Foreclosure Fraud

How to Protect Yourself from Foreclosure Frauds and Scams

What to do if you are a Victim of Foreclosure Fraud

“You can run, but you can't hide!” sounds like a line from a low grade “B” movie.  There is, however, a lot of truth to it when it comes to foreclosure.  However, if you face up to the problem, take action and talk to your lender about your situation, you have a much better chance of avoiding foreclosure.

Before we go any further, let's look at four simple facts that, according to a recent survey, many people don't know.  

      First, your mortgage company knows when you miss a payment. You really cannot hide.  

      Second, your lender does not want your house. They are lenders, not real estate agents.  

      Third, they can help you avoid foreclosure.

      Fourth, lenders will help you try to avoid foreclosure if you work with them.

Think twice before embarking on a plan and think very long and hard before signing anything.  Before you talk to anyone about selling your property, get three agents from different companies to provide you with a Comparative Market Analysis which will give you a very good idea of the value of the home.

Homeowners have many options when it comes to avoiding foreclosure. As a first step in avoiding a foreclosure, experts recommend opening the lines of communication with the mortgage lender. Homeowners are advised not to ignore any letters or phone calls from the mortgage lender. They should contact the mortgage lender as soon as they know they will be late on a mortgage payment. Homeowners should explain to the mortgage lender their financial situation and why they are late on their mortgage payment or payments. They should also present financial information such as income and expenses so the mortgage lender can analyze how best to deal with the situation.

Many times mortgage lenders may be able to work with homeowners to come up with a payment plan that is more suitable to the homeowners' current resources. Many mortgage-lending companies have a loss mitigation department dedicated to these types of issues. Homeowners are also not advised to move out of a home that is in the process of foreclosing. Abandoning the house may disqualify the homeowners for any help the mortgage lender or others may be able to provide.

Homeowners with only a temporary financial problem paying their mortgage may want to consider options such as a repayment plan or forbearance. With a repayment plan, homeowners are allowed to divide up their past-due mortgage payments and add those amounts on to their current mortgage payments each month until their mortgage loan is caught up to date.  With a forbearance, the mortgage lender allows homeowners to delay their mortgage payments temporarily. The homeowners then pay back these delayed mortgage payments under a repayment plan or in a lump sum once the forbearance period is over.

For homeowners with long-term financial difficulties, mortgage modification or a deed in lieu of foreclosure may be good options.  Mortgage modification is the process of incorporating the past due amounts into the mortgage loan.  With this method, homeowners can finance their past due amounts instead of paying them right away. The modification may include extending the length of the mortgage loan and lowering the monthly mortgage payments to help homeowners keep to the payment schedule.

Home owners who still cannot afford mortgage payments, even with the help of a repayment plan or mortgage modification, may want to consider selling their home to avoid a foreclosure. If they cannot sell their house, then a deed in lieu of foreclosure may allow homeowners to voluntarily give their home back to the mortgage lender without a foreclosure. This process absolves the homeowners of their mortgage debt and will likely not do as much damage to the homeowners' credit as a foreclosure.

No matter what method homeowners use to avoid foreclosure, experts recommend that they not delay their actions. The earlier in the foreclosure process the problem is dealt with, the better the chances of stopping the foreclosure would likely be.

When facing foreclosure, the worse action any home owner can take is to simply abandon the home.  Abandonment, according to most security documents signed by the home owner, allows the mortgage company to take immediate action to foreclose upon the property.  

Furthermore, the home owner could be sued for losses incurred during the foreclosure, taxed by the IRS, and face other consequences of foreclosure.

The home owner may lose any and all opportunities to salvage any money out of the home, save his or her credit and stop the foreclosure against the home.  In addition, the home owner may lose out on special assistance from private, local and governmental agencies that are designed to prevent foreclosure on a home.

There are options.  Every home owner facing foreclosure should look at these options as there are many success stories that have come out of these options.

A.               Reinstate the Loan (Repayment Plan) 

You can call your bank or lender and ask them to reinstate the loan.  A formal or informal plan to re-pay the lender all of the past due amounts and fees over a period of time.  This type of workout will usually require a down payment, then monthly payments along with your regular monthly payment. You may be allowed to reinstate or make the loan current by paying a lump sum or making scheduled payments to your lender over a given amount of time. Just explain to them you had a few bad months and things are now better and most lenders will try to work something out with you.

