Mortgage Delinquency: What are your Options?
A delinquent mortgage is generally understood as one whose borrower is more than 60 days late on making payments. With the ratio of such borrowers already at a record high (6.25% at last count) and climbing, it’s a condition that’s relatively widespread. As a (potentially) delinquent borrower, it’s important that you’re aware of your options, which are more diverse than you might think.
Under the best-case scenario, the missed payment would have been a fluke, and you would resume making payments as normal. Given that for the majority of borrowers, delinquency is a precursor to foreclosure, this probably isn’t a realistic expectation. The alternative, then, would be to speak immediately with your lender, to determine if/how it is willing to help you.
Ideally, your lender will immediately consent to a loan modification, with both a reduced principal and lower interest rate. Unfortunately, this remains remains the exception, even given government incentives. In fact, the federal program has succeeded in catalyzing the conversion of an abysmal 4% of temporary modifications into permanent modifications. If you were to expand the denominator to include all delinquent mortgages – and not just those that have already received a temporary modification – this 4% figure would become so small as to be essentially meaningless. In other words, if you’re facing foreclosure, you probably can’t count on your lender to voluntarily save you.
Well, that’s not entirely true…Citigroup has announced a temporary moratorium on foreclosures until the conclusion of the winter holidays, and Fannie Mae has encouraged other lenders to follow suit, which means that at the very least, you can stay in your home for another couple weeks. But don’t worry, state and local governments have you covered. New York, in fact, is just the latest state to implement a new statute that requires lenders to submit to mandatory “mediation” with a third party prior to foreclosure. This initiative also aims to connect delinquent borrowers with counseling agencies, so that they can better understand the predicament and the choices they face.
If in spite of the government’s efforts and mediation, you are still facing foreclosure, you may want to consider a short-sale. Under a new set of regulations currently being mulled by the federal government, lenders would be required to adhere to “nationally uniform documents, timelines and financial incentives” when evaluating short-sales, which would greatly streamline the process. Of course, the burden would still fall on the borrowers to convince the lender/investor that a short-sale is in their best interest (when compared to a foreclosure), but anything that simplifies/expedites the process is certainly welcome. [By the way, for those who aren't familiar, a short-sale refers to a special type of home sale, whereby the proceeds of which are less than the value of one's mortgage. It is usually understood that the buyer will be "forgiven" the difference.]
Failing a short-sale, borrowers can plead their case in court. A handful of “activist” judges have handed down incredible rulings in recent months, in some cases absolving the borrower of all of their mortgage debt. Again, this remains the exception. Since the “cram-down” measure (which would have given judges discretionary power to modify mortgages) was defeated in the Senate, it looks like borrowers are back on the defensive on this front.
In the end, you may have to “settle for foreclosure. But don’t despair: according to a recent academic paper that has received a tremendous amount of publicity, foreclosure is not nearly half as bad as people think it is, from a legal/financial perspective. (Obviously, the emotional/practical side of foreclosure is tragic, but the paper ignores these considerations). In fact, some people are deliberately jumping straight from delinquency into foreclosure and skipping all of the hassle in between, in part of a growing trend known as “strategic default.” The author of the paper reckons that those with underwater mortgages could spend decades rebuilding the equity in their homes, or simply walk away “and their credit rating could recover enough in two years for them to qualify for new home loans.” Sounds like a no-brainer to me.