Short Sales - A Guide For Foreclosure Investors - Part 5 BRICKWALL DEADLINE?
What if the homeowner contacts you just a day or two before the
foreclosure sale is scheduled? In some states the homeowner can ask for one
delay. Or…
You can contact the loss mitigation division, explain that you want to buy the
home if they will consider a discounted payoff… and delay the sale. Sometimes
they will.
The last resort is one we explain in “The Million Dollar Foreclosure
System”. Bankruptcy! That will stop the foreclosure cold. If you just need a
couple of weeks to workout your deal with the mitigation division this could be a
good tactic.
Don’t do it unless you have learned from the lender’s mitigation rep that
they are open to a discounted payoff, but they won’t delay the sale… or you have
a backup plan for buying the home.
You could warn the mitigation department that if they don’t delay the sale
the homeowner has bankruptcy petition papers filled out and ready to file that
afternoon. That may move them to action… or not.
You can buy a do-it-yourself bankruptcy kit at an office supply store. Help
the homeowner fill it out. Then drive the homeowner down to file it at the federal
courthouse (or the local equivalent).
Call the office that would be conducting the foreclosure sale and inform
them the defaulting homeowner has just filed for bankruptcy. You will find the
name and address of the entity handling the foreclosure on the notice of
foreclosure. That office may require that you deliver a bankruptcy court certified
document to them. Either way that stops the foreclosure.
If you are then able to work our your discounted deal with the mitigation
division explain to the homeowner that if they don’t show up for their court date
the bankruptcy will automatically be dismissed.
FORBEARANCE
If the homeowner’s monthly mortgage payment is $700 (for example) and
he is six months behind with payments you may be able to workout a
forbearance agreement with the lender. This is a way the homeowner can
establish a payment plan to pay off his arrears.
You learn that the homeowner is $4,200 behind in monthly payments and
fees. Propose to the mitigation rep that the homeowner can pay $2,000 now and
an extra $366.67 each month for the next six months. For those six months the
homeowner would be making payments of $700 plus $366.67 for a total of
$1,066.67 monthly.
If the homeowner couldn’t afford the extra $366.67 per month you could
ask that the lender allow the payments be spread over 12 months. If the
homeowner can’t even afford that sometimes the lender will add the arrears to
the end of the loan.
If the homeowner faithfully makes the forbearance agreement payments at
the end of six months they would be out of default and could go back to the $700
a month loan payment. If they don’t the lender can restart the foreclosure at the
point they stopped it.
A foreclosure investor can benefit two ways from a forbearance
agreement.
If you find a homeowner facing foreclosure and they won’t consider selling
to you ask if they would like your help in stopping the foreclosure. If they say yes
you contact the lender and try for a forbearance agreement.
Explain to the mitigation rep that you are a friend of Ms. Homeowner and
you would like to help her get the foreclosure problem cleared up. Tell the rep
that the homeowner is working again and is now able to make the payments.
Ask the rep if there is any way she could make up the back payments a little
each month.
You want the mitigation rep to suggest the forbearance agreement. You
don’t want to be the one who mentions it. Then you can negotiate how much will
be paid up front and how much can be added to each payment for a number of
months. The rep will ask that you send some proof that the homeowner will be
able to make the payments… pay stubs, etc. If that is acceptable the rep will
send the homeowner an agreement to sign.
Some investors have turned forbearance negotiating into a business.
They charge the homeowner for this service and use it to find deals.
They may run an ad like:
STOP FORECLOSURE!
We can help you save your home.
Call 1123-4567
They collect a few hundred dollars to arrange the forbearance and then
stay in touch with the homeowner. A high percentage of these homeowners are
back in foreclosure within 12-months. The investor already has a bond with the
homeowner and is in the best position to buy the home through a short sale or
“subject to”.
You may find a homeowner in foreclosure that just wants to get out of the
home and get on with their life. If you don’t have the cash to do a mortgage
discount deal with the lender try for forbearance on behalf of the homeowner.
If the lender agrees, you buy the home “subject to” the existing mortgage
and forbearance agreement. If you flip the property on a lease option you
probably would have negative cash flow for the few months of the forbearance
agreement. If the property had equity you could tolerate the negative if you
could cover it from other cash flows.
There may be some danger of the lender’s mitigation division learning that
you have purchased the property. That might be a violation of the forbearance
agreement and restart the foreclosure.
