Tennessee Bankruptcy Lawyer Blog

I have written several times about the problems with the federal foreclosure relief program (called HAMP), but the bad news just continues to be reported. Today, two separate reports discussed the difficulties many homeowners are facing when trying to get a mortgage modification.

On MSNBC's website, there is a long report documenting the backlogs, communications problems, and failures to follow the HAMP guidelines that plague the program. The report explains that the different departments within loan servicing companies that handle the loan modification and foreclosures often do not communicate with each other and, as a result, the loan modification efforts do not necessarily stop the foreclosure process. Even Homeowners who believe they are working with the servicer on a loan modification are getting foreclosure notices on a frequent basis.

Bob Sullivan's blog post , also on MSNBC's website this morning, takes the explanations to a more personal level. It describes the experience of a couple from Pennsylvania who, despite doing everything asked of them in their trial loan modification, received a foreclosure notice. While this report is not unusual, the story itself highlights a problem that has received very little attention. The couple obtained a trial loan modification that reduced their mortgage payment by $2,000 per month. They made the payments for the 3-month trial period, but then had to work through all of the paperwork red tape for another 7 months. At that point, the couple received a foreclosure notice that indicated that their loan balance was then $20,000 more (thanks to the $2,000 per month reduction in payments, plus penalties and fees) than it had been at the beginning of the trial modification period. During their 10-month ordeal, the mortgage company reported to the credit rating agencies that the couple had made only partial mortgage payments, which caused a massive drop in their credit scores. The credit score drop caused their credit card interest rates to skyrocket, so they had a new problem on their hands.

If you live in Tennessee and are facing these kinds of problems, we may be able to help. As the stories about the problems with HAMP point out, you need to be diligent in working with your mortgage company to make sure both the loan modification and foreclosure departments are working together.

Stacy Johnson, of Money Talks News, posted a great article on bankruptcy on MSN Money Central. He told the story of one bankruptcy filer and the issues that led him to bankruptcy. Stacy also does a great job of explaining the benefits and pitfalls of filing bankruptcy.

As explained in the article, not everyone who is having trouble paying the bills should file for bankruptcy. But, if you are in real financial trouble, the worst thing you can do is waste too much time before finding out about all of your options. I encourage you to read his article.

CNN reported today that the number of mortgage loan modifications, and particularly the number of permanent loan modifications, increased significantly in December. Despite the fact that the number of permanent modifications since the HAMP began more than doubled in December alone, the all number of permanent modifications is still at only 7.4% of all modifications that have been started. In addition, more than half of all people who are granted trial modifications end up being denied permanent modifications. In addition, foreclosures still outpace the number of loan modifications.

Even the best of the loan servicers that participate in the HAMP has only placed 47% of its eligible borrowers into trial modifications. The worst of the loan servicers has placed only 19% into trial modifications. If the percentages continue at the current trend, more than half of those borrowers in the trial modifications will not receive permanent modifications. As a result, the current percentages for permanent modifications are alarming. Of the largest mortgage loan servicers in the country, the percentage of eligible borrowers who have received permanent modifications ranges from 2.41% to as little as 1.68%.

If you are eligible for loan modification under the HAMP, you must be diligent in keeping in touch with your loan servicer, completing all of the paperwork required by the servicer, and staying on top of the process to ensure that the servicer follows through. But, as I have mentioned in earlier posts, you need to make sure you can afford the modified payments. If not, the modification may only be delaying the bigger problem of foreclosure.

Many people may not have even known about the program, but President Obama's Second Lien Modification Program, a "complementary program" to the Home Affordable Modification Program ("HAMP"), appears to be over. If you are not familiar with the Second Lien Program, it was intended to help homeowners who had more than one mortgage loan adjust the terms of the second mortgage. When the program was announced back in April, the Treasury Department's release stated that when a HAMP modification was initiated on a first mortgage, the Second Lien Program would "automatically reduce payments" on any second mortgage on that home. As with the HAMP, mortgage servicers had to enroll in the program with the Treasury Department to participate. However, it appears that not a single servicer enrolled in the Second Lien Modification Program.

