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According to recent statistics, there were more than 3 million foreclosure filings in 2008. One in 54 homes received at least one foreclosure notice during the year. Our policymakers in Washington are scrambling for a solution to help troubled homeowners. When will relief be available?
As foreclosures increase, some homeowners are trying to take advantage of falling interest rates in order to lower their mortgage payments. According to the Mortgage Bankers Association, 85 percent of all mortgage applications are now for refinancing. The average interest rate for a fixedrate mortgage for 30 years is approximately 4.75 to 5 percent. The problem with refinancing for most people, of course, is the obvious fact that property values have declined significantly, and most properties have either zero or negative equity. Thus, a lot of homeowners are stuck with mortgage payments that they can no longer afford. As a result, homeowners are now looking at loan modification as their only other option.
Voluntary efforts by lenders to modify mortgages have somewhat helped to slow down the pace of foreclosures but, in my opinion, are still not enough. A lot of these lenders are unable to cope with the high volume of defaulted loans and their loss mitigation or loan workout departments are understaffed. This has made it difficult for homeowners to communicate with their lender in finding a resolution. Most lenders will not even discuss loan modification unless the homeowner is already behind on payments. Thus, a lot of homeowners are intentionally defaulting just to get their lender’s attention. I know it doesn’t make sense, but that is exactly what is happening these days.
This week, the Senate will debate its version of the stimulus and recovery package which includes a measure that will allow bankrupt homeowners have their mortgages modified under court protection. But expect some delays. It seems like the Senate leaders and the Obama administration cannot agree on whether the measure should be part of the overall stimulus and recovery package or if it should be considered under separate legislation. They are afraid that including the foreclosure relief measure in the bill will cause the Republicans to either delay or reject the entire package. There is no doubt that the need for foreclosure relief is urgent but passing actual legislation that the lawmakers can agree on is not as easy as it sounds.
Under the proposed measure, bankruptcy judges will be allowed under Chapter 13 bankruptcy to reduce the mortgage balance on the debtor’s principal residence if the property has negative equity (Chapter 13 is the type of bankruptcy for individuals with regular income who can at least pay some of their debts). So let’s say you owe $500,000 on your primary residence and your property is only now worth $350,000. In this case, the judge can reduce the loan balance to $350,000. The difference of $150,000 becomes an unsecured debt to the lender and can be paid off, most likely for pennies on the dollar, at the end of the case. This process is known as a "strip down." The judge can also erase periodic rate adjustments, prepayment fees, balloon payments, etc. and all other terms of the original loan that make so many mortgages toxic for a lot of homeowners. (Currently, a "strip down" may be possible with a wholly unsecured junior trust deed—let’s say a second mortgage on your residence but you cannot do it with the first mortgage on your property. The proposed bill, if passed, will allow you to do this.)
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