Facing Foreclosure? Take A Deep Breath And Don't Panic

The ongoing subprime meltdown will claim its next victims in October, when adjustable rate mortgages worth over $50 billion reset, but homeowners facing foreclosure can keep a roof over their head by following a few common-sense tips. Above all, don’t panic, and don’t ignore the problem – instead, try the following:

  • Reason With Your Lender: Ask and ye shall receive. Explain your situation, and ask for a lower or fixed rate, or more time to pay off the mortgage. As the subprime market implodes, lenders are trying harder than ever to retain paying customers.
  • Call A Counselor: Counselors can help delay foreclosure – sometimes for up to a year – but only if you give them ample time to negotiate with lenders.
  • Lawyer Up: As a last resort, a lawyer can help you file for Chapter 13 bankruptcy, which forces lenders to negotiate a payment plan. Lawyers can also help borrowers who had little chance of repaying truly outrageous loans sue the lender for violations of the Truth in Lending Act.
  • Be careful if you choose the legal route, as Chapter 13 can hurt your credit score, and a failed suit against a lender can put you further in debt by making you liable for attorney’s fees.

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    1. Katharine says:

      I would think a foreclosure would be worse for your credit then a bankruptcy.

    2. logie-al says:

      This meltdown is having much further reaching consequences than just homeowners. I was rudely informed this week that my bank, Old National Bank in Indiana, is calling all of my business loans. I have never missed a payment, always paid more than the minimum, and have been a loyal customer for nearly 10 years. Now they are wanting me to come up with nearly half a million dollars in 4 months. And I’m not the only in this town. I know of at least two other business owners that they have called their loans on also. Both have successful businesses and always pay their bills, but because Old National’s lending department is getting killed by the meltdown, they are trying to get money from wherever they think they can. But now, I may have to close my businesses and possibly go into bankruptcy because they can’t pay THEIR bills. Just a matter of time before they call my car loan…

    3. tcm22 says:

      I think the original author needs to understand a bit about causality. The aforementioned “meltdown” is not what causes the foreclosures. It is the effect of the foreclosures on the overall market that is causing the “meltdown”, not vice versa. It is a result of “victims” who took out home loans, promised to repay, and have now defaulted once interest rates started to vary.

      If people go ahead and pay what they agreed to pay when they signed the contract, the “meltdown” will have no effect.

      Here’s a hint — don’t take out loans you can’t afford to repay. I took a fixed rate mortgage in 2005 rather than risk increased payments of a variable rate, despite the initial low rates.

      The real victims here are not the homeowners getting foreclosed, but the employees and shareholders of mortgage companies who are now left holding the bag while the other “victims” default on loans they never should have been given. Lots of business made high risk loans that should never have been made to begin with. The deadbeats who default on them aren’t the ones suffering.

    4. jkings1 says:

      My only caution is that lenders sold the mortgage loans in the secondary markets and generally act as “servicers”. The thumbs up or down decision on whether new payment terms can be formulated rests with the holders of mortgage backed securities (MBS), which is generally a fairly narrow one sized fits all formula.

      With respect to the guy who banks with Old National, if this is true — that your business loans are being called — it’s a major story for it shows this lender is on the way to needing intervention from the FDIC. If a Top 100 bank is calling relatively small 1/2-million dollar loans we’d all better start getting our mattreses ready to store cash. If you have documentation, I’d like to see it… you can redact names, figures, etc.. but i would love to see this. My email is jimkingsland@gmail.com.

      TCM22.. your comments are wrong. Supremely greedy lenders and Wall Street counter parties capitalized on the greed, lack of self control and lack of sophistication that is prevalent in our society. I have no compassion for the employees, or shareholders of companies who capitalized on the $2 trillion in subprime loans issued over the last three years and then had those loans further fashioned in toxic but high fee yielding mortgage backed securities and derivatives like CDOs. oh, and don’t rest on your laurels as a fixed rate mortgage holder who is above the frey. Fixed, or not… I see nothing smart in taking out a mortgage in 2005, which was the peak year for the housing market. Ouch!