A better idea might be to get an option to buy the property contingent upon
you being able to work out a forbearance agreement with the lender on behalf of
the homeowner. Your option consideration would be the lump sum payment that
would come at the beginning of the forbearance period and the amount of the
monthly payment over and above the normal payment. $366.67 in the example
above.
At the end of the forbearance period you would exercise your option and
all option consideration would be credited toward the purchase price.
This option would be a confidential agreement between you and the
homeowner and not something the mitigation rep would need to know about.
RECAST
In some cases when a borrower is in default the lender may consider a
request to recast the loan. That can mean a number of things. The lender might
lower the interest rate, or allow interest only payments for 12 months, or add the
arrears to the end of the loan, or…. Well you have to ask the mitigation rep if they
will recast and just how will they recast.
BACKGROUND
The widely used Fannie Mae/Freddie Mac mortgage form requires the
lender to send a 30-day cure letter to the borrower. The cure letter gives the
borrower 30 days to bring payments current or face acceleration of the balance
of the loan. After the 30 days have passed, the lender basically has the option of
saying we no longer wish to accept the arrears, but we declare due now the
entire balance of the loan.
As a practical matter most lenders will attempt to collect arrears and will
not start foreclosure proceedings for at least three months or more. When a
foreclosure is started in states that require a judicial foreclosure the lender's
attorney will typically search the public records to determine whether anyone else
has any liens on the property and name those parties as defendants in the
foreclosure action.
That step ensures that whoever buys the property at the foreclosure sale
will get title free of liens. Identifying, tracking down and serving other lien holders
with the foreclosure papers can take many months.
In trust deed states the procedure moves faster, because the trustee just
sends notices to the address found on each lien. The lien holders do not have to
be “served” with notice in most trust deed states.
While a homeowner can arrange a so-called workout to avoid foreclosure
at any stage, the faster a borrower acts, the better his chances. Most lenders and
mortgage service companies have foreclosure prevention departments. They
are there to try and find a way to avoid taking away the home.
Fannie Mae, a government-created company that buys residential
mortgage loans on the secondary market, has a number of Home Saver
Solutions for borrowers who fall behind on their mortgage. For example, one of
the "easiest fixes" Fannie Mae lenders can provide occurs when a borrower
misses a single payment. If this is a one-time occurrence; the lender will work
out a pay plan so that the borrower can spread out the arrearages over five
months.
Such a workout is most useful for borrowers who have had a temporary
drop in income, possibly because of a job loss or unexpected bills.
It is also possible for homeowners who have fallen behind on their
mortgages to take advantage of some other strategies intended to avoid
foreclosure.
In some cases, lenders will agree to a "special forbearance," whereby the
lender may provide for a temporary reduction or suspension of mortgage
payments to let a homeowner in arrears recover. In most cases those most likely
to qualify for a special forbearance have temporarily lost jobs or incurred unusual
expenses and can prove that they will be able to make future mortgage
payments.
Another possibility is mortgage modification. The borrower may be able
to refinance the debt or extend the term of your mortgage loan. If current interest
rates are significantly less than the interest rate on the mortgage, the lender
might be willing to refinance the loan to a lower rate, reducing the monthly
payment. As with other arrangements made with lenders the borrower must be
able to convince the lender that he is in a position to make the new mortgage
payments.
In some cases homeowners who have loans insured by the Federal
Housing Administration and who are behind in their mortgage payments may be
able to get a "partial claim" from HUD. If an FHA loan is delinquent for between
four months and a year and the lender had not yet started a foreclosure, a partial
claim may be possible if the borrower can show that he can resume the regular
monthly payments.
With a partial claim HUD provides the money to the lender to bring the
mortgage current in exchange for the borrower's agreeing to repay the money to
HUD — interest free — when the property is sold.
But why would lenders be willing to go so far to help out borrowers who
are not making payments? Because the lender doesn't want to own houses!
There are other potential solutions to mortgage problems that lenders
might consider. If there is enough equity in the house to pay off the mortgage if
the house is sold, the lender may hold off on foreclosing, provided that the lender
believes the borrower is making a good-faith effort to sell the home at a
reasonable price.
Here’s another idea. Chapter 13 bankruptcy allows a debtor to pay off
money he/she owes over time. The bankruptcy court judge can approve any
repayment plan that is recommended by the bankruptcy trustee. The repayment
plan would be for all debt and not just what is owed to a mortgage lender.
If the debtor’s financial problems seem to be behind him and the trustee
believes he has the income to satisfy his debts over a proscribed time period the
trustee will recommend that a foreclosure be placed in abeyance.
