No word strikes greater fear in a homeowner’s heart than “foreclosure.” Every day, the media trumpets new figures showing a continuing increase in foreclosures.
If you want to keep your home, your best option is to work something out with your mortgage lender in a way that will satisfy both of you. If, on the other hand, you are ready and willing to leave your home, there are ways to follow that path that will leave you relatively flush rather than destitute.
Most people I talk to in my practice want to stay in their homes but need to change some aspect of their mortgage—the amount of principal, the interest rate, the monthly payment. There are a number of ways to make this happen—by refinancing the mortgage, modifying the mortgage, or filing for bankruptcy.
Many home mortgage modifications happen under a government program known as the Home Affordable Modification Program (HAMP). However, lenders are free to follow their own procedures for settling mortgage issues that don’t qualify for modification under the HAMP guidelines. Participation in HAMP is also voluntary for many lenders, and those who don’t participate in HAMP offer a variety of workout approaches.
HAMP employs a number of government-funded incentives for lenders to modify first and second mortgages. Unfortunately, HAMP has not come close to providing adequate relief for the millions of homeowners who can’t afford their mortgages, though a second level of HAMP (Tier 2) was introduced in 2012 to make it easier for struggling homeowners to qualify for relief. The deadline for the program has been extended to December 31, 2015.
Changes in the Foreclosure Landscape
In 2008, when I first started writing about the state of foreclosure in our nation, home values were in free-fall and foreclosures were becoming all too common. Now, five years later, home values have not yet recovered (with a few regional exceptions) and millions of homeowners continue to face foreclosure. Between then and now, a deep recession has stripped many homeowners of their employment. The percentage of homeowners who are underwater on their mortgages has continued to rise to unprecedented levels, now exceeding 25%. And the degree to which these homeowners are underwater has also increased to alarming levels—often approaching 60% in the most impacted areas. As the overall housing situation has grown worse, the attempts by the government to fix it through HAMP and associated programs have, as mentioned, increasingly fallen far short of the mark.
The actual judicial and legislative machinery of foreclosures also has radically changed in the past four years. In the past, I was able to provide readers with a reasonably accurate picture of how long a particular state’s foreclosure proceedings would take, based on the laws in place. While a number of states have tweaked their foreclosure statutes to provide certain classes of homeowners with marginally more protection, the big change has come with the lenders themselves.
As the number of foreclosures has grown, so has the scrutiny placed on the practices employed by the mortgage industry. From time to time, this scrutiny has uncovered fraudulent acts on the part of lenders (such as the scandal over “robo-signing”), which have caused many lenders to declare moratoriums on foreclosures. Also, as HAMP and HAMP 2.0 were implemented, many lenders opted to put foreclosures on hold while homeowners went through the modification application process. And, because of the massive number of people applying for modifications, this application process frequently took months or even over a year in some cases. In short, at present, modifications are causing foreclosures to take longer—sometimes a lot longer—than would ordinarily be the case.
One of my major themes in 2008 was that it often makes sense to walk away from your home rather than pour money into what may be a hopeless cause. This approach has since been labeled “strategic default.” For one very large reason, I think it now makes even more sense to take this approach into consideration than it did previously. The reason? The longer you can stay in your house without making your mortgage payments, the better off you will be economically. And because of the modification mess, the mortgage-related scandals, and the increasing number of potential defenses to foreclosure (which include throwing as much paperwork at the banks as you can to see what sticks), you will probably be able to stay in your home a lot longer than was previously the case.
Foreclosure Isn’t the End of the World
In my law practice, I advise people who feel swamped with debt and are considering filing for bankruptcy. For many of them it makes absolutely no sense to keep pouring money into a house they are destined to lose. For others, it’s completely sensible to do everything they can to keep ownership. Sometimes the reasons for these decisions are personal; sometimes they are economic.
In the end, you must make this decision for yourself, but remember: Your house is not your home. (I was reminded of that fact recently by someone who’d been raised as an “army brat” who talked about her mother’s ability to recreate their home in whatever new quarters they occupied every couple of years.)
Owning the house where you live may feel like the American dream, and losing it might seem like the end of that dream. Believe me when I say that it’s not. If you are eventually forced to give up the house you are living in, painful as it may be, it’s a loss that you will recover from over time, both emotionally and financially. To find out more about coping with foreclosure, see Foreclosure's Silver Lining.