    5. chili_dog says:

      DO NOT fall for this “calling for repayment” scam. Certainly the bank is in need of funds and believe you will fall for it. If you have a loan doc, you are protected even if the lender fails. Because who ever buys the debt will have to honor the contract. If you can’t or don’t know who to pay, simply set up a separate account, usually with your lawyer as an escrow to show that you made payments on time and as per the contract agreement. You will be safe, this happened to me several years ago.

    6. jkings1 says:

      Loans can be called… don’t fool yourself.

    7. julienne says:

      @Katharine: Yes, a foreclosure is worse on your credit than a bankruptcy. A bankruptcy wipes the slate clean, giving you a fresh start credit wise. My clients have been able to get new home loans less than 2 years after a case closes. Other credit is even easier to get.

      The problem with the Chapter 13 remedy is that most people can’t afford their house even with a debt repayment plan. They have to make the current payment plus a payment on arrearages every month without fail, or they go back into foreclosure. To restate the obvious, lax lending standards put too many people into houses they couldn’t afford.

      I push the Chapter 7, which wipes out the foreclosure, credit cards, medical bills, repossessions, etc. But it’s never any fun to tell someone, “You’re going to lose your house.”

    8. smarty says:

      Sorry, no sympathy for the 1 year ARM/subprime purchases. Bought a place in 2005 and put 20% down on a 30 year fixed rate. Imagine that, one of many homeowners who did something called RESEARCH before making a big purchase. I seriously considered 7/1 and 10/1 ARMs for the lower rates, and with idea that I would sell it before the 7th or 10th year, but the lower rate with the 7 or 10 years ARMs were not significant enough. Oh, they wanted to sell me 1 year ARMs, and pushed it hard, but once again, something called RESEARCH gives more factual information than SALESPEOPLE do. Sure, I wanted a bigger place, but RESEARCH told me to buy an AFFORDABLE house with a 7/1, 10/1, or 30 year fixed mortgage and 20% down. Foreclose all the idiots and fast.

      Sympathy for business owners like Logie-Al, sorry that you are being screwed because a lot of the public are nothing but sheep who are easily led by salespeople. Instead of blaming themselves for not doing RESEARCH, they play the victim mentality that is encouraged in today’s society, and in some cases, by the Consumerist.

    9. jkings1 says:

      Smarty.. you’re admitting you bought a home in 2005 at the peak… and that you feel you did RESEARCH which resulted in a good decision? LOL.

    10. synergy says:

      Sorry, still not sympathetic. It’s called not trying to live outside of your means.

    11. pureobscure says:

      The real problem with ARMs is that people don’t put that money aside during the initial lower rate period. They see the “extra income” as an opportunity to buy more stuff, or take a nice vacation. I see it all the time amongst the people I work with–and it’s simply impossible for me to feel sympathy for them. It’s just not that hard; live well within your means, and forget about keeping up with the Joneses.

    12. lil-piggy says:

      Logie-Al – what an interesting comment, made me retrieve all your comments, which made me doubt the completeness of your comment here. since you cited the name of a nyse listed company, i hope for your sake that you can back up the statements that you made, can you cut and paste the logo and test of the loan call letter? – thanks

    13. smarty says:

      @jkings1: Yep. Obviously you didn’t read. I had planned on living here for 7 – 10 years. That means I would not be flipping it in a year or two or three using the ARMs that are part of the housing market mess. With a 30 year fixed mortgage, I’m not beholden to interest rate changes. To put it in simpler terms you can understand, my total principal and interest per month does not change. Also, according to Zillow, my house has increased by $19,000 from what I paid. And Zillow shows a sale of the same model house 1 block over (same builder) at $2k over that (sale in June 2007). Eppraisal shows +$15k total value. Lastly, you obviously didn’t do ANY research before posting because the housing market is a cycle. That means home prices will go up, down, and sideways.

      [www.dallasnews.com]
      “Dallas home prices rise among few U.S. gains” – read the full article, at the end the person interviewed said to ‘wait and see’ for anyone considering buying now at the peak. I bought two years ago. “Peaks” are different for different cities, counties, and states. It’s ok that you didn’t know that.

