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HOME MORTGAGE MELTDOWN

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On this page: Beware Loan Modification Services Asking For A Large Up-front Fee, HOPE for Homeowners, What to do when a lender will not work with you, What can you do before you are foreclosed on?, Who owns your debt?, Tax consequences of Debt Forgiveness, Beware Foreclosure Predators 

This page is under construction... but there is some good information here nevertheless, give it a read.

Beware the loan modification services asking for a substantial up front fee. There’s been a lot of talk lately about loan modifications for homeowners facing foreclosure. When you go to the HUD website to look up a counselor that is close to you, you may find your phone call goes unanswered. Try different phone numbers, persistence pays off.

You may be tempted to go to a firm advertizing prominently on the TV or via other media. But the reality is you do not have to pay for your loan modification help, and and although many of these firms are legitimate, there are many scammers waiting to prey upon you in your moment of desperation. To some struggling homeowners, the salesman behind the mortgage modification sales pitch might sound familiar as many former mortgage brokers who were selling subprime and predatory loans are now trying to make a quick buck in the loan modification market.

Government efforts so far to help out troubled homeowners have been equally ineffectual. The Hope for Homeowners alliance program announced last year with great fanfare has so far only helped a few hundred mortgage holders. Therefore it’s no wonder you would want to turn to a company that promised immediate assistance. In fact, swarms of for-profit companies are advertising loan modification help right now. They are succeeding because consumers still don’t really know where to turn. They are filling in where the government is failing.  Many consumers have hit similar brick walls when dealing with lenders.

The problem for homeowners in trouble is that criminals and government-backed counselors can look identical to consumers who need help. The organizations listed on HUDs Web site – with names like Consumer Credit Counseling Services – seem indistinguishable from for-profit firms at first glance. Whether it is legitimate or a scam it all starts the same way.

Not all for-pay loan help services are scams, though, so it’s hard to give blanket advice. Many consumers find it necessary to pay a lawyer to work out a complicated loan restructuring, for example, and there’s nothing wrong with paying a lawyer an up-front fee. Some legitimate services that charge a small up-front fee, and ask for larger payment upon the completion of a successful modification. Consumers should not pay more than a few hundred dollars up front, unless they are dealing with a lawyer.

Some government regulators have begun to take notice of potentially misleading modification services. In February, Connecticut Attorney General Richard Blumenthal announced his office was investigating a company named H.O.P.E. Alliance after it allegedly asked for $1,500 in up-front payments from consumers. In order to afford the fee payment, the firm told customers to stop paying their mortgage, he said. The firm’s name also deceptively mimics the name of the government-backed, nonprofit modification effort, Blumenthal alleges.

Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away! Still, that message hasn’t gotten through to consumers. And when HUD’s Web site lists phone numbers that go unanswered and banks give consumers the runaround, it’s no wonder troubled homeowners are tempted to pay when they finally find someone who will answer the phone.

Best Advice: There is no reason to pay for mortgage help.

• When trying to get a HUD-approved counselor, persistence will pay off. Visit the HUD Web site and try several phone numbers until you reach someone who sounds genuinely interested in helping.
• You can test your eligibility for a government-backed loan modification at the Financial Stability Web site. Please be aware that this link goes to a website outside ABC LLC; we have no control over their content and they will have their own privacy policy. 
• If you are tempted to pay someone, don’t do so until you get results. You wouldn’t pay for auto repairs or a home remodel until the work is done, so why pay a mortgage modification company? As a rough guideline, consumers should not pay more than a few hundred dollars up front unless they are dealing with a lawyer.
• People facing mortgage problems often are embarrassed and try to deal with them privately. If anyone in your family might be in trouble, don’t be shy. Recommend they visit the HUD Web site – take them to a computer and show them the site if need be. HUD counselors can offer a variety of solutions to consumers. A surprising number of consumers are able to refinance and avoid foreclosure, thanks to new government-backed programs.   Back to Top

HOPE for Homeowners (H4H): Homeowners, contact your existing lender and/or a new lender to discuss how you may qualify for the H4H program. The HOPE for Homeowners (H4H) program was created by Congress to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. H4H is an additional mortgage option designed to keep borrowers in their homes. The program is effective from October 1, 2008 to September 30, 2011. If you are having trouble making your mortgage payments, HOPE for Homeowners may be able to help you, by refinancing your loan into a new 30-year or 40-year fixed-rate loan with lower payments.

