Common Misconceptions and Mistakes to Avoid
By Steven R. Neuner, Esq., Attorney at law, New Jersey and Pennsylvania
Neuner and Ventura LLP, Marlton, New Jersey
For most of us our home is very important and losing it is traumatic. In the past few years the combination of a bad economy and collapsing real estate market has put more people than ever in a situation where they cannot afford their home. Understandably, most people what to save their home. But the path to that result is neither clear nor always simple. In this article, we will discuss some common misconceptions and mistakes that people make. This article is necessarily general, and based on New Jersey law and practice as of July 2011. You should always seek qualified advice about your particular situation.
- Misconception: Lenders Have to Restructure My Mortgage because I owe more than the home is worth.
Lenders do not have any obligation to restructure your mortgage. They have every legal right to pursue all their rights under the loan documents, with few exceptions. The government sponsored “HAMP” or “Making Homes Affordable” programs only offer them incentives if they agree to modify your loan. A few lenders have reached agreements with state attorneys general under which they have agreed to offer borrowers for certain high-risk and speculative mortgage loans an alternative, if they meet certain qualifications. But these are the exception not the rule.
And lenders rarely if ever will agree to reduce the principal balance on the loan. Instead they may temporarily reduce the interest rate, or extend the term and/or put the arrears on the back end of the mortgage.
Even this will not happen unless you are able to show that you can afford the reduced payment on the mortgage.
- Misconception: Lenders Will Modify My Mortgage Because they will be better off than going through the risk and expense of foreclosure
One would think that a lender would prefer to avoid the expense, and risk of foreclosing on someone’s home. After all, the market is flooded with homes and foreclosures. And foreclosures in New Jersey are, as of this writing, taking almost 3 years to get to a sheriff sale. Even then, the lender usually gets the property back and has to sell it in a very slow and continually-declining market. So the lender will act in their own best interest and want to deal, right?
Wrong in many cases. First, the “lender” is not a bank. The loan is almost always held in a trust owned by a large pool of investors. The loan was sold off early on. The Trust is controlled by a trustee whose rights and powers are governed and limited by a Pooling and Servicing Agreement. So who are you dealing with? Usually you are dealing with a Servicer, a company that collects money on each mortgage and performs other administrative functions in handling each mortgage in the trust pool. The Servicer usually gets paid a flat fee and has no incentive deal with your problems. Also, the Servicer’s powers are governed by the Pooling and Servicing Agreement, which usually require that a mortgage in default be foreclosed.
Servicers can and do offer or consider a mortgage modification. But remember that the Servicer’s ability to settle is not under its control. For these mortgage modification programs, there are usually strict guidelines that must be followed. If you do not meet those requirements, you do not get a modification.
Even where you meet the requirements, the process is slow and uncertain. This may be due to under staffing or some other reason. You can expect to have to produce detailed documentation. What you send may very likely get lost at least once and have to be resent. You may receive contradictory instructions. You may end up dealing with different people at different times who will not know anything about your application. Literally, “the left hand does not know what the right is doing”. You may or may not get approved. If you are rejected, you probably will not be given an adequate explanation. We have seen situations where people were told they were approved only to later get a rejection letter. The history of loan modifications to date is that only a small percentage of borrowers really get permanent help. You may be one of them, but the process will not be fast or easy.
- Misconception: A Mortgage Modification is always in my best interest. Tip: Do your own budget and carefully consider alternatives
If you are unable to pay your bills now, will a modification be a real solution? Do not even start the process until you have done a personal budget and figured out what you can afford. If you cannot afford the mortgage even at a reduced 2% interest rate (about the best we have seen) then you are wasting your time.
You need to look at alternatives. Some people are so far behind on their mortgage that they may be better off just not paying and waiting until the sheriff’s sale (which could be years away). The savings from having “free rent” for that period of time can be substantial. That money could be used to pay off student loans, pay taxes, save for retirement or for other good purposes.
And for many people in this situation, getting rid of large credit card payments or other debts may be what is needed so they can afford their mortgage, even at a reduced rate. Which brings us to the next point…
- Misconception: Bankruptcy and Mortgage Modification do not mix.
A bankruptcy under Chapter 13 can include provisions to bring a mortgage current. New Jersey is in the process of implementing a program to encourage mortgage modifications in the context of a Chapter 13 Bankruptcy. Usually, the debtor/borrower continues payments to the lender in the full or a reduced amount while the process is ongoing. Please note however that bankruptcy courts have very limited powers to modify home mortgages without the lender’s consent. The main benefit of a Chapter 13 Bankruptcy may be just the court involvement. In New Jersey’s proposed program, the lender is required to respond promptly to requests for information, and to designate a specific person with responsibility to negotiate in good faith with the borrower. At the end of the day, a mortgage modification must be voluntary and the terms agreed to.
But that is not all. In a Chapter 13 bankruptcy, you may be able to bring your mortgage arrears current by payments (in addition to the regular monthly payment) over as long as five years! And generally, there is no interest added. So you could end up with a five year interest-free catchup loan. (You still have to pay a trustee commission which would be 8-10%)
And if you have a situation where the amount owed on the first mortgage is more than the home is involved, in New Jersey and Pennsylvania you may be able to “strip off”a second mortgage or other junior lien. This means that if successful, the second mortgage is no longer a lien on the home and becomes an ordinary unsecured debt that can be discharged just like credit card debt.
- Tip: Get early and qualified legal advice to understand all your choices. This discussion is general in nature and based on New Jersey law. Whatever you do, you must seek individualized and qualified legal advice from an attorney who understands the process. Know your options. Have a plan.
July 8, 2011
This article is intended only to provide you some general guidelines, based on New Jersey law. Every situation is different and you should get qualified legal advice. There is no substitute.
© Steven R. Neuner, 2011. All rights reserved.