      [money.cnn.com]
      Area: Dallas-Fort Worth-Arlington, TX
      Median Home Price:$156,500
      Change: 1.7%
      Check out Salt Lake City, up 21%! But Palm Bay, FL down 15%!

      Please explain how the peak in SLC was in 2005 when they just had an average gain of 21%!

    14. jkings1 says:

      Smarty… you’ve been checkmated already. THe fact is, you bought a house in 2005… LOL!!! Don’t brag about that… it almost makes me wince that you don’t realize how foolish it sounds. And now you’re bragging about a $19,000 gain??? LMAO!!!! Nationally prices peaked in 2005…. undisputed fact. Rest assured, that while your market has been flat to a touch higher over the last two years (spare me the $19k gain, puhlease) you will regret buying at your 2005 home price and those folks in Utah will be feeling even more moronic than you will.

      [www.winterspeak.com] You’re right it is cylical, but the little picture there in the link gives you an idea of just how out of control the cycle was and what reversion to mean is in housing peaks and valleys. Draw yourself a trendline from WWII to the end of that graph (you can do that I hope). If housing reverts back to the trendline as it has for the past 60 years, you’re looking at home prices going back to 1997 on a national scale. Let’s say Dallas only gets to 2001… you will no longer be sitting pretty having jumped in near the top, which is where you are if your home value has only risen by $19k.

      Oh, and Zillow??? Please stop me from near death by laughter. ROTFL!!!! They have mine valued at $1.02 mln (which I’m sure you won’t believe, but who cares)… basically unchanged for the last year. I can tell you here in burbs of NYC, house prices haven’t crashed, but I know there is no way I could sell my house in a reasonable period of time even for $850,000 given that the jumbo market is almost dead. Even townhouses priced at $350k are dead money right now and that would be a value that falls within conforming loan standards.

      You need to do better research sonny. You’re only as good as your information.

    15. smarty says:

      @jkings1: You’re still wrong. Peaks are different for different areas, something you still can’t comprehend. And what’s moronic is you saying that someone who bought a house nearby in 2004/2005 and sold it for around a $21k gain in 2007. That person made a nice little profit, what’s wrong with that? Yet you say they are stupid for buying a house in 2005? Or some people in SLC made a $21% gain from buying a house in 2005/2006 and sold it in 2007 are moronic? Your logic defies common sense. Being from NY, I would think you’d understand buying low, and selling high. Clearly you don’t. What housing does in NY doesn’t mean that’s what happening in other parts of the country. All you have to do is understand that some people in SLC just made a 21% gain from the sale of their home a couple months ago. That means if they bought a $100k townhouse in 2005, they just sold it for $121k. Maybe I’ll sell my place, but I doubt it cause I like the area, I like my career, and the friendliness of most of DFW. I have a home with a front and back yard for my dogs and child to play in, and I have some nice neighbors. I may live in it for 5, 10, 25, or more years. Sorry, but I enjoy this place. I just feel sorry for you grandpa, for some reason, you have to berate everyone for buying a house in 2005 like a bitter old man.

    16. kromelizard says:

      @tcm22: @smarty: You’re both so unfortunately dumb it makes me sad. You’ve already been fucked and are convinced you should sympathize with the people who did it to you.

    17. thepounder says:

      @jkings1: SMARTY might just live somewhere like I’m lucky enough to; where all this garbage hasn’t effected anything really. One nice perk of living near the military. I’m just saying…

    18. ctan says:

      SMARTY: You are correct in the respect that some places peak more than others and Texas may be better than most in the country because of the restrictive limits on lending in that state. However, once the foreclosures really start to hit in the next two to three years and we see 2.5 to 3 million bank owned properties for sale in that same period of time, the value of your home WILL fall, it just has to. If you purchased the home as an investment then you should sell, if not then live there and be happy, nothing wrong with that.

