In late 2006, loss mitigation became prevalent, elicited by the dramatic increase in foreclosures nationwide. As many lenders went out of business, the surviving lenders were forced to eliminate all loan programs which were most prone to foreclosure, and tighten lending guidelines. Resultantly, homeowners, who were able to qualify for loans previously, were no longer able to refinance. With the market rife with risky sub-prime, adjustable rate, and negative amortization loans, many homeowners fell victim to dramatic payment increases, and thus defaulted. The only option, then, was loss mitigation or foreclosure defense.
Different Kinds of Loss Mitigation:
- Loan modification: This is a process whereby a homeowner’s mortgage is modified. Accordingly, both lender and homeowner are bound by the new terms. The most common modifications are lowering the interest rate, reducing the principal balance, ‘fixing’ adjustable interest rates, increasing the loan term, forgiveness of payment defaults and fees, recapitalization of accrued outstanding principal, interest, and fees, or any combination of these.
- Short sale: This is a process whereby a lender reduces the principal balance of a homeowner’s mortgage to permit the homeowner to sell the home for the actual market value of the home. This specifically applies to homeowners that owe more on their mortgage than the property is worth. Without such a principal reduction the homeowner would not be able to sell the home.
- Short refinance: This is a process whereby a lender reduces the principal balance of a homeowner’s mortgage to permit the homeowner to refinance with a new lender. The reduction in principal is designed to meet the loan-to-value guidelines of the new lender (which makes refinancing possible).
- Deed-in-lieu: A deed-in-lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments.
- Cash-for-keys negotiation: This is a variation of the deed in lieu of foreclosure. The difference is that the lender will actually pay the homeowner to vacate the home in a timely fashion without destroying the property. The lender does this to avoid incurring the additional expenses involved in evicting such homeowners.
- Special Forbearance: This is where you will make a reduced monthly payment. The lender will ask you to be put on a repayment plan when the forbearance has been finished to pay back what you missed, while other times they just modify your loan.
- Partial Claim: Under the Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The mortgagor will execute a promissory note and subordinate mortgage payable to United States Department of Housing and Urban Development (HUD). Currently, these promissory or “Partial Claim” notes assess no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property.
A foreclosure defense allows homeowners to assert their legal rights and oppose a foreclosure proceeding by engaging in litigation defense strategies. One method of addressing a foreclosure proceeding is to defend the foreclosure litigation. Our law firm can assist a client by answering the initial summons and complaint. Considering that 20 to 30 days from the date of service an answer and/or motion to dismiss is due, it is imperative to file a timely response. The answer is one out of several documents which are usually filed as part of a foreclosure defense. Other documents include a motion to dismiss, if applicable, and a response to a motion for summary judgment.
Even if a client is past the 20-30 day threshold after receipt of the Summons and Complaint, our law firm can move to enlarge such time under appropriate circumstances. As the foreclosure litigation progresses, the Plaintiff’s other papers, including the Motion for Summary Judgment, can be opposed. Moreover, even when the foreclosure proceeding is nearing an end, there are still available options such as preparing an Order to Show Cause in an attempt to stay the foreclosure sale and/or the transfer of the deed. If a client is considering defending the foreclosure litigation, a client needs representation from a law firm that is dedicated to this area of practice.
Effective strategies are contesting service of process where our client was not properly served with the summons and complaint, and requesting discovery in terms of disclosure documents from the closing where there are questions as to proper disclosure. In many cases, demanding that the plaintiff produce original loan documents, which they may lack, some courts may view as necessary to pursue the action.
If a client, who has been in foreclosure for over one year or has a foreclosure sale date, desires to defend the foreclosure action, we may need to proceed by emergency Order to Show Cause in order to have a possibility to stay the foreclosure sale.
A client needs to assert all defenses regarding either the foreclosure proceeding or any other issues that involve the mortgage. Defending the foreclosure action allows the client the opportunity to assert any defenses, either technical or substantive, involving the foreclosure proceeding, the mortgage holder’s conduct and/or any issues which involve the mortgage and mortgage note. Legal defenses can delay the foreclosure proceeding and allow more time to explore alternative solutions, and potentially threaten the dismissal of the foreclosure action. Many times, our firm can identify possible issues that would create a strong defense and threaten the dismissal of the foreclosure action.
The best chance a client has for success is to retain the services of our law firm immediately upon initiation of a foreclosure proceeding. Even if the client thinks it is too late, it may not be. Our firm may, if needed, make a motion to extend the time to file an answer in certain situations where the time has expired.
Orders to Show Cause are emergency motions and can be pursued in both state court (the Supreme Court of New York) and federal court (the United States Bankruptcy Court). In state court, the Order to Show Cause usually attempts to stop a foreclosure sale on an emergency basis by arguing that based on technical and/or substantive grounds the homeowner should be given more time and opportunity to pursue a definite and tangible option that has a good chance of resolving the foreclosure situation. Such options are sales and refinancing that are almost completed and usually technical reasons also need to be present to show that improprieties in the foreclosure action exist, such as process of service.
In bankruptcy court, an order to show cause usually attempts to give a debtor an additional opportunity to stop a sale by reinstating a formerly dismissed case or by asking based on “changed circumstances” for permission to file an additional bankruptcy case where the debtor due to previous, excess bankruptcy filings cannot obtain an automatic stay upon a new bankruptcy filing.
OTHER FORECLOSURE OPTIONS
There are other foreclosure options such as Chapter 7 or Chapter 13 bankruptcy:
Chapter 7 Bankruptcy
In situations where you have lost your job, you have been downsized, or it is unrealistic that you will have sufficient financial assets to make your mortgage payments, a Chapter 7 bankruptcy may be the best route for you. The Chapter 7 bankruptcy gives you the opportunity to discharge your debts and financial obligations while you can exempt personal property and significant amounts of equity in your home.