HUD Guide To Avoiding Foreclosure: includes information on getting help, what to do when a lender won't work with you, foreclosure scams, H4H, state by state listing of resources, what to do if you can't keep your home, etc. Please note link goes to HUD website; ABC LLC is not responsible for their content and you should refer to their privacy policies. 

The following is from the HUD website: What to do when a lender will not work with you. You've done all your homework, talked to a housing counselor and tried to talk to your lender. But, the lender won't work with you. What do you do now?

• For an FHA-insured loan: Your lender has to follow FHA servicing guidelines and regulations for FHA-insured loans. If your lender is not cooperative, contact FHA's National Servicing Center at toll free (888) 297-8685 or via email.
• For a VA-insured loan: First, visit the VA Foreclosure Alternatives page. If you need assistance or have additional questions, talk to a Loan Service Representative.
• For conventional loans: If you have a conventional loan, first talk to a HUD approved Housing Counselor (or call (800) 569-4287). They may be able to help you with your lender. You can also contact Hope Now (1-888-995-HOPE) to ask for assistance in working with your lender.

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The time to act  when you realize you are going to under go a home mortgage meltdown is NOW! You can be foreclosed on in as little as 90 days.  Don't wait until you are foreclosed on.  Call your mortgage company and start talking to them.  Don't assume the sudden change in income is going to turn around quickly. The sooner you act the better your chances of resolving the matter without being foreclosed on. DO NOT IGNORE THE MORTGAGE COMPANY LETTERS.  DO NOT ABANDON YOUR PROPERTY.  Let  your mortgage holder know you are in trouble and be prepared to supply them with information such as your monthly income and expenses.  Foreclosure costs mortgage companies a bundle too. 

Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you.

Negotiate with your mortgage holder-keep calling them until you get through.  Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments; you must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan. You may be able to refinance the debt and/or extend the term of your mortgage loan; this may help you catch up by reducing the monthly payments to a more affordable level.

If you have an FHA loan (as opposed to a conventional loan or VA loan) you may file for Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current; you may qualify if your loan is at least 4 months delinquent but no more than 12 months delinquent; you are able to begin making full mortgage payments. When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full; the Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan. You may qualify if: the loan is at least 2 months delinquent; you are able to sell your house within 3 to 5 months; and a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure. You can qualify if: you are in default and don't qualify for any of the other options; your attempts at selling the house before foreclosure were unsuccessful; and you don't have another FHA mortgage in default. 

Other thing to note: law bankruptcy judges cannot revalue your principal residence, although they can restructure other kinds of debt, therefore do not count on bankruptcy to save your home. In fact it will probably force a foreclosure.   Back to Top

Who owns your debt?

Be mindful of who is foreclosing on you. A home owner can be working with one group to modify the loan while another is moving to foreclose - if your mortgage holder sold your loan and didn't tell you, you could find yourself in this situation. You must find out who holds your mortgage and negotiate with them.  Make sure the bank suing you is the one who holds the loan.

 The Truth in Lending Act in which just trying to find out who owns the loan can be a barrier against foreclosure as the complexities of mortgage loan securitization can cast doubt on who has the legal right to foreclose. If you are being foreclosed on, you can send a request to the lender to produce the note and they have 30 days to respond. The servicer of the loan must prove they own the mortgage. Examine your foreclosure document - sometimes they admit up front they can't produce the note (that it has been lost or  destroyed). You have every right to require them to prove they hold the note.  Requesting the note can buy a little time and if the loan servicer cannot produce the note then you may have technical grounds to stop the foreclosure as only the note holder can foreclose.  If the loan servicer cannot prove they own the debt you can fight them but you will likely need a lawyer to fight foreclosure on these grounds.

Adding insult to injury some people being foreclosed on find the bank has tacked on thousands of dollars in miscellaneous fees.  In addition to proving they hold the debt, they also must produce the documents showing what they have paid these fees for. 