      As far as the misconception that a sub-prime loan has a “teaser rate” and then adjusts to the real rate. I’m here to tell you that is just not the case. A sub-prime rate is most commonly a rate fixed for two years with a two-year pre-pay and then there is the less popular 3-year variation that carries the three-year pre payment penalty. At the end of the fixed portion of the term the rate jumps by 3 % and then by another 1% every six months until it reaches its “cap” or “ceiling” of generally 7.5% ABOVE THE INITIAL START RATE (The ceiling is somewhere between 13% and 15% based on the average rate being offered at the time). Now I told you all of that to tell you this…. these loans were designed to force the borrower to refinance, its as simple as that. All was well and good until the price of housing reached a point that the average homebuyer could no longer afford the average priced home, at which time the market started to fade.

      All this brings us to the final blow that ultimately IMO will bring the economy of this country to its knees. On 3/1/2007 “Black Friday” the SEC raided Freemont Investment and Loan, giving the whole industry a massive black eye. Within three days all 100% ltv sub-prime loans where gone (notice though that FNMA can still do these loans…hmmm almost suspicious) and now all these sub-prime borrowers are stuck in loans that are destined to adjust to 15%, which of course they cannot afford.

      The point is this, nobody should be hoping for families in this country to lose their homes. What kind of inhuman, anti American crap is that? I just can’t imagine what kind of person it would take to actually wish that on another family, it really makes me want to puke.

    19. smarty says:

      @ctan: Yeah, I know it’ll fall, it already has according to Zillow. But we have no plans to sell, and payments (very affordable at ~27% of our net salaries) are not increasing with a fixed loan. That doesn’t mean I’m safe, job changes may require a move. But the gov rarely decreases in size, so I’m pretty safe. The wife at a private company is at more risk of a job loss. However, I continue to add to our emergency fund, with one year safe, and planning to add until it’s at 18 months. All my research shows that Texas didn’t experience the sharp increase during the boom as others did, and is expected to experience a moderate decrease. [www.dallasfed.org]
      That article was one reason we went with a 30 yr fixed, instead of 7/1 or 10/1 ARM.

      More recently, it looks like Texas especially is NOT one of the overvalued housing markets which have the greatest risk.
      [money.cnn.com]

    20. howie_in_az says:

      Since there’s all sorts of drama going on in the mortgage industry, would now be a good time to phone one’s lender and negotiate for a lower interest rate? I’m in no danger of losing my house and have a fixed-for-30 rate, but it seems like I should make like the poor people and cash in while I can; why should the people that can’t pay their loan get out of higher interest rates if I can’t as well?

    21. ctan says:

      Yea Howie absolutely just put all your mortgage payments in the bank instead of sending them to your mortgage company. Then after your credit is completely destroyed from a 180 day late on your mortgage your lender should be willing to talk, assuming of course that your interest rate is high enough that renegotiating the note would make a difference… Or I supposed you could just refi

    22. kylere says:

      I have tried and failed to have any sympathy for people that get a long term loan with no real restrictions on what the holder of the note can do.

      When I acquired my current 5.15% fixed rate loan, i could have had a 3% and change ARM. But not being a fool, I took the smart choice. The first step to being a good consumer is self education, the most common failing is GREED.

    23. zibby says:

      Also, have a Jamba Juice.

    24. ctan says:

      KYLERE Just an observation, but you’re not a sub-prime borrower. If you have a fixed rate of 5.15% then you have received one of the very best rates that has ever been offered in the history of mortgage lending in this country. No joke, there where only a couple, maybe three weeks over the course of the last few years that the rate dipped that low. You don’t empathize with the sub-prime borrower but you wont sympathize as a matter of choice. Sympathy exists when the feelings of one person are understood and appreciated by another, empathy is actually sharing another’s suffering. You apparently are incapable of either.I hope you’re not offended, you chose the words to post, I was just making an observation.

    25. robperryrob says:

      I never thought of “Reasoning with my lender” so taking your advice I called US Bank and asked if I could defer payments or pay interest only for six months. I also mentioned that I had paid the loan down over $100,000 over the last 5 years and never missed a payment. I didn’t expect anything, but the denial was surprising: “We don’t offer any assistance until after you default on a loan.” OMG ROTFL LOL