Get help with a mortgage modification
Dear Liz: Your recent answer to the reader who was trying to get a mortgage modification was on the money. The staff at our mortgage servicer is not only poorly trained but completely irresponsible. They promise personal representation, then never call again, and fail to answer voice messages left for them. There are no supervisors to answer difficult questions. They cannot (or will not) give criteria for approval. They give ever-shifting reasons for denial, but ignore the responses I have given. I have been trying for a year and will continue until I am approved. But what a terrible hassle. They must have some secret agenda for not doing these loan modifications.
Answer: There’s a lot of finger-pointing going on right now about why more mortgage modifications aren’t being done, but few would argue that lenders are doing a terrible job of communicating with their customers. You might want to consider enlisting the help of a housing counselor approved by the Department of Housing and Urban Development in your quest. The counselors’ services are free or low cost, and you can get referrals at http://www.hud.gov. Good luck.
Will you face a tax bill after foreclosure?
Dear Liz: Several years ago, we were talked into getting what I believe was a predatory loan — a negatively amortizing mortgage for 100% of the purchase price of our home. The loan broker assured us we could refinance the following year to a more traditional mortgage.
We paid the minimum monthly payment required, which didn’t cover all the interest owed, so that amount was added to our mortgage balance. Like others, we have experienced the nightmare of the current housing market, and with the negative amortization adding on even more debt, we are severely underwater.
We’ve worked with two companies trying to get a workable loan modification but to no avail. The bank is not cooperating at all.
A lawyer I consulted is advising us not to pay at all going forward, saying that the upside-down home isn’t worth saving or worth the grief. She told us to put our payment amounts into savings so that we have something to live on after we have to leave the home, which I so far have been able to do. But I’m worried about the potential fallout.
Would we be required to pay taxes on the remaining balance we owe after a foreclosure? If we can’t afford to pay the taxes on $200,000 of untaxed income (that we really didn’t earn), what do we do then? Does bankruptcy help with that?
Answer: When a lender cancels or “forgives” debt, it typically sends you a Form 1099 for the amount of forgiven debt. This amount usually must be included as income on your tax return. But there’s a big exception when it comes to mortgage debt secured by your primary residence.
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude from your income the debt that’s left over after a foreclosure. The law applies for the calendar years 2007 through 2012.
You can find more information about the act in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, as well as in IRS news release IR-2008-17.
In some cases, lenders aren’t content to write off the excess debt and instead decide to pursue homeowners after foreclosure for the remaining balance owed. You may be protected by state law from such a lawsuit (as homeowners in California typically are), but you’ll want to discuss this possibility with your attorney. If you are hit with such a lawsuit, you may need to consider filing for bankruptcy.
Should she walk away from her home?
Dear Liz: I’m 59 and have been unemployed for more than three years. My retirement is gone, my unemployment insurance has expired and my family resources are maxed out. I own one rental property that I’m trying to sell because it has a negative cash flow. The comparable market is glutted now. I’ve missed the last four payments on my home of 32 years, although I’ve applied for help through the Making Homes Affordable program. I am overwhelmed and unsure how to handle this. Do I just walk away? I am actively seeking employment, working with Goodwill’s Job Connection, but don’t have much hope at this stage. I’m too young for a reverse mortgage and too old for doing physically demanding work.
Answer: Talk to a housing counselor approved by the Department of Housing and Urban Development about your situation, including the rental property. (You can get a referral to this free or low-cost help at http://www.hud.gov.)
You don’t need the financial drag of this property adding to your woes. Ideally you’d be able to slash the price for a quick sale, or if you owe more than the property is worth, to arrange for a short sale. That’s when the lender agrees to accept the proceeds of the sale in lieu of the larger amount you owe. Otherwise, you may need to let the property go into foreclosure.
You may not be able to save your primary residence either. If you don’t have any income, you’re unlikely to get a refinance or a modification, but the HUD counselor can apprise you of your options. If you have any equity in the property, it probably makes sense to sell it while you can rather than let the bank take over and lose a small fortune in foreclosure-related fees. For more information, read attorney Stephen Elias’ book, “The Foreclosure Survival Guide.”
Don’t expect mortgage lender to do the right thing
Dear Liz: We applied for a loan modification a year ago and submitted all the paperwork requested on time. Our lender claims we were denied because of missing papers. I had everything documented, so the denial was appealed, but as of now we’re still waiting to hear whether we were approved or not. What can we do? We haven’t made a payment since last March. We have the money on hand to make three trial payments, as we were originally instructed, but I’m so worried.
Answer: Unfortunately, your experience is all too common — and too often people waiting for an answer from their lender wind up losing their homes to foreclosure. Lenders’ poorly trained and poorly staffed loan modification departments have created endless nightmares for homeowners trying to avoid foreclosure.
You should immediately enlist the help of a counselor approved by the U.S. Department of Housing and Urban Development. You can get referrals from http://www.hud.gov or by calling (800) 569-4287. The advice is free or low-cost. A counselor can help assess your situation, offer alternatives and guide you through the modification process — if a modification is still an option.
You also should read attorney Stephen Elias’ excellent book “The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket.”
What you shouldn’t do is expect the lender to do the “right” thing, including honoring any promises or commitments made to you. The people who get loan modifications have to be tenacious, persistent and savvy about the process.
Why refinancing isn’t easier
Dear Liz: This is a response to your answer to the reader who asked why home refinancing wasn’t simpler. All the reasons you cite are the same ones that banks cite. But they are all irrelevant for refinances conducted by the same lender. I am assuming two things about the reader’s situation: (1) they haven’t been late on any payment, let alone missed one, and (2) they are seeking to lower an interest rate that is higher than current market. If so, then it doesn’t matter if the house is in poor condition, if the person’s income has declined or even if the person has a job. While the new tighter standards are relevant to new loans, the bank already has this one and it’s in the bank’s best interest to make sure it remains a good loan. If a keystroke refi with a lower interest rate helps ensure that, then why not?
Answer: If it were in banks’ best interests to make sure their home loans remained in good standing, we probably wouldn’t be in the real estate mess we’re in today. Banks would have been far more willing to refinance or modify loans than they have been.
In fact, most banks don’t hang on to the loans they make. The loans are sold to investors, and the bank becomes the loan servicer, essentially just processing the payments.
Once you understand that, you understand that a refinance is, in fact, a new loan that must meet the criteria of the investors that will eventually buy the loan. Today, the vast majority of home loans are purchased by Fannie Mae and Freddie Mac, taxpayer-owned entities that already have billions of dollars in bad loans on their books. They aren’t interested in adding any more.