The repayment plan would include all monies owed to creditors, but we
will focus on mortgage payments. Let’s say the homeowner owes the lender
$10,000 is back payments, fees and foreclosure costs.
The bankruptcy trustee determines that the debtor has enough income to
pay off all of his debts over a period of 36 months. He divides the $10,000 owed
the mortgage lender by 36 months and comes up with $277.78. The
homeowner’s regular monthly mortgage payment is $732.50. The additional
$277.78 would be added to that for a new monthly payment of $1,010.28.
Could you buy the home after the payment plan had been mandated?
You would only do so if it would be a sensible deal. The opportunity might arise
under a couple of different circumstances. The homeowner might find the
financial strain of sticking to the payment schedule was affecting his family life.
He would sell to get out from under the larger monthly payment – move to a less
expensive home and focus on paying off the other debts covered by the payment
plan.
If you found a very motivated seller in foreclosure you might suggest
Chapter 13 bankruptcy as a last resort in curing his financial difficulties. You
would help him through the process and then buy his home.
In both cases you could consider buying “subject to” the existing mortgage
and repayment plan. Or you might have the homeowner give you an option to
buy the home, and then contact the lender and negotiate a discount for an early
payoff of the loan.
As an added incentive to the seller you might even offer to lease/opltion
one of your other properties to him. This would allow him to move into a home
he could afford, rebuild his credit and have a chance to own the home at the end
of the option period despite a bankruptcy and foreclosure on his credit record.
As you can see there are a number of ways a clever investor can use a
program to help the homeowner and himself.
SCAM ALERT
Filing a bankruptcy petition automatically stays--stops for a period of time-all
actions against the debtor or the debtor's property, including collection,
foreclosure, and repossession. In recent years some people in California have
created whole businesses out of the delay possibilities provided by the automatic
stay. These entities often advertise as "foreclosure services" or "mortgage
consultants."
+ The fractional interest transfer scam. A bankruptcy debtor receives a
5% or 10% interest in property that is held by another borrower who faces
foreclosure. Because a bankruptcy debtor then holds the interest, the original
borrower's creditors cannot foreclose until the bankruptcy judge lifts the
automatic stay.
.
One homeowner facing imminent foreclosure was approached by a scam
perpetrator, and agreed to sign deeds of trust and grant deeds transferring
fractional interests in her property. The homeowner paid the foreclosure
consultant a few hundred dollars per month.
The recipients of the fractional interests included homeless individuals
and apparently fictitious people. Eight of them filed for bankruptcy one after the
other. Each filing stayed foreclosure on the homeowner's home, causing a 10month
delay between the first filing and the completed foreclosure.
+ Serial filings by related debtors. The same individual or related
individuals file several bankruptcy cases in a row to delay foreclosure.
+ Voluntary dismissals of serial Chapter 13 cases. The debtor asks
the court to dismiss the case. When a bankruptcy trustee obtains dismissal of a
case for failure to appear or make required mortgage payments, the dismissal
order usually prohibits the debtor from again filing for bankruptcy within 180 days.
A voluntary dismissal avoids this prohibition. The debtor can immediately again
file, renewing the automatic stay.
+ Involuntary petition scams. Under certain circumstances, the
Bankruptcy Code permits creditors to file "involuntary petitions" against
borrowers. In this scam, an entity will file--for a fee--a bankruptcy petition against
an individual facing foreclosure, causing the automatic stay to take effect on the
individual's behalf.
+ Phony alias amendments to petitions. The bankruptcy petition is
amended to add an alias name of the debtor. The alias is actually the name of an
unrelated person. The amended petition is recorded or otherwise used to stop
eviction or foreclosure proceedings against the unrelated person.
Many foreclosure services falsely promise homeowners that they will work
out problems with lenders. Some debtors do not even know that bankruptcy
petitions have been filed in their names. A debtor may think the foreclosure
service is working out the lender's problems, when in reality the service simply
placed the debtor in bankruptcy to obtain the stay's temporary protection.
Other debtors may not know that properties have been transferred into
their names to delay foreclosure in fractional interest scams.
Some bankruptcy foreclosure scams involve the use of false Social
Security numbers, harming the credit records of innocent bystanders--the real
holders of those Social Security numbers.
.
IN CONCLUSION
At this point you should understand that there are plenty of ways to profit
without being dishonest. Yes, your goal is to make money, but you can do that
by lifting some of the worry from the shoulders of defaulting homeowners.
Go Forth and Prosper! This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
