Dear Liz: I have an excellent credit rating, a steady job and an interest-only mortgage of $480,000 on a home now worth $400,000. I also owe $52,000 on an adjustable-rate home equity line of credit. In 2015, the interest-only portion of my loan ends and the principal payments will start, driving my payment to more than $4,000 a month. I have tried for the last four years to work with the lender to achieve some manner of stability, but to no avail. I have been told that my first loan has been sold to an outside investor. Is there any hope for me? I like my house.
Answer: If you haven’t already done so, you should make an appointment with a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find referrals at http://www.hud.gov, or you can call the Consumer Financial Protection Bureau at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor.
Housing counselors can evaluate your situation and offer guidance about any programs that might be available to help you refinance or modify this loan. You also should pick up a copy of attorney Stephen Elias’ book, “The Foreclosure Survival Guide,” so you can better understand this process and whether it’s worth fighting to save your home.
HUD-approved housing counselors offer free or low-cost help. Beware of anyone who promises to help you for a fat fee, because it’s probably a scam.
Interest only on a almost half a million dollar home? Clearly living above your means.
Interest-only loans were pushed pretty hard by mortgage brokers and loan officers who usually earned extra fees for promoting them over traditional 30-year fixed rate mortgages. You could argue that there are a few people for whom they were a good fit–people with big but irregular incomes who were disciplined enough to pay down big chunks of their principle when they received bonuses or other windfalls. But way too many people got them for homes they really couldn’t afford.
Liz’s advice to consult with a HUD counselor is spot-on. You won’t get the straight story from the lenders directly, but the HUD reps can run the numbers and confirm eligibility for HARP, HAMP, HAFA, etc. I just wanted to point out that the $52k second is totally underwater, so once the first mortgage has been stabilized, it might be possible to negotiate a lump-sum settlement on the second.
Thanks, Charles. I’ve heard from readers that some seconds are being written off or “forgiven,” which is a heck of a turnaround from a few years ago when second mortgage lenders were holding up modifications, refinances and short sales.
Liz, those are probably examples of principle reductions under the $25 billion national mortgage settlement with the Department of Justice last year, which applied to the top five mortgage companies. I’ve also seen a number of seconds/HELOCs get wiped out under the DOJ settlement. It’s a real gift when it happens, but consumers do still need to be aware that this will create a taxable event. Before accepting, it’s important to determine whether they will be able to claim an exemption under the Mortgage Forgiveness Debt Relief Act (extended through 12/31/2013) or the standard insolvency rules. Otherwise, a second mortgage problem could easily turn into a whopper of a tax bill from the IRS!