There are many resources out there that tell you about what a foreclosure really is, but as I get more experience dealing with these types of situations, it is clear that a concise breakdown of the process and some of the solutions might be welcome. Many of the solutions that follow are unknown to sellers, because banks don’t want you to know about them, and neither do real estate agents (first priority might be getting a sale, instead of actually helping you negotiate with the bank to help you out of a difficult situation). Luckily, I like full disclosure, so this is intended to help first.
A side note: some of these solutions can also be applied to other types of distress, such as estate sales among many siblings, divorce, or other issues that arise. I might also mention that I am no attorney, so nothing here should be taken as legal advice.
Are Foreclosures Common?
It seems that whenever the discussion turns to distressed property owners, the 2007/2008 financial crisis becomes the center of the discussion. When prices tanked and the faulty mortgages that caused the disaster were discovered, many homeowners simultaneously lost their jobs – further inflaming the issues of this time. So, not only do we have millions of homeowners realizing their loans were bogus, but we have large, institutional business going under, and smaller business trying to make ends meet – it was the perfect storm.
Though the amount of foreclosures is steadily declining, we are far from out of this, and this does not include the short sale inventory. According to CoreLogic, there were 2,488 foreclosures completed in the 12 months through June of 2016 in Connecticut, and about 1.6% of the inventory is in foreclosure, down 20.6% from last year. Very few states are seeing an increase in foreclosure inventory. Overall, 1% of all homes with a mortgage are in foreclosure, and 2.8% of all mortgages are in serious delinquency*.
*CoreLogic, Inc; National Foreclosure Report, June 2016
So, what does this all mean?
Seeing downward trends in foreclosure numbers is positive, as it indicates that we are getting out of the mess we were in. With 1%, as compared to 3.4% in 2013, of all mortgages with foreclosures, we have come a long way. However, there are still a huge amount in serious delinquency, which really means that the bank hasn’t had time to take these homes, or does not want to.
I am in foreclosure, what can I do?
There are many options that come before foreclosure. Forgive me for passing through these quickly, but it can get boring quickly if not applicable to you (remember, this is the abridged version); they are in order of most beneficial to the homeowner:
Pay Off the Debt: This option is straightforward, pay what you owe including all the back taxes, back payments, and fees/interest applied to those payments. If you have the money, you should do this, unless your credit is not important to you.
Loan Modification: There is a difference between a modification and a refinance. A refinance simply means that you get a lower interest rate by qualifying for the same loan you still have, with the same bank you are dealing with. A modification is different, it is the act of taking what you owe (including all bank payments and interest), and re-structuring the loan over another 30 years (or some loan term), in order to catch up without a huge payout all at once.
Forbearance Agreement: Another word for this is payment plan. The main difference between this and a loan modification is that you are still in foreclosure for the duration of the payment plan, and you pay in a shorter period of time, on top of your regular mortgage payment. For example, if you owe $10,000 in back payments/interest, and your mortgage payment is $1500 per month, then you might pay $1916.67 for 24 months to pay back interest, and get out of debt. Banks are sometimes willing to negotiate an agreement like this if you can afford the payments. If you owe hundreds of thousands, this might be infeasible.
Subject To: This option is the least useful to a homeowner, though sometimes it is better than the alternatives that follow. A ‘subject to’ [existing mortgage] deal would involve finding an investor with cash, to pay off your outstanding debt, the cost of which is the transfer of the deed in their name. The owner would still hold the mortgage, and the investor would then own the home. The bank is paid off, the seller moves out, and an agreement is made that the investor would refinance in a number of years (say 3-5) in order to get the loan into their name. It’s a great option if you don’t want to take any credit hit and if an investor is willing to do it.
Short Sale: Short sale is typically the most common option by the time the seller goes to an investor/Realtor for help. A short sale is the sale of the home to a buyer where the bank agrees to forgive all the debt, and sell the home at a steep discount. This is a much simpler description than what it actually takes to convince the bank to do it, but the alternatives for the bank justify short sales in most cases. Short sales tend to be a harm to the seller’s credit for 2-7 years, a much better out than foreclosure.
Foreclosure: The last option, and the most desperate option is the foreclosure, or forfeiture/acquisition of your home to/by the bank. In other words, the bank takes the home after a long and drawn out process. At some point, there is no shame in having your home taken by the bank, as it will enable you to move on with life (and hopefully you have been banking all the cash you are not paying into the mortgage). I say this is the last option, because it ruins your credit for 7-10 years. No bank or thorough landlord will want to touch your financial situation for a long period of time afterwards.
How Do I Know Which One to Use?
The answer to this question is not an easy one to answer, so I will not attempt to do it in this blog. Every homeowner is in a different situation, whether they have multiple mortgages, other liens on the property, a home in disrepair, and many other factors effecting your ability to use one or another of these options. Your bank might also be unwilling to work with you.
The best thing you can do is find someone who can help figure it out. An attorney, a Realtor with experience in these matters, an investor who has negotiated with the bank, are all viable options. The point is that you find someone you can trust, and that is familiar with the bank practices in your state.
We (Joe and Chris Balestriere) are Realtors in Fairfield County, Connecticut. Our blog is meant to educate buyers and sellers and equip them with tools to get the most out of their Realtor, whether it is us or someone else. We focus on technology and how it enhances the work we do for our clients--we are not top CT Realtors by accident.