Because of the way mortgages have been securitized, it’s often unclear who actually owns the debt; the originating lenders may have only pledged the loans and didn’t actually transfer them to the trusts that are supposed to hold them and issue the securities. Only the true debt owner has the legal standing to be a plaintiff in a foreclosure.

 Similarly, the loan originators can’t appear in court and claim the right to foreclose because they would be in violation of securities laws for not transferring the loan to the trust when they were supposed to.

Making an issue out of the actual ownership of the securitized title might strike some as a shameless stalling tactic aimed at abetting a debtor who, after all, owes the money. But if such basic legalities aren’t adhered to, a homeowner could pay his or her way out of a foreclosure jam only to wind up in another when a new plaintiff emerges claiming to own the debt. There have been cases in which homeowners have been sued for foreclosure by two different trusts, each claiming they owned their house, and cases where trusts have been sent documents on the same case by two different servicers.

This tactic can be used to gain reworked more manageable loans (without all those extra fees). A recent study of foreclosures showed that in a staggering 40% of cases the mortgage holder could not produce the note.  Bottom line, if you are being foreclosed on, you might find it advantageous to get a lawyer, show up in court and fight. 

If you are the victim of a predatory lending practice or outright fraud and you can prove it in court, you may be able to get the foreclosure tossed out.   Back to Top

The Mortgage Relief Act of 2007 has provisions eliminating income from debt forgiveness on home mortgages.  Be careful about how your handle your home mortgage meltdown as there are tax consequences for debt forgiveness and you must structure your solution accordingly - there are limitations to the amount of debt forgiveness income that is excluded per the Mortgage Relief Act of 2007.  The IRS has a publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments which has answers to many questions you may have about the tax consequences of your meltdown solution.  Please note link goes to IRS website; ABC LLC is not responsible for their content and you should refer to their privacy policies. 

Examples:

Debt forgiveness $40,000.  There was an original mortgage or $420K on a principal residence valued at $435K, a second mortgage for a kitchen expansion of $30K and a refinance of both mortgages for $475K for mortgages with a balance of $440K and a cash payout of $35K for credit card debt.  Only $5K of the debt forgiveness qualifies for the principal residence exclusion as $35K is allocable to the cash payout and is realized as taxable income.

Debt Forgiveness of $25K. A mortgage in foreclosure where the loan exceeds the closed property's value by $25K.  At the time the taxpayers liabilities exceed their assets by $11.5K.  The principal residence exclusion applies to the full $25K whereas the insolvency would exclude only $11.5K.  The taxpayers should use the principal residence exclusion.

Debt Forgiveness of $750K.  A principal residence valued at $2.6M was purchased for $3M including $400K cash.  Foreclosure took place when the mortgage was paid down to $2.5M but at the time the residence was only worth $1.75M.  The mortgage holder forgave the $750K balance on the mortgage, however at that time the taxpayers were insolvent to the tune of $726K. Because the mortgage debt is $500K in excess of the $2M limit for the principal residence exclusion, the insolvency exclusion applies to the extent the taxpayer's liabilities exceed their assets at the time of debt forgiveness. Back to Top

So you being foreclosed on.  Once a property falls 2 or 3 months behind mortgage lenders routinely file public notice of default at the county recorder's office.  This begins formal foreclosure proceedings.  Scam artists routinely scan the public notices to find possible victims; they descend on desperate home owners with an outstretched hand offering to help and trick home owners into signing over title to their homes.  Usually the ersatz rescuer is a stranger who contacts the owner with a great offer to save their home.  They say that if the homeowner signs over or shares ownership with a third party the struggling homeowners can improve their chances of repairing their credit and getting refinanced. Of course the victims ultimately find their name has been removed from the title and they have no chance of getting it back.

The best defense against foreclosure pirates is to be aware of the various scams.

