Brent’s Credit and Debt blog

I normally don’t like the New York Times.  They seem to have a seriously biased slant to their reporting, and I prefer a more balanced view of things.  However, in this case, one of their reporters has things dead on.

Susan Saulny, a writer for the New York Times, has written a story about a new problem with Foreclosure:  The bank may not want your property back!

In some cases, the cost of the foreclosure exceeds the value of the property.  In that case, the lender may not go through with the foreclosure, which means the holder of the title (the current homeowner) is liable for the property.

The real problem, though, is that in some cases the former owner moves out, but when the foreclosure stops, the former owner is liable for the property.  In the article, Ms. Saulny goes on to explain that this liability may include fines if the home is not kept up, as well as other fees.

The rest of this story is available here:

http://www.nytimes.com/2009/03/30/us/30walkaway.html

I was talking to my Realtor today, and heard some interesting information.

She is helping a young couple and their kids relocate from another state.  They have a fairly limited budget, and are trying to stay under a $150,000.00 purchase price.  This couple has been pre-qualified through a lender they chose, and have a pre-qual letter, so they can purchase up to that $150k mark.

They found a house they like, and decided to put in an offer on it.  The house is owned by Countrywide Mortgage, and they had a little surprise that went along with the offer.

They told the couple that they would have to fill out a Countrywide mortgage application before the offer would be considered!

Now, I know that times are tough for mortgage companies.  I know they have taken a beating.  But this seems really extreme.  Let’s take a look at what this does:

1)      The couple applying for the loan are going to take a hit on their credit scores.  Queries against your report that are similar in nature, such as several mortgage applications within a short amount of time, are considered ‘shopping’, and do not ding your credit.  However, since this couple qualified several months ago, the new app will be a big hit.  It is only 5 to 20 points, but if that drops their credit scores a bracket, it will affect other rates that they may be eligible for.

2)      The original mortgage company may be out of luck on this loan.  Countrywide may win the mortgage, and that means another company loses business.  Normally I am fine with this, but not if the application is coerced and is not what the couple intended to do originally.

3)      This adds extra time to the whole process.  This couple is relocating for work (he is in the military and is being re-assigned), and they have to move quickly.  Now they make have to stay in temporary housing for several months, much longer than they had hoped, before their place will be available.

4)      Unless the mortgage company is being really generous, the purchaser might have to pay for the privilege of filling out yet another loan application.

Why would a mortgage company do this?

Well, financially it makes a lot of sense.  The mortgage company has taken a loss on the principle of the house.  Let’s say this was originally a $180,000.00 loan.  It now sells for $150,000.00.  That is a $30,000.00 loss, correct?  Well, not exactly.

The first several hundred payments on a property are largely interest.  If this house had a $1,000.00 payment for, say, 5 years, $60,000.00 would have been paid out.  Let’s be conservative, and say that $40,000.00 of that was interest (that is pretty conservative).  In that case, after the mortgage company paid back their expenses and the interest they had to pay on the loan from their financers, it probably made a profit on that interest of $20,000.00 or so.  My numbers aren’t exact, obviously, but they make a profit on every payment.  Otherwise they wouldn’t be in business.

They also wrote off the bad debt on taxes.  That takes even more away from their loss.

They had to eat some bucks on the short sale.  Fine.  That is part of doing business.  Now they are looking to make money back.

When a short sale happens, the original lender loses any monthly profit on the loan, unless, of course, the new loan is through them as well.  They want that loan!  The new buyer has to qualify, of course, but if they can hang on to the loan they can make up some of the loss.  So, it makes perfect sense that they want an opportunity to get the loan.

I can see why they do this, but I am not happy about it.  Any time I have to fill out additional paperwork, take a credit score hit, and get nothing out of it other than the privilege of being able to buy something, I feel wronged.  This is a business practice that feels predatory, and I would hope that enough people boycott companies pursuing this practice that it will soon come to an end.

So you’ve missed some payments on your mortgage.  And now, you get the letter:

‘You must contact us immediately!’

In my case, it was a bit different.  My property taxes went up, and so I wasn’t paying enough on the mortgage.  Every short payment counted as another late, so they were already grumpy with me when I started having to miss payments.  By the time I figured out you really have to talk to someone to make things right, it was too late for me.

You see, I made a mistake.  I tried to make payments when I could, and buried my head in the sand thinking the thing would take care of itself.  But I didn’t understand how my mortgage company worked.  In my case, I missed January and February, and then paid in March.  That March payment was applied to January, so I was still 2 months behind.  Then I missed 2 more in April and May.  4 missed payments, and the proceedings began.

Your mortgage contract will spell out the terms of the foreclosure process, so go take a look at it now.  But the truth is, every state has it s own foreclosure laws that describe how long they have before they can foreclose, and how long you have to try to fix things before they sell your house.

Typically, this is the sequence of events:

1)       Your mortgage company will send you a letter telling you that unless you pay your past due balance, they will start foreclosure proceedings.

2)      Shortly after that, they will hire a law firm to handle the case.  The law firm will file with the county that your property is in to start foreclosure proceedings. 

3)      You will get a letter from the county, and they will run newspaper ads announcing to the world that you are about to lose your home.

4)      If your state has a ‘right to cure’ provision, you can file a document with the county prior to the actual sale date, but you must be able to pay off the property with a new loan by the sale date in order to keep your property.

5)      If you don’t try to keep it, the sale happens and someone else owns your home.

The timeline for this varies by state, but it isn’t long.  In Colorado, it takes less than 60 days from start to finish.  You might be able to get away with as many as four missed payments before they come after you, but the faster you get on track the better.

For more information about your state laws, check here: http://www.foreclosurelaw.org/.

The best thing you can do is CALL YOUR MORTGAGE COMPANY!  Talk to them.  Find out if they will be willing to let you move the late payments to the end of the mortgage.  Or try to refinance.  But if you have the ability to pay the mortgage, do NOT let your home foreclose!  Your credit will suffer for years, and your options are limited.

For more information, see my entry: http://creditconundrum.wordpress.com/2008/03/12/cc12-what-will-my-credit-look-like-after-a-foreclosure/

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.