An important thing to keep in mind when considering a short sale to avoid foreclosure- your lender is not technically obligated to sell your house in such a manner. For them, it is a pure cost-benefits calculation. When they allow a real estate short sale, they have to swallow the discrepancy between the amount you owe on your mortgage and the money your house brings in when it sells. They don’t like doing this unless the alternative is even less profitable.

You may even have a potential buyer who has put down all the paperwork to make an offer, and they still won’t cave. On the plus side, this can go two ways- the bank may say you have to go into forclosure, but they may also try to convince you to stay in your house and refinance your mortgage.

You may even be able to settle it with a loan modification.

If that doesn’t work, though, and your bank is willing, a short sale may be completed. In order to comfort potential buyers, you may want to think about moving out of your house while going through the shortsale process- this will make it seem less likely that you may decide to simply refinance. And be sure to get official approval from your bank. “Bank Approved Short Sale” is much more likely to get takers than one that doesn’t yet have expresss permission. a

Recently, the U.S. Department of Housing and Urban Development (HUD) has passed new guidelines allowing FHA borrowers to seek to cut down their monthly payments on their mortgage through a Making Home Affordable loan modification program starting August 15^th.

Before this, homeowners struggling to make their payments on an FHA-backed mortgage were not allowed to get a loan modification.

Now, at-risk mortgagors will be able to lower the principle they must pay on their loans by up to 30% in what is being called a ‘partial claim’. However much the principal is reduced will be combined into a second, no-interest mortgage that isn’t due until the first one is completed, or the property no longer belongs to the borrower.

Reducing the principal on the original mortgage in this way will allow homeowners to lower their monthly mortgage payments to an amount they can afford, preventing foreclosures and defaults. The old MHA loan modification program used to leave the principle alone, reducing only the interest rate.

The goal of either method, however, is to reduce monthly mortgage expenses for homeowners to 31% of their income.

An added bonus of the new MHA program is its ability to bring borrowers up-to-date on their payments: it includes all past due payment into the second, no-interest mortgage.

The program is called FHA Home Affordable Modification, and in order to qualify, a borrower must already be in default on their mortgage, (that is, at least one month past due on payments) but not more than one year past due.  This, hopefully, will prevent those who are irresponsible and completely unable to make payments from joining, and also preventing those who can make their payments just fine from taking advantage of the program.

In addition, any borrower wishing to take advantage of the program must be the owner and occupant of a single-family residence, and be able to prove that they have enough financial resources to maintain payments on the new mortgage. They must also not have purposefully defaulted on their mortgage payments even though they had enough money to pay. Also, applicants must not have more than 55% of their monthly income in total debt after modification.

The new program doesn’t only incentivize the mortgage owners, but lenders as well. It offers up to $1,200 for each loan to lenders. Homeowners who do not have an FHA mortgage should try to get a loan modification through the first Making Home Affordable loan modification programs which deal mainly with changes of interest rates.

For more information on the FHA-Home Affordable Refinance Program can be found on the HUD website.

Eraly in this recession, people were worried about literal bank failures a lá the Great Depression. Mortgages were in trouble, interest rates were going haywire, and people were pulling their money out of banks fast.

The Federal Deposit Insurance Corporation protects the deposits of consumers in the event that a bank fails, and has been doing so for decades. In this day and age, there is no reason to fear that a bank will lose your money. The organization has recently said that banks and other lenders should try to give certain qualified borrowers a ‘temporary respite’ from their monthly mortgage payments. This is known as a forebearance, and can last up to six months, especially if the mortgage holders are trying to work out a loan modification.

The agency has released a plan to lower loan payments to lower levels for borrowers to have defaulted, but only those who can prove that they only defaulted because of job loss or involuntary salary reductions. The FDIC chairwoman has released statements saying that they’re making these announcements, not just to save money and mitigate losses, but because it’s the right thing to do. They’re trying to keep families in their houses and keep the economy going strong.