• equity skimming and stripping - You have seen the signs, We Buy Houses! We Will Save Your Credit! Avoid Foreclosure! The fake buyer will have you sign over the deed at some point - you may not even be aware that you have done it - NEVER SIGN ANY DOCUMENT YOU DO NOT UNDERSTAND.  The Real Estate Investor may offer to make payments while you live there and pay rent with the option to buy it back later; then the investor never pays the mortgage. If the home has any equity the scammer sells your home and pockets the equity that you could have received if you had sold the house yourself.  Remember signing over the deed to your home does not mean you have transferred the mortgage debt; the deed to your home and your mortgage are two separate documents.  The scammer will also tell you that the foreclosure will go against them once you sign over the deed, however the foreclosure always goes against the person listed on the loan, not the deed.
• phony counseling agencies-some groups calling themselves counseling agencies may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything.
• lender scams and loan flipping -  predatory lending practices included subprime loans with higher interest rates, excessive and hidden fees, insurance and other unnecessary products, abusive and abnormally high prepayment penalties, balloon payment terms and mandatory arbitration in which the homeowner signs away their right to sue for the fraud being perpetrated via the loan.  Anytime you take out a loan you are going to be borrowing MORE money.  Lenders can make a lot of money churning loans even if you don't make dime on the deal.
• phony loan transactions - the home owner thinks they are signing new mortgage documents, but they are really signing over the deed to their home. 
• property flipping - the scam artist will offer much more than the asking price of a home with a stipulation that the surplus amount over the asking price is given back to the borrower at closing. At closing, the inflated value of the home will be attributed to home improvements that were never made. The scam artist will pocket that surplus money and default on the loan. As a homeowner, especially one whose house has been on the market a long time, this may seem like an attractive deal but remember – falsifying documents is fraud.
• Other internet and phone scams - seminars, listings etc.  A large one-time up front fee may spell trouble.
• Bankruptcy does not stop foreclosure - it merely gives you time to put your finances in order.  Always use a reputable attorney to handle your bankruptcy. In this scam, the Bankruptcy Specialist gets you to sign over fractional interest in your home while they are bankrupt or "sells" their fractional interest without the owner's knowledge to someone who files for bankruptcy.  The bankruptcy the scammer has filed holds off the foreclosure while the scammer continues to collect money from the victim who is unaware that bankruptcy has been declared involving their property.  They can repeat this process several times.  Again depending on the nature of the foreclosure scam the distressed homeowner may not even be aware that they have signed over any interest in their home.
• I'll get you top dollar! Maybe they will, maybe they won't. Use local agents and get three competitive market analysis and be very cautious.

It is so bad out there you should NEVER do business with anyone who comes to your door, calls you out of the blue, or sends you a flier.  If someone does not want your to talk to your trusted advisors such as family, friends, accountants, financial advisors or a lawyer - walk away. Upfront money required? - walk away.  If someone will not give you documents so you have time to review them before signing - walk away.

• Beware of any buyer who tries to rush you through the process. 
• Don't sign any papers you don't fully understand.
• Never sign documents with blanks or false statements.
• Make sure you get all "promises" in writing.
• Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
• Check with a lawyer or your mortgage company before entering into any deal involving your home.
• If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information. Also researching mortgage scams on the internet is a great source of information - you may be able to find what scams are already running in your area - you may find your would be rescuer is on somebody's watch list.  Your home may be your single biggest asset, no matter how desperate you are always do your homework; do not become a victim of ignorance or haste. 

When homeowners or borrowers suspect they may be a victim of a con-artist’s work, they have many legal resources available to help them. Potential victims need to report mortgage fraud, mortgage scams, or predatory lending practices as soon as there is an indication these might exist. Waiting to make sure can be costly. Both on the national level and on the state level, government and private organizations are available to answer questions and provide help. If you suspect you are a victim of mortgage fraud, contact the local FBI office; if you suspect or need to report predatory lending practices or other abusive-types of lending, contact your state Attorney General’s office; if you suspect or need to report mortgage scams by a real estate broker or appraiser, contact the state’s real estate licensing board or appraisal licensing board. The Better Business Bureau is also an excellent resource if you think you are a victim of fraud. If you have been scammed and you are more than 60 with low income you may be able to contact AARPs legal counsel for the elderly.  Back to Top

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