So, what does this mean for most homeowners? Be wary of some of the mortgage modification programs being advertised. While there is a federal modification program (at least for first mortgages), the federal modification programs are not being utilized by the mortgage servicers to the extend many people thought. Unfortunately, there are many people trying to take advantage of homeowners who are looking for help. If you are trying to obtain a loan modification, check to see if your mortgage servicer participates in the HAMP. Then, if you need help, make sure you do your research on the company that you engage to help you. Using a bankruptcy or foreclosure defense attorney may be your best option.

With the increase in foreclosure proceedings, the question will invariably come up: "Do I need to move after I receive a foreclosure notice?" Conventional wisdom has generally been to stay in the house until you receive the notice of the sheriff's sale. However, even moving out at that point may not be in your best interests. The answer to the question really will depend on your particular circumstances, but keep the following issues in mind:

• Will moving out diminish the value of your house? Some people don't seem to care anymore after getting a foreclosure notice, but keep in mind that you may be on the hook for any unpaid mortgage balance after the home sells. As a result, you really want the house to sell for as high a price as possible, even after foreclosure. If you leave the house early, the house is more likely to be the target of thieves or squatters. Abandon houses often end up with missing fixtures, pipes, and any other items (include building materials) that can be used or sold by thieves.
• Do you have anywhere else to go? If not, staying in the house as long as possible will be helpful. Although you may not be able to pay the full amount of your mortgage payments, maybe you can save enough to at least pay the upfront costs (i.e., first month's rent, security deposit, etc.) for an apartment or rental home.
• What if the lender doesn't follow through on the foreclosure? This may never have crossed your mind, but more often than ever before, lenders are "walking away" from foreclosures. As a recent article from MSM explained, "bank walkaways" create issues that you need to consider before moving out of your home. For example, if the lender doesn't take possession of your home or doesn't complete the foreclosure, you may continue to be liable for property taxes, home insurance, homeowner association dues, and building code violations. As a result, you may be better off staying in the house and trying to work with the lender to modify the mortgage loan.

No matter what situation you find yourself in, don't just ignore the situation. Walking away from the house may end up costing you much more than you ever realized. Keep in touch with the lender (or loan servicer), see if the lender is going to follow through on the foreclosure, and make sure you can find another place to live. If the time comes to either fight the foreclosure or file bankruptcy, find an experienced counselor or attorney to help you.

RealtyTrac Inc., reported on Thursday that 2.8 million homes, a new record, received a foreclosure-related notice in 2009. The number was a 21% increase over 2008 and represented approximately one out of every 45 homes in the U.S. Luckily, the same report indicated that foreclosure-related notices were actually down in 2009 for Tennessee.

A foreclosure-related notice is any notice given during a foreclosure process, so it includes notices in the early stages of foreclosure that are received before a home actually goes into foreclosure. While some of these notices did not result in actual foreclosure, the number does indicate that a record number of Americans are having trouble making mortgage payments. While it comes as no surprise that we set a new record, it doesn't appear that our troubles are over yet.

The number of notices appeared to decrease as the year went on, likely an indication that government efforts to prevent foreclosures may have had some effect. The federal Making Home Affordable Program ("HAMP")loan modifications are attributed with that success. However, as I have mentioned before, most of the HAMP "successes" have been temporary modifications. Over 750,000 mortgages have been modified on a trial basis under HAMP, but as of November, only 31,000 mortgages have been permanently modified.

With the temporary status of most of the loan modifications and the continued weakness in the economy, RealtyTrac still anticipates another 3 million to 3.5 million homes to enter some phase of foreclosure in 2010. If you find yourself in this position, I would encourage you to check out all of your options as early as possible in the process.

The Wall Street Journal reported on January 5, 2010, that the number of Chapter 7 bankruptcy filings for November of 2009 (the latest available data) was up 42% from November of 2008. The number of Chapter 13 filings were also up by 12% for the same periods.

The really interesting part of the report is that the bankruptcies are hitting people with higher incomes and high education levels. The reason for the change? Likely the combination of job losses, wage reductions, and foreclosures. With so many people either being out of work or taking jobs making substantially less than their previous jobs, the only option for many people is filing for bankruptcy.

One other interesting observation from the report is that the number of Chapter 7 filings made up two-thirds of the bankruptcy filings in November of 2009. This is in spite of the fact that the 2005 changes in the bankruptcy laws were intended to make filing for Chapter 7 more difficult.