All over the state, banks and lending institutions are growing their loss mitigation departments in order to process more short sale transactions and facilitate loan modifications and reamortizations. In this day and age, most lenders accept short sale requests and/or offers, even after someone has been issued a Notice of Default. Because of the 2009 foreclosure crisis, mortgage lenders have been suffering from record losses and are now much more willing to work with homeowners to complete short sales.

This means that California homeowners can be assured that even if they get behind on their payments, they are not automatically going to have to default or be foreclosed on. The problem is, different lenders have different levels of tolerance for short sales and requests for loan mods. Most lenders will have their own pre-determined, specific criteria for these transactions. A homeowner must jump through a lot of hoops- conditions, approvals, paperwork, and the like- to get a short sale through.

And there are other factors that determine whether or not a lending institution will accept a request for a shortsale, and the level of ‘liens’ may help make that decision. Junior liens for example (like HOA and HELOC lenders, and those that deal with second mortgages) might be more willing to accept short sales. Tax liens holders, on the other hand, are more likely to reject such requests.  And if your lender asked for mortgage insurance on the loan they gave you, they’ll also probably need the insurer to be a part of the negotiations as they navigate the short sale.  The insurer may be asked to shell out some dough to help cushion the fall of the lender.

Basically, there is a vast network of steps you need to take, people and institutions that needs to be involved, parameters that must be met, and processes that you must slog through to complete a real estate short sale, get a loan modification, or otherwise avoid foreclosure. It’s a complex, specialized kind of transaction, and the entire process tends to have a high failure rate, especially among homeowners that choose to forge th path alone, without professional counseling or help. A knowledgeable, experienced professional can really facilitate the process. A loss mitigation specialist or real estate lawyer who specializes in short sales would be a good person to have on your team during such a time.

We talk a lot about loss mitigation here, but it seems we never give a full, descriptive definition. This is the gist of what the HUD (Department of Housing and Urban Development) says counts as loss mitigation:

Loss mitigation is a service provided by a third party with the goal of helping a mortgage-possessing homeowner lessen the amount of money they lose if they can no longer make their mortgage payments. Usually, it is a division within a lending bank, though it can also be a private financial firm. The process by which these experts try to help decrease the amount of money lost by the bank and the homeowner is to facilitate negotiation between the two parties. Usually they do their best to avoid outright foreclosure.

New terms are often reached through either loan modification, short refinance negotiation, real estate short sales, a deed-in-lieu of foreclosure, or some other form of loan work-out.

These types of services use to be relatively uncommon and reserved for special cases. Nut ever since the 2008 recession hit, more and more homeowners have been turning to loss mitigation tactics to try to deal with financial burden. Unfortunately, this places a big strain on banks, who are unused to having customers feel they are entitled to this service and are struggling to grow their departments.

That’s where outside firms step in and fill the gap- to try to benefit both the overwhelmed bank and the overworked homeowner.

Fifteen United States Senators, including Senator Jack Reed from Rhode Island, wrote to Secretary Shaun Donovan of the Housing and Urban Development department, calling for some sort of plan to help/incentivize lenders and bankers to be more responsive to homeowners.

They say a particular issue is those who have been told by HUD-approved counselors to talk to their lenders and have been turned away or put off for months. One of the first steps to getting a loan modification, counsel most specialists, is to get a hold of one’s mortgage lender and begin working out a solution. If they can’t even be reached in the first place, there’s not much you can do.

California loan modifications in particular require a lot of paperwork. One family put together a ‘workout’ package that was more than two hundred pages long, and then was informed, three months after they sent it in, that it was outdated and they would have to re-do it. In the end, they had to re-do it four times over five months.

Legislators are trying to introduce bills that will take measures to help banks hire more service people and loss mitigation specialists.

Banks in today’s market are made to deal with higher demand for mortgages and mortgage/loan services, including but not limited to refinancing and loan modifications, than ever before. The backlog at lending and banking companies is starting to effect everyone’s ability to access loss mitigation services.