Here is an example:

Jeff falls behind 3 payments on his house. He pays $1800 a month for a mortgage payment.  Then there are $500 in late fees. Ed owes a total of $5900 to reinstate the loan.  He sells a bunch of his personal belongings for $10,000.  So he pays the bank, they say "Thank You", and Jeff continues to make his regular monthly mortgage payment. The Notice of Default (NOD) is canceled, the home is brought out of foreclosure, and everyone is happy. However, Jeff's credit was still hit with the NOD which will hurt a little.

B.               Forbearance

The lender has the capability to reduce or suspend payments for a period of time allowing you to recover from a financial setback.  Something similar to reinstating the loan is called a Forbearance Agreement. This is when you actually negotiate a "deal" with the bank. You can ask the bank if they will add on the amount owed in back payments to the back of the loan. You could even ask if the bank would be willing to take a smaller portion upfront and add the rest to the back of the loan. Another option is to ask to pay some upfront and forgive the rest. Or you could even ask to forgive the whole thing. You never know unless you ask. Banks want to work with you, trust me.

C.               Loan Modification

Designed to resolve default for longer term financial problems, this could include reduction of the loan interest rate, or reducing payments.

D.               Loan Assumption

If the loan cannot be brought current and kept current, the payments on some loans can be assumed by a new borrower.

E.               Short Sale

A short sale is when you sell your home to an investor before the foreclosure can be completed.  This is an approach to consider if you have little or no equity in your home.  The banks will probably deny this approach if you have a lot of equity.  If you do have a lot of equity either sell the place or try one of the refinance approaches.

In a short sale you agree to sell your house to an investor.  The investor will then negotiate with your lender to accept a discount on your loan.   What this does is allow an investor to buy your home under market value (because of the discount on the loan) and you can avoid the foreclosure auction.  

If you use this approach make sure you find someone to buy your house that has successfully complete a lot of short sales and has a high success rate.  Many banks will not consider short sales and you need to be careful to follow the strict guidelines that other lenders have.  Not all short sales are successful so you must have an alternate plan in case the lender does not agree.  Refer to the Where to Find Help section for information on locating an investor to work with.

F.                Deed In Lieu of Foreclosure

This is one of the least preferred options, and it is often not acceptable to the lender due to title issues or the presence of other loans against the property.  You can give the property back to the lender and if there are no other liens on the title, the lender may agree to take the property back.

This process of transferring ownership from you to the lender under these circumstances is called a Deed in Lieu of Foreclosure, and is sometimes referred to as a "friendly foreclosure" because in essence that what it is. You just walk away.

A deed in lieu of foreclosure does not protect your credit, nor will it cut off the rights of junior lien holders. In other words, the lender would take the property back subject to the junior lien holders. This will avoid the possibility of a deficiency judgment in the event the property fails to produce enough to cover the outstanding debts after it goes to auction.

If you have equity in your property this is not a good option. You will give up all rights to receive any surplus from the auction.

G.              Refinance Your Home

If there is a lot of equity in your home and you're not too far behind on payments, this can be a great option.  Some lenders will refinance your existing loan(s) and include them as part of the new loan, any late payments, and fees that you would need to regain control.  It would all be "wrapped" into one mortgage.

The challenge that most homeowners have is they have leveraged their home to the maximum. Therefore, there is very little equity in the home especially when you add on back payments and fees.  Thus it becomes very difficult to refinance.

Another potential problem with this approach is that the homeowner has destroyed their credit rating.  With a low credit score it can be extremely difficult to find a lender to give you a new loan at decent rates, if at all.  Note – stay away from hard money lenders as that will just put you into a deeper hole.

H.               Sell Your House through a Realtor 

If you have equity in the property this can be a great option. However, if you have very little equity, it is very hard to sell homes with real estate agents. The reason why is because you have to pay a realtor fee or commission if they list your house. Typically it's 4-6% of the purchase price. Then what happens is they increase the purchase price of the home to compensate for the commission and now it becomes practically impossible to sell your house when it's at or over market value in such a short time. Plus, buyers cannot qualify for loans if the home is selling for more than what it's worth. You would be better off to try and sell it yourself.

I.                   Sell the House Yourself

All you need to do is put a FOR SALE sign in your front yard. If you go this route, you should tell everyone you are selling your home, maybe they know a friend or relative who is looking to buy in the neighborhood. If you live in a high traffic neighborhood with listings, you have a very good chance people will call you. In the meantime, as a backup plan, "just in case" you can sell your home to us, we can try to discount the loans so we can buy it. Yes, we also buy houses, and if we are successful, you leave with cash in your pocket and a foreclosure off your record.

