender must take to begin foreclosing on a property in Minnesota. The NOI to foreclose letter is typically a 30 day notice. The borrower has these 30 days to dispute the debt (if there is one), establish a work out agreement (thereby preventing additional fees/costs), or bring the account current. If none of these options occur, the lender will forward the account to a foreclosing attorney and stops accepting any further payments from the borrower.
Once the account is forwarded to a foreclosing attorney, the Minnesota legal timeframes begin and the borrower starts to accrue attorney fees and foreclosure costs. These fees and costs must now be factored into the total amount of the delinquency. Next, the foreclosing attorneys will send written notice to the borrower indicating that they now represent the lender in attempts to collect on the debt.
The total amount of the debt (amount owed on the property) is called due but the amount required to prevent foreclosure is the total amount to reinstate the loan (pay all past due payments, fees/costs).
At this stage in the process, the borrower hears less and less from their lender and receives more and more solicitations from others (brokers, loan officers, real estate agents, investors, attorneys, etc.).
Meanwhile, the foreclosing attorney proceeds with the legal means to repossess the property and schedules the sheriff’s sale date. The sheriff’s sale date is the deadline date to prevent foreclosure on the property. In Minnesota the sheriff’s sale must be scheduled for a minimum of six consecutive weeks. Four weeks prior to the sheriff’s sale taking place, the homeowner is served with the Notice of Sale.
The sheriff’s sale date is the deadline date to prevent foreclosure. You have up until the date of the sale to reinstate or bring your account current, negotiate a work out agreement with your lender, file bankruptcy or sell your house. If none of these occur, the sheriff’s sale takes place and borrower is foreclosed on.
In Minnesota this is not the end of the foreclosure process. A sheriff’s sale is a public auction of the mortgage debt owed on the property. The highest bidder purchases the debt and is issued a sheriff’s certificate. Once this happens, the borrower’s mortgage is extinguished and the borrower automatically enters into the six month redemption period. The borrower must continue to occupy the property at this time. If the property is vacated or abandoned, the redemption period will be reduced to as little as five weeks.
During redemption, the borrower continues to hold title to the property. While remaining in title, the borrower has some limited options to redeem the mortgage.
Know that you have options!
Before the sheriff’s sale takes place there are options for homeowners.
Reinstate or bring the account current at any time prior to the sheriff’s sale taking place. Contact the lender and request a written statement of the total amount due.
If the lender has forwarded the account to a foreclosing attorney, contact the foreclosing attorneys and request an itemized breakdown of the amount due. Keep in mind that the amount due will continue to increase with each month’s mortgage payment, additional late fees, attorney fees and foreclosure costs. Reinstatement figures may need to be requested every 30 days until the funds are gathered to bring the account current.
Without the full amount of the money to bring the account current, contact the lender. Find out what kind of work out options are available on your account. Work out options may vary depending on the status of delinquency, type of loan product that was originated, the borrower’s ability to afford the loan, and the guidelines set by the investor.
To prevent foreclosure you must be able to afford your mortgage payment in addition to the household expenses, demonstrated through a documented ability to afford the payments.
There are two main lender work out options in the sub prime market: Repayment or forbearance plans, and loan modifications or deferments.
A repayment/forbearance agreement is an increase in the monthly payment over the number of months required to repay the defaulted amount. The lender will require the documentation that supports the ability to repay the increased amount and a lump sum down payment to secure the agreement. The larger the lump sum down payment the more affordable the monthly repayment will be over a fewer number of months to complete the plan.
A loan modification is sometimes referred to as a deferment however these work outs slightly differ. A loan modification is a permanent change in the mortgage product. Ideally the modification includes changes to three specific loan terms; the principal balance, the term of the loan and the interest rate. The delinquent payments are added to the principal balance, the loan term is extended, and the interest rate is reduced and/or fixed. The loan is re-amortized and even though the principal balance increases, this increased balance is repaid over a longer period of time and at a change in interest and the monthly payment should decrease. A deferment adds the delinquent payments to the back of the mortgage and all of the other terms remain the same. These payments are paid at the time the entire loan is paid off.
Each investor sets the guidelines as to what work out options are available per account. Not every investor and therefore subsequent servicer offers these options. And each investor may have a different set of guidelines as how each work out is implemented.
There are some other limited options available to prevent foreclosure. To determine your options, contact a foreclosure prevention counselor for an unbiased, honest assessment of your situation. Don’t wait! Understand your options, know your timeframes and your rights, and don’t fall victim to an unscrupulous lender.
North or North East Minneapolis residents can contact the Northside Residents Redevelopment Council at 612-277-1140 or visit www.nrrc.org. You can also call 3-1-1 for foreclosure info.