In areas where unemployment is booming, mortgage delinquencies and foreclosures are also on the rise, and even those who manage to successfully secure loan modifications could be in trouble again in home balues continue to fall, or incomes continue to drop.

Lenders are doing their best to expand their loss mitigation services as requests skyrocket, but officials in the industry have commented that the delays are greatly hindering everyone’s efforts to revive the housing market. Loan modification programs are suffering, and short sales are taking way longer than they should. Banks were not prepared for this.

Senators have written to the Secretary of Housing and Urban Development, Shaun Donovan to help formulate a new strategy to help and coerce lenders to help homeowners quicker and more often. Even HUD-approved counselors are having a hard time getting homeowners access to loss mitigation departments.

It takes a very savvy counselor or professional to get banks’ attention and expedite the process. California loan modifications especially are on the rocks.

If you’re in a position of falling behind on your mortgage payments and fear foreclosure, the first and best step you can take is to talk to your lender. Don’t wait until the situation is dire, and you’re delinquent or on the ropes and considering a short sale. Get in touch as soon as you foresee any payment problems.

When you call, double-check and make sure that you have your account information right on hand so you don’t have to make them wait. Be able to give a quick summary of the financial problems you are having, and be sure to have hold of recent income statements and your household budget.

Also, mentally prepare yourself for having this conversation several times, and then to talk to the same person a few times. You will likely have to fill out what’s called a loan “workout” package, to be eligible for a loan modification or other help.

Ask your lender how much time they plan to give you to do the workout, and what your obligations are under its stipulations. And try to swing for your property being kept off foreclosure lists as you work through the workout.

Don’t be afraid to call your lender- it’s not the end of the world to do a little homework and be prepared to save your home form the possibility of foreclosure.

According to a New York Times survey conducted last year, from November 2008 to February 2009, the amount of non-subprime mortgages that ended up being delinquent for at least ninety days was reaching record heights of 1.5 million. The loans that we either in foreclosure, delinquent, or in the process of being repossessed by the lender totaled more than two hundred billion dollars.

In that same time frame, subprime mortgages in the above three categories were topping 1.6 million dollars, and the troubles loans of those with only slightly tainted credit numbered in the hundreds of thousands.

All totaled, more than four million loans, worth more than seven hundred billion dollars, were either 90 days delinquent, being foreclosed on, or being repossessed.

The government is trying to rectify the situation, but is having a hard time putting a dent in the sheer number of people in distress.

One comment: if you’re even nearing the point at which you think you may not be able to cover your payments, act immediately. Do not let yourself get even a little behind- it will only become a more difficult battle from there. Enlist help right away, and contact your lender to see if there’s not something you can work out between you. Between the options of loan modifications, reamortization, restructuring and reinvesting, not to mention short sales, there are many ways to avoid having to go totally delinquent and get your house foreclosed.

The law passed in July of last year forcing lending institutions in California to accept most loan modifications within certain parameters is now helping homeowners avoid foreclosure situations.

California Loan Modification Code (Civil Code 2923.6) took effect last year, and has since been applied to all residential loans from January 2003 to 2007 that are secured by residential mortgages and are the primary home of the owner. The code broadens and extends the Pooling and Service agreements that all residential mortgages have, including a duty to optimize present net value to investors and related parties, to requiring lending servicers to agree to loan modifications.

Basically, homeowners in the State of California have added a new weapon to their arsenal to guard against foreclosure and default, thanks to the California government.  Lenders are literally contractually bound to provide loan mods, which is a total turnaround from standard practice just a few years before, when loan modifications and real estate short sales were relatively uncommon. Now, it seems foreclosure is the absolute last resort, not the norm.

Failure on the part of a lending institution to comply with the Civil Code then allows borrowers to sue for wrongful foreclosure or specific performance problems in any State Court.