When You're Facing Foreclosure
How to Avoid Foreclosure Rescue Scams
I need information about foreclosure and bankruptcy. When unemployment drags the family budget down, even extreme thriftiness can't prevent serious problems. What can a person do to keep their home? And what scams should a person be alert to, when considering professional help to prevent foreclosure?
Help from Consumers Credit Counseling
One of the first things I did when my husband became ill and could not work for an extended period of time was to contact Consumers Credit Counseling. They are in the phone book and also have a website at debthelpnow.com.
The help is free or extremely cheap. They can work with creditors to help you make the payments or even get them eliminated altogether. You should contact them early before things are too far-gone. I no longer worry about losing my house or car and I was able to keep 1 small credit card for emergencies, the rest of the credit cards I will do without.
Know the Options and Scams
O Boy, do the scammers come out of the woodwork when a notice of foreclosure hits the publications...and I've seen most of them!
I am a real estate agent in California and have worked closely with numerous homeowners who, on the brink of the foreclosure sale itself, called me for help in "dumping" their home before a foreclosure marred their credit history.
My #1 question for them was, "Do you want to move, of would you rather keep your home?" Without exception, every homeowner I spoke with wanted to stay in their home but, because of the overwhelming response from other real estate agents, attorneys and other professionals telling them they had to dump their home fast, they didn't know there was another option.
Just as credit card companies will adjust your interest rate and payment if you've experienced difficulties, your lender will consider a loan modification. Many people aren't even aware that this is a possibility. Call your lender and ask for the phone number to the "Loss Mitigation" Department. This is different from the people in the collection department who have been calling you over and over asking when you'll make a payment, this department will try their best to help you out of a difficult situation. Lenders do not want your property; an REO property (Real Estate Owned) means a liability to them. Of the numerous loan modifications I have submitted, I have had a 100% success rate!
The first thing the Loss Mitigation Department will do is send you a Loan Modification package. It will include a Request for Modification form, a Financial Statement form, and several other forms you will need to fill out and get right back to them. You'll need to account for all your finances so they can see that you're not covering up any hidden assets or other properties, and you'll also need to do some mathematical figuring so you can demonstrate your financial ability to begin making your monthly payment again.
You'll also be asked to provide a "Hardship Letter". This is probably the most important item in the package - the one that will make or break the final outcome. Here's where you'll finally get to use your high school report writing skills. In this letter you'll need to describe, in detail, why you have been unable to pay your mortgage. Explain the medical emergency, loss of job/wages, family or natural disaster that caused the hardship (the 1994 Northridge earthquake in Southern California was responsible for many foreclosures).
The goal of the Hardship Letter is to tug on the heartstrings of the person who reads it. You should also explain how your situation has now improved. As silly as it sounds, it's your goal to make them cry. Your family home depends on it! The following is an excerpt from an actual hardship letter:
"...Then the baby was born 6 weeks prematurely and I had to stay home with our other three children while my wife stayed in the hospital. I lost my job and my health insurance with it. We exhausted our savings paying medical bills for follow-up treatments for the baby." He went on to say that he had been hired at a new job with full health care benefits, and his new baby was in great health and the family was on the road to financial recovery. They had also described how this home was their life-long dream and they were looking forward to raising their children and, down the line, their grandchildren there.
This was probably my most successful modification. The family had called me 7 days before their home was to be sold on the courthouse steps to the highest bidder. They thought they could hurry up and buy a home with 0% down before a foreclosure showed up on their credit report. By the time their modification was completed (after another 6 months went by without their having to make any payments), their lender had agreed to lump all their past-due payments onto their principle balance and re-amortize the entire amount (re-figure the payment) based on a new lower interest rate, and their payment was lower than before (initially it had been 11.875% and was lowered to 7.5% - the current market rate at that time)!
As an interesting note: once a home is in the modification process, the foreclosure sale is continually postponed - you just need to keep checking to make sure everyone in that department stays on their toes in that respect. A "little" mistake on someone's part could mean your home is sold at auction!
The cost of a modification varies from lender to lender, but at the very least you'll be asked to pay for a credit report and title insurance. A "Broker's Price Opinion" will also be asked for, and most brokers/agents will do this free of cost - just be up front with them so they know you are not looking for a listing agent! The BPO is used in lieu of an appraisal.
The Ploy: An agent or attorney says they are experienced in "Short Sales" or "Short Pays" (selling a property where there is not enough equity to repay the entire amount owing to the lender - the majority of foreclosures. Heavy negotiating with the lender is required). They may even tout themselves as the area expert in this difficult field, and state that this will get you off the hook and protect your credit. Beware!
The Scam: Even if an agent of attorney has done hundred of short sales, it doesn't mean they will protect you! There are things that most agents aren't even aware of or don't care about!
- If the proper verbiage is not used in the purchase contract when your buyer makes the offer to buy your home, even if the lender agrees to take less than is owed them, it could show up on your credit as "Sold Short" - this is almost as bad as a foreclosure! It shows future potential creditors that you walked away from your financial obligation owing thousands of dollars!
- Unless your agent knows the proper verbiage on the negotiating contracts, your lender could issue you a "1099" for tax reporting. The IRS will receive a copy of this 1099 that shows the dollar amount that the lender basically gave you, i.e., Income. Guess who pays taxes on that...Not your agent!