J.                Bankruptcy

It is very important you understand how bankruptcy works. Many people use bankruptcy as a scare tactic. There are several different "chapters" of bankruptcy. Some are work-out others are wipe-out, but here is the general idea. When someone files bankruptcy it's almost like someone builds a "bullet-proof" barrier around the house. No one can touch you! However, you are not free of all responsibility and most people do not understand that. We are not a bankruptcy attorney, but you need to know the difference between a Chapter 7 and a Chapter 13 bankruptcy so you know what happens.

Like we mentioned earlier, some bankruptcies are "work out" others are "wipe out". The two that we will focus on are the Chapter 7 and Chapter 13. These are the most common in your situation. Chapter 7 is the "wipe out" and Chapter 13 is the "work out". Bankruptcy is a federal court action designed to help individuals repay their debts or eliminate their debts depending on their circumstances. Chapter 13 bankruptcies are designed to reorganize debts in an effort to repay all debt. Chapter 7 bankruptcies are geared more towards liquidation of assets. Both Chapter 7 and Chapter 13 immediately stop the foreclosure process and any creditors from taking further action against you.

Chapter 7 

When someone files a Chapter 7 bankruptcy, all assets are frozen. The attorney will create what is called an automatic stay. Meaning everything "Stays" put. The homeowners can't buy anything, they can't sell anything, and they can't even give away anything. If they try to sell their home, they couldn't. If they try to give away money in savings, they can't. Any unsecured debt like credit cards, unsecured loans, etc. are eliminated or wiped out. They do not exist anymore. Then the trustee or attorney who represents the court and the creditors will look at all the assets (house, car, furniture, equipment) anything of value and decide what must be liquidated to pay some of the debt that was wiped out.

If the homeowners are in the middle of foreclosure, a Chapter 7 will stop the foreclosure process. Usually banks will then ask the trustee to release the property from the automatic stay so they may continue with the foreclosure process. Once the property has been released from the bankruptcy, the foreclosure process starts right where it left off. Typically you have anywhere from 3-5 weeks until the foreclosure process begins again.

Chapter 13 

Chapter 13 is a little different. When someone files a Chapter 13, they don't take all the assets and sell them. Instead they take all the monthly payments and discount them for pennies on the dollar. It's like a debt consolidation plan. Whatever amount is agreed upon has to be paid to the bankruptcy count every month for the next 3-5 years. So the homeowners get to keep their house, their cars, and all their assets.

Now, as long as the homeowner stays current with the mortgage payments and pays the amount agreed upon, they will be fine. However, if any payments are missed, the trustee will dismiss the bankruptcy and the foreclosure process will begin again.

Bankruptcy should be the last alternative or option and should not be used to stop foreclosure unless you have no other option or else you need the protection of a bankruptcy due to other circumstances or situations you are currently up against. If you feel this may be your best option, please seek legal advice from a competent professional in this field.

K.               Go through with the Foreclosure

Basically you don't do anything. Typically you will get evicted after about 2-3 weeks. You leave with nothing in hand and a foreclosure on your credit report. This is without question the worst option of all. Don't let anyone convince you to just give up and do nothing. At least try something. You have nothing to lose. It could mean the difference between a few thousand dollars in your pocket compared to nothing and a foreclosure on your credit.

To complete a successful workout with your lender often requires that the lender can determine that you have suffered a financial hardship and will have the financial capability to be able to keep the loan current.  A successful workout plan involving a pre-foreclosure sale or Deed In Lieu of Foreclosure will be dependent on the lender being able to determine there was a financial hardship and that foreclosure is inevitable.  Most lenders will require the following documents as the minimum for considering a loan workout, and many lenders will not consider a workout until the loan has been delinquent for at least 90 days.

      Hardship Letter - This letter describes the hardship that caused the loan to go into default and describes your preferred solution to bring the loan current. The hardship should be involuntary, such as divorce, job layoff or medical reasons. This letter will also include your proposal for a workout and the reason you are confident the workout plan will succeed.

      Pay Stubs - One or two current pay stubs from each person occupying the property who is contributing to the payment of household expenses. The lender will use this to determine the feasibility of any repayment plan, or to determine foreclosure is inevitable.

      Tax Returns - Self employed borrowers will need to provide the last two years tax returns along with a current profit and loss statement. Many self employed borrowers don't receive pay stubs; the lender will use the tax returns to determine income levels.

      Financial Statement - A statement outlining all of your income, assets and liabilities. This statement provides a "snapshot" of your financial situation allowing the lender to determine the economic hardship can be overcome.

One key thing to remember if you are attempting to complete a workout without outside assistance is to submit ALL of your paperwork together as a package and be sure to keep copies of everything. Your lender needs all of the information to be able to make a determination of which type of workout may be appropriate.