The following questions have been asked recently about distressed sellers and related issues.
The homeowner is falling behind with mortgage payments and fears foreclosure. How can the broker help?
The broker may refer the seller to independent, not-for-profit housing counselors for financial advice. Distressed sellers may obtain free personalized advice from counselors certified by the U.S. Department of Housing and Urban Development at 1-888-995-HOPE. This toll-free number is answered 24 hours a day by highly trained, compassionate credit counselors who will help the homeowner establish a budget, understand the terms of his or her loan and talk with the lender. Also see the Homeowner Resources on Page 11.
The broker may also wish to discuss alternatives for avoiding foreclosure with the homeowner, as outlined on Pages 1-5 of the March 2009 Legal Update, “Working with Distressed Sales,” at www.wra.org/LU0903, and the January 2007 Legal Update, “Avoiding Foreclosure,” at www.wra.org/LU0701.
A seller in foreclosure has been contacted by an “investment company” claiming they will pay off the mortgage and allow the seller to stay in the home by renting it and later buying it back. Is this a legitimate deal?
This scenario illustrates the elements of a typical foreclosure scam. The home owner should consider having legal counsel review any contract with the investment company and the lease and option before agreeing to this proposal. If the payments or terms cannot be met by the seller, the danger is that the investor will take title, evict the former owner/tenant and sell the property for profit. See the Federal Trade Commission foreclosure scam resources at www.ftc.gov/bcp/menus/consumer/credit/mortgage.shtm.
The new Wis. Stat. § 846.40 regulates similar schemes called “foreclosure reconveyances,” that is, transactions where the homeowner transfers title to the property in foreclosure to a “foreclosure purchaser” who redeems the property and enters into a land contract, purchase agreement, option to purchase or lease with the original owner, enabling that owner to stay in the home. The new law requires a written contract, a mandatory five business day right to cancel, that the foreclosure purchaser verify the homeowner’s ability to pay for the conveyance back and other legal protections for the homeowner.
The broker is working with a seller in financial distress who is considering selling. The broker knows he cannot give legal advice and told the seller to speak with a lawyer, but would like some information on this issue. The seller wants to know if it is in his best interest to try a short sale before going into foreclosure and if a short sale would have a less detrimental impact on his credit status.
Although potential sellers want an easy answer to such a question, there is no one-size-fits-all answer. The answer will depend upon the owner’s payments and ability to pay the mortgage, the value and condition of the property, market conditions and the terms of the mortgage in light of the potential seller’s other financial obligations. The owner’s individual situation should be carefully assessed by a financial or credit counselor and/or a lawyer who can advise the owner regarding these alternatives because every situation is unique.
Representatives have from Fair Isaac, the company that produces FICO credit scores, commented that the damage to a distressed homeowner’s credit score primarily depends on how far behind the owner is with his or her mortgage payments and what the lender reports to the credit bureaus. Whether the situation is resolved by a short sale, deed in lieu of foreclosure or foreclosure has a lesser impact.
If the owner is more than 120 days behind on the mortgage, the damage to the credit score is probably already done. Foreclosure, a deed in lieu of foreclosure or even a short sale may reduce the owner’s credit score by up to 200 to 300 points, depending on the overall condition of the owner’s credit. On the other hand, if the seller is not more than 59 days behind on the mortgage, the effect of a short sale may be much less.
A foreclosure generally will show on a homeowner’s credit report as a “foreclosure/repossession,” whereas a short sale or deed in lieu of foreclosure typically is reported to the credit bureaus as “pre-foreclosure in redemption status” or “settled.” A foreclosure action does not have to be filed in the courts to be considered a “foreclosure” by lenders and the credit bureaus.
A consumer with a short sale generally will be able to obtain a loan for a new home within two years, while a foreclosure can prevent a person from purchasing a home for five to seven years. According to the Fannie Mae Selling Guide online (www.efanniemae.com/sf/guides/ssg/sgpdf.jsp), the time an individual may have to wait before becoming eligible for a home loan generally will be: foreclosure — five years, deed in lieu of foreclosure — four or five years, bankruptcy — four years, short sale — two years. All of these time limits are subject to the borrower putting 10 percent down and meeting other credit requirements. These time frames may be reduced for extenuating circumstances such as high medical bills, death, etc.
For further information about credit scores, visit www.myfico.com/CreditEducation/ and www.ftc.gov/bcp/menus/consumer/credit/reports.shtm.
Homeowner resources
A homeowner should call 1-888-995-HOPE to speak to a counselor about how to avoid foreclosure. This line is available in English and Spanish 24 hours a day, seven days a week. Or visit www.995hope.org for more information.
Go to www.AnnualCreditReport.com to ask for a free copy of the credit report, once a year, or call 877-322-8228.
For counseling resources, nonprofit organizations and other experts dedicated to helping consumers avoid foreclosure can be invaluable. Homeowners at risk should:
- Consider contacting their attorney or a local Legal Aid office, especially if they have reason to believe they were the victim of questionable lending practices. A good place to start is at www.lawhelp.org.
- NeighborWorks® organizations work with the Homeownership Preservation Foundation to offer a nationwide assistance at 888.995.HOPE. You can speak with a counselor day or night to help you get back on track financially (in English and Spanish).
- Reputable counseling agencies, such as NeighborWorks® organizations, can help you avoid foreclosure. Look up your nearest NeighborWorks® organization at www.nw.org.
- The HUD website has a list of HUD-approved counseling organizations by state at www.hud.gov/counseling. We recommend that the list be used as a starting point to find good counselors. You also can call 1-800-569-4287 or TDD 1-800-877-8339.
These resources are from the brochure, “Are You Having Problems Paying Your Mortgage? Learn How to Avoid Foreclosure and Keep Your Home,” produced by the National Association of REALTORS®, the Center for Responsible Lending and NeighborWorks® America (October 2008). Preview a copy at www.realtor.org/wps/wcm/connect/43671c804d154cd7ba24fee634190075/rir_govaff_foreclosure_brochure_10212008.pdf?MOD=AJPERES&CACHEID=43671c804d154cd7ba24fee634190075, or order online at www.realtor.org/prodser.nsf/products/126-126?OpenDocument.
Tracy Rucka is a Staff Attorney and Debbi Conrad is Director of Legal Affairs for the WRA.