In other news, the National Association of Realtors (the "NAR") reported that seasonally adjusted home sales agreements (as opposed to closed sales) for November of 2009 fell by 16% from October of 2009. This is the first drop in 9 months and the single largest drop since the index started in 2001. It typically takes a month or two to close on a sales agreement, so this number indicates that actual closed sales for December of 2009 and January of 2010 will be significantly lower, as well. The NAR indicated that the dropoff likely occurred because of the original expiration date of federal homebuyer tax credits was December 1st, which seems to indicate that sales have been propped up by the credits. Although the credits were extended until April 30, 2010, the real problem with this news is that it may indicate even more housing problems later in 2010 after the credits expire.

Taken together, the two news reports suggest the economy is not yet on the upswing.

I'm sure you've heard about loan modifications under President Obama's housing plan. You may have heard about the Treasury Department pushing lenders to do more of them. However, many people are now questioning whether the loan modification program is doing more harm than good. The New York Times recently reported that, according to some experts, loan modifications simply delay the inevitable and destroy homeowners' savings in the process, leaving homeowners worse off than before the loan modification started.

As the article points out, as do other articles (including the one from Megan McArdle in The Atlantic ), is that modifying the terms of a mortgage without reducing the principal balance may not be enough. For years, homebuyers have been encouraged to "buy all the home you can afford," and many did so at historically low interest rates. But now that so many homeowners have either lost a job or lost part of their incomes, they may be in a home they simply cannot afford, regardless of any loan modifications. If a homeowner cannot afford the principal balance on the home, none of the loan modifications currently being pushed by the Administration will solve that problem. Rather, the loan modification programs just encourage the homeowner to keep making payments to catch up, often draining any savings the homeowner may have. Oh, and the other problem the lender will likely forget to mention, these loan modifications can have a negative effect on the homeowner's credit.

The New York Times article tells the story of a foreclosure that occurred while a homeowner who was going through the trial loan modification period (typically a 3-month period step required under loan modification programs to make sure the homeowner can make the new payments before the modifications become "permanent"). The Florida homeowner did everything right under the terms of the modification, but the lender continued to delay the "permanent loan modification." The 3-month "trial period" turned into 6 months and the lender foreclosed on the home and sold it (to itself for $100, no less) before making the modification "permanent." Luckily, the homeowner got the help of a foreclosure defense attorney and the foreclosure has been overturned. However, the case highlights some of the problems with the current loan modification process.

If you have negative equity in your home, you really need to proceed cautiously with any loan modification program. Ask yourself, can I really afford the modified loan payments? If not, you need to be looking at all of your options.

HAMP stands for the Home Affordable Modification Program. It is part of the current Administration's Financial Stability Plan. Generally, this is the federal mortgage stimulus plan that has been talked about extensively in the media. Although you do not have a "right" to a loan modification, the program is available to a large number of homeowners who are behind on mortgage payments or a struggling to make mortgage payments. When a Tennessee homeowner approach our firm for loan modification help, we take the homeowner through the following steps to see if they qualify under HAMP.

There are a number of factors to qualifying for help under HAMP, but the following five requirements must be met before even starting the discussion:

• You must be the primary resident of the home (i.e., not available for rental property loans);
• Your mortgage payment is more than 31% of your monthly pre-tax earnings;
• Your loan amount is less than $729,750;
• You are unable to afford your current mortgage payment; and
• Your loan servicer (i.e., the company to which you pay your mortgage) must be a participating servicer in the HAMP (Home Affordable Modification Program).

Obviously, the last of those basic factors could be fairly subjective. The federal government has a questionnaire available to help you determine if you are "eligible" for the program. However, notice the disclaimer at the bottom of the questionnaire. The disclaimer says the questionnaire will help you determine if you are "eligible," but that "the servicer or your loan can tell you if you qualify." (My emphasis added).

The HAMP is a step you can take before falling into a foreclosure situation. There are HUD-approved mortgage counselors who can help you with the HAMP. The HAMP website has a list of HUD-approved counselors. However, if you run into problems or are already facing the possibility of foreclosure, we would be happy to help.