Forestalling the Foreclosure

Everywhere you look, and in every direction you turn, the U.S. housing market calamity is the topic of the day. The bottom continues to fall out of both new and existing home sales, with no end in sight. Mortgage lenders have been devastated, and banking institutions have also begun to feel the heat. Business has fallen off for realtors, homebuilders, investors, home improvement stores, and just about everyone that has any stake – directly or indirectly – in real estate. And although most pundits point to a record number of foreclosures as a leading cause of the industry's woes, there seems to be little real concern for the actual victims of those property losses. Each foreclosure statistic is more than just a number; it's an individual or family who's been uprooted from their home. What can be done from the viewpoint of those at the grassroots level, that is, the homeowners?

If you're a homeowner and you're behind on your mortgage payments, there are steps that you can take. The first and most prudent thing that you can do is to contact your lender. Do this as soon as you begin to feel a financial strain developing; there's no need to wait until you start missing payments. Approach the lender and discuss your situation. Remember, it's in absolutely no one's best interest for you to default on your loan, and the vast majority of mortgage lenders will do all that they can to help you meet your obligation. And by being proactive in your circumstance, you're letting the lender know that you're not going to run from your responsibility, and this will go a long way toward inspiring the lender's trust and desire to work with you.

However, if you're already so far behind that the lender has already begun to mention the "F" word, all still may not be lost. Again, make contact with your lender and try to negotiate an agreement to work out your financial difficulties by way of an extension, a refinance, or some other method. The point here is to head off, if at all possible, the foreclosure process before it starts.

Before going any farther, be sure to familiarize yourself with your loan documents to see if you have the right to bring your payments current once foreclosure documents have been filed. Most states typically use either a mortgage or a deed of trust to secure real estate, and both generally allow the homeowner to reinstate the loan by bringing the payments current at any time before a notice of sale is advertised. You may be able to arrange replacement financing with the same or a different lender, a friend or family member, or by taking in a partner in an equity-sharing agreement.

Of course, in some instances, there may not be very much that you can do to avoid the unavoidable. Once the foreclosure course actually begins, you're fighting a completely different battle. And although some (depending on the homeowner's unique circumstances) can't be won, it may be possible in many cases to either delay or completely stop the process. For instance, just because your home is already in foreclosure doesn't mean that you're no longer allowed to talk to or negotiate with the lender. It's certainly not too late, though the prospects for your success rest squarely on how amiable (or not) the creditor still is toward the idea of working with you. (This is the main reason that you don't want to let a lot of time pass and the situation to get beyond critical before you attempt to sit down and have a meeting of the minds with them.) You may be able to come to some form of concord, such as a forbearance agreement. Using this instrument, the lender may agree to accept a lower monthly payment from you for a certain period of time. The unpaid amount would continue to accrue (along with corresponding interest, of course) and be added to the balance of the loan and payable as an extension – that is, additional payments tacked on at the end of the mortgage.

Additionally, if you're in the midst of a foreclosure and you have a second (or even third) mortgage on your home, you might try to negotiate with one of these subordinate lenders to pay off the higher loan(s) and incorporate it into a single new loan, thereby giving you only one monthly payment to contend with and also (possibly) extending the life of the mortgage and, hence, lowering the payment amount. This actually puts the subordinate lender in a safer investment position because he or she would now be the first mortgage-holder.

If you're not successful in negotiating with the lender or obtaining other financing, the court will afford you an opportunity to answer the foreclosure complaint and state your case. You'll need to make an initial written response to the suit, so carefully study all of the information at your disposal – looking specifically for any errors in the lender's figures, inaccuracies in the property's legal description, or any other inconsistencies you might find that would constitute grounds for a counterclaim against the lender. Federal Truth-in-Lending laws demand strict adherence, and violation of these disclosure regulations can subject a lender to heavy fines. If you can prove to the court that the documents provided by the lender don't meet the requirements set forth by law, you may be able to have the entire foreclosure procedure rendered null and void. Furthermore, the foreclosure judgment could be withdrawn (even after the redemption period has expired) if you can prove that the lender didn't make a reasonably sufficient effort to contact you or that some other error occurred during the process. But even if you find that the lender made no mistakes and you have no defense, you should still take the opportunity to answer each point of the lender's contention with explanations that you think the court should consider.

You may also be able to bring a countersuit against the lender if they've intimidated or threatened you in any way. The Federal Trade Commission (FTC) spells out your rights and a debt collector's responsibilities in such situations. If you feel that the lender has used unfair, deceptive, or heavy-handed means during the foreclosure process, be sure to note this in your written answer to the court.

A few other alternatives that may (or may not) be worth considering:

• Offer the lender a partnership in your home. If you're significantly behind on your payments and can't find a reasonable way to catch up, offer the lender part ownership of the equity in your property. In return, request that the lender cancel a portion of your debt. This option may work well if you've owned your home for a number of years (and thus built up a considerable amount of equity) or you're in a market that's experiencing rapid appreciation.
• Offer the lender the additional collateral. If your loan balance is close to the value of the property (in other words, you have little equity built up), you may be able to persuade the lender to be a bit more lenient with the addition of extra collateral. This will place the lender in a more secure financial position and, hopefully, give you more time to overcome your financial difficulties. However, it may also encourage an overzealous lender to foreclose more quickly, no longer fearing that the proceeds of the loan won't be fully recovered because it now has access to the supplemental collateral. So be very careful here.
• Offer the lender of 'carrot.' Cash often speaks louder than anything else. Offer the lender a few points in cash as compensation for a temporary payment moratorium. If the interest rate on your loan is lower than prevailing market rates, you may find the lender quite agreeable.
• Sell your home. If it becomes painfully obvious that you can no longer afford your house, then a prudent course of action might be to sell it as quickly as possible in order to pay off the mortgage. Although a somewhat drastic measure, if the loss of your home is unavoidable, then it would make little sense to let your credit go down the drain along with it. It's quite possible that a sale of the property will not only prevent a nasty negative mark in your credit file, but also keep you from substantial attorneys' fees and a possible deficiency judgment against you should the property bring less than the outstanding mortgage balance in a foreclosure auction.
• Let the lender know that bankruptcy may be looming. If all else fails, you might consider the option of bankruptcy to dissuade the lender from pursuing foreclosure. Or, you could try to get the lender to accept a deed in lieu of foreclosure, if they'll also agree not to seek an additional deficiency judgment.

If your home is in trouble, you're encouraged to not only seek professional legal advice, but also to educate yourself thoroughly on your responsibilities and rights under the law. Any bank can provide you with material about Regulation Z, or you can use the Internet for a more in-depth study. The FTC's website is also a valuable source of information regarding consumers' rights.