- Again, your agent needs to know the right working to negotiate with your lender. Unless your loan is the original loan you purchased the home with (not a refinance), your lender, at their discretion, could seek a deficiency judgment against you for the balance owing. This judgment could follow you to the end of your days and beyond!
The Ploy: A seemingly professional entity will suggest you deed the property over to them to avoid foreclosure (of course you will have to vacate the premises, but they will help you find a rental). They will then dispose of your home at fair market value and you won't owe them anything.
- Not only does deeding over a property not avoid a foreclosure on your record if the payments are not made or the loan not paid in full, often times these clever scammers will simply rent out your property and collect rents until the home is foreclosed on. You are on the loan, not them! Think about it...it's the same reason people are reluctant to co-sign! And the poor unsuspecting renters get to meet the Sheriff when he comes to evict the tenants because the house now belongs to the bank. Sometimes all of their renters are people who deeded over their homes to them in the first place!
- Reading the fine print in some of these bogus offer revealed that the commission actually paid by the original homeowner was in excess of 10% and was written so that the monies could be collected for years after the sale at a very high interest rate.
The Ploy: "List your home with me and I'll pay you $XXXX."
The Scam: This is illegal. If you can get it in writing, I'd be very surprised. One of the forms you and your agent will be asked to sign is one stating that there is no money, you are not expecting any money and you are not getting any proceeds from the sale of your home. If you don't get it in writing, good luck trying to collect after the sale closes!
These are only three of the most popular scams out there. People come out of the woodwork professing to help you, but just who are they really trying to help?!? And filing Bankruptcy only stalls the inevitable - you wouldn't put a bandage on a broken arm OR cut it off, right? Get it fixed!
One thing is for sure - a homeowner in foreclosure needs to act fast.
Ideas to Avoid Foreclosure
A few thoughts for the reader who asked for advice on this:
- First, with regard to avoiding scams: I wouldn't pay anyone for advice or service. I think most reputable credit counseling services provide free service. Look in the phone book, check the library--look for recent magazine articles as sources of advice and resources.
- Work with your lender. Don't keep your problems a secret. If you can't pay, tell them why; tell them what you plan to do, when you can pay. Unless this is a short-term problem, you probably need to sell your house. (And it would be better to sell than have the house repossessed.) Don't delay--but get some good (free) advice. Work with your lender on this. They might be willing to give you breathing room to let you sell the house. They don't want to repossess it, either.
- Pay Your Mortgage. Credit card companies can cut off your credit. Other creditors can repossess your belongings. Utilities can cut off your water and electricity, but only the mortgage company can make you homeless.
How do you pay the mortgage?
- Defer all other expenses. Pay only the minimums on your credit cards (or, and I hate to say it, don't pay anything on them if it's that or the mortgage--but write them letters explaining your circumstances--ditto with all other bills.
- Don't do anything that will cause you to put out cash. Postpone your dental work, home repairs, cancel your subscriptions, cable service, Internet access. Eat what you have on hand, and learn to like beans, oatmeal, ramen noodles, etc. Don't use your air conditioning, cut back on all utility use.
- Use all other assets. Sell your savings bonds, cash in insurance policies; take money out of your retirement plan. Raid your coin collection, kids' college funds, penny jar, whatever you have (or have forgotten you have.)
- Have your kids' contribute their savings and allowances. Borrow from relatives.
- Sell everything you don't use or need. Then start selling what you do use and need. Have a garage sale; consign items at thrift shops.
- Generate some more income. Deliver papers, phone books, do telephone soliciting. Check the want ads. You may be able to work for a housecleaning service, store, fast food place, tax prep place, etc.
- Collect cans and bottles. Baby-sit.
- Make a list of everything you could possibly do. Rank order them by what would be smart to do anyway. Perhaps have a garage sale to get rid of unused junk and paring unnecessary expenses and see what will generate the most cash quickly.
- Take in a roommate.
Take Action Quickly
I was a foreclosure officer/supervisor for more than twenty years. I urge you to immediately contact your mortgage company and advise them of the problem. The absolute worst thing you can do is hide because if we don't know the problem, we can't try to help. Many companies can and will work out a payment plan with you. Just make sure you can keep up the payments. Try to work with them before they actually file the legal document for your State that starts the foreclosure (Notice of Default, Notice of Sale, etc.), as substantial fees are incurred when this action is taken.
Another option is called a deed-in-lieu or re-assignment. However, you will not keep your house. You will just avoid foreclosure and various qualifications are necessary to obtain this type of relief.
If you really feel that things will not get better, a bankruptcy will stop the procedure, for a while. I would suggest that you look into a Chapter 13 BK which is actually a payment program, mandated by the Court, which all creditors must accept. The other types of bankruptcies usually liquidate all of your assets and you usually lose the house. You can file any kind of bankruptcy without hiring an attorney. I am sure, by now, there is information on the net for this-or-use a cut-rate paralegal service if necessary. If you do have to engage Counsel, make sure the firm is well known for handling real estate problems.
Since the formal notices regarding foreclosures have to be a matter of public record, anyone can find out. Do not sign anything that transfers your property such as grant or quitclaim deed offered to you by someone you don't know or is making you a fantastic offer. Do not make any type of agreement to a third party that promises to get you out of default for a fee. However, you may want to contact a reputable real estate broker and look into selling if you are out of options.
Take the Next Step
- Take action today, so you will be better off tomorrow. For instance: find a new job , get additional training, and get out of debt.
- Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!