Posted on 01/07/2009 4:19:03 PM PST by Tidbit
How To Restructure Without Getting Taken
Best friend from law school (and her husband) live in the Phoenix area. Their home value has decreased so drastically that they're upside down on their mortgage to the tune of $600K. They aren't behind on payments, nor do they have any trouble making their payments. Although, her husband is in the construction industry, and has experienced a $100k reduction in income.
They are considering mortgage restructuring, but don't want to get taken in by somebody crooked.
Ethical questions aside, can anybody help me point her in the right direction? How do they begin to educate themselves on this issue? And then how do they find somebody honest to work the deal? Does restructuring impact their credit record? Is restructuring something that only irresponsible people do?
And is restructuring something that folks will be doing for the foreseeable future? They have no plans to move, per se, but are afraid if they don't take action now, they'll be stuck at some point down the road. There's definitely a psychological element here: they feel trapped in a home that may not recoup it's value for 20 years.
It's gut wrenching when you consider that these are people who basically did everything right.
If they are that far upside down they most likely will not be able to restructure unless they have a bunch of real property to put up as collateral.
I don’t think restructuring effects their credit but then again the loan modifications we hear about usually require you to be behind on payments.
If a person owes more on the home than its worth and is making payments why would the bank restructure? They certainly aren’t going to reduce the mortgage amount.
But then I’m not a mortgage broker. Good luck
www.naca.com l-o-o-k-s like a legit website for info on this.
I’m not sure about programs offered in Phoenix. Here in Sacramento I know of at least one company that will try to find a pool of mortgages from the same lender, and will try to buy the notes at a discount. If they can buy the notes at 35-50% of the current market value, they then restructure the mortgage at 75% of current market value at a fixed rate. Obviously, you have to request to have your mortgage included in the pool, and there is a fee of $2500. However, they give a written guarantee to refund your fee if they cannot purchase the mortgage and restructure it within 12 months.
The theory here, of course,is that many of these mortgage holders are holding a lot of potentially bad paper, and would rather sell it at a discount now, rather than take the risk of having to foreclose on it later and then resell it at an even greater loss. I can’t testify to their success ratio, but there may be something similar in the Phoenix area.
First of all, if one or the other has been thru (or near) law school, they shouldn’t need fourth-hand info on how to do this.
That said, all banks I’ve encountered and read about require an element of “proof” that the borrower is “distressed”. That has 2 possible meanings: It means, they can’t make the payments. It could also mean they WON’T make the payments. The idea that they want a mort principlal reduction because their or someone else’s opinion is that the value of the home has dropped is just flat out irrelevant. Even if true. These workouts aren’t just handed out. If they can still make the payments, the lender has zero motivation to adjust the mortgage and typically won’t even discuss the issue.
So, they have to stop making payments before the lender will consider a workout. There are of course credit rating considerations, business continuation considerations, and there are recourse considerations (whether the lender can seek to attach other assets beyond the home itself; which has to do with which state they are in and whether they ever refinanced the home or are still paying ONLY “purchase-money” mortgage payments.
A Phoenix home underwater by $600K (using your number) is probably quite the spread. They have to work out an exit strategy which may involve constructively (purposely) defaulting on their loan. They may indeed be loads better of just walking away. That they did the right thing by paying their mortgage timely doesn’t seem to be any kind of ideal currently applauded in this country.
Move America Forward spokeswoman/Blue Star Mom Deborah Johns is in this field. If you want to send me an outside email or phone number by private mail I can forward it to her.
In some cases (perhaps all), I've heard that the IRS considers this money forgiven debt and makes you claim it as income so they can tax you on it.
I have heard that too, I didn’t consider that. I’m glad you mentioned it. I think that’s wrong. Forgiven debt shouldn’t be considered as income under any circumstances. That’s crazy. Especially when you consider how all of these banks aren’t paying taxes on the bailouts.
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