New homeowner’s exemptions: Under the new bankruptcy exemption statute passed in New York State that went into effect in January 2011, each individual on a deed can exempt up to $150,000.00 of equity in his or her home upon filing bankruptcy. This means that a husband and wife who file a joint Chapter 7 Bankruptcy can keep up to $300,000.00 in equity in their home and still discharge their credit card debts, personal loans, and other financial obligations. A Chapter 7 Bankruptcy is designed to give homeowners a fresh financial start. It removes the burdens of credit card debts and other financial obligations.
Automatic stay: when filing a bankruptcy you received an automatic stay from the Federal Bankruptcy Court. Your creditors, by court order must stop harassing you. You will stop receiving past due notices and legal documents in foreclosure actions. Filing a Bankruptcy will stop all collection activities against you.
Chapter 13 Bankruptcy
If you find that you are behind on your mortgage payments and you are sued in a foreclosure proceeding, a Chapter 13 bankruptcy may be an effective method of keeping your home. A Chapter 7 bankruptcy involves a liquidation of non-exempt assets. A Chapter 13 bankruptcy restructures your debt using your future income to bring your mortgage current in three to five years, and to pay a portion of your unsecured debt (credit cards, personal loans, hospital bills, etc.) during this period. Interest and penalties on credit cards, personal loans and other unsecured dept can be eliminated by filing a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy sets up a repayment which allows you to make your current foreclosure payments as they become due and pay off arrears. A Chapter 13 bankruptcy is often referred to as a “wage earner” plan. This is because it is designed to be utilized by consumers who have regular income that is sufficient to fill the requirements of a Chapter 13 bankruptcy plan.
- Foreclosure: This is the process whereby the party holding a mortgage initiates a proceeding to obtain a court order to sell the property. At the end of the process the lender can sell the property and keep the proceeds to pay the mortgage off and the lender’s legal expenses.
- Acceleration of mortgage: The acceleration of a mortgage occurs when the financial institution or individual holding the mortgage calls the entire balance immediately due and payable. The acceleration clause in the mortgage is usually triggered by non-payment of the monthly mortgage payments. By way of example, for a period of three months or more if you have a $200,000.00 mortgage that requires you to make monthly payments of $1,500.00 a month and you miss three of the mortgage payments the bank can accelerate the mortgage and demand immediate payment of the entire $150,000.00. The mortgage is accelerated before a foreclosure proceeding is initiated by the financial institution. Once the mortgage has been accelerated the bank won’t accept payment from you. The entire mortgage amount is due and payable.
- Title Search: Before a financial institution initiates a foreclosure proceeding a search is conducted at the county clerk’s office in the county in which the house is located (in the City of New York the search is conducted at the registration of deeds office). The purpose of the search is to see what liens, judgments or other encumbrances may be on the property. All individuals who have liens or judgments on the property are also named in the foreclosure lawsuit.
- Foreclosure Auction: In the State of New York after a judgment of foreclosure is rendered, a referee is appointed and the referee sells the foreclosed property on the courthouse steps. The sale on the courthouse steps is referred to as the foreclosure auction.
The following is an explanation of many of the commonly used mortgage terms in the State of New York:
- Fixed rate mortgage: This refers to a conventional type of mortgage which has a specific interest rate and a uniform monthly payment. The term of these mortgages are usually either fifteen or thirty years. Fixed rate mortgages are considered to be the safest types of mortgages.
- Adjustable rate mortgage: This refers to a mortgage that has a interest rate that adjusts or fluctuates periodically. The fluctuation is related to interest rates in general. Adjustable rate mortgages are more likely to adjust upwards and become more expensive then adjusting downward and becoming less expensive. Adjustable rate mortgages are referred to as ”ARMs.” This type of mortgage is a good choice if you plan on owning the home for a short period of time. This will enable you to sell the home prior to the mortgage adjusting upward.
- Interest only mortgage: This is a type of mortgage loan where the principal amount that is due in owing never changes. The borrower only pays the interest on the loan.
- Jumbo loan: This refers to ”jumbo mortgage.” This is a term referred to by Fannie Mae and Freddie Mac for what is considered to be non-conforming mortgage loans. They are generally mortgage loans of a very substantial nature.
- Amortization: This refers to a schedule of loan payments. It also refers to as an amortization schedule. It shows the monthly mortgage payments that are due and owing on the indebtedness over a long period of time.
- Equity: This is the actual value of your home. The equity is the market value of your home less what is due and owing on your mortgage or mortgages. The equity in a home is subject to the appreciation or depreciation of a home depending on market values in your neighborhood.
- Credit Score: This is a scoring system used by financial institutions and creditors to determine an individuals credit worthiness. An individual’s credit score is determined by credit bureaus such as Equifax, Experian and Transunion. The actual score itself is based on a formula that involves an analysis of an individuals financial situation based on how and when they pay their bills and their payment habits. When bills are paid on a timely basis the credit scores are high. When bills are not paid on a timely basis or not paid at all the credit scores are lower.
- Home Equity loan: This is a loan secured by the equity or value in your house.
- Home Equity Line of Credit: This is a line of credit, the amount of money you can borrow, that is secured by a loan on your home. Funds may be borrowed by using checks or debit cards.
- Loan origination fee or points: Each point or loan originating fee is equal to 1% of the amount of your loan. Example: If you borrow $100,000.00 a and you pay one point that point would be $1,000.00. If you paid two points it would be $2,000.00. This is also referred to as mortgage points.
- Principal: The principal in general refers to the amount you owe on your loan. Each month when you make a loan payment a portion of it goes to pay off the interest on your loan and the remainder pays off principal. When a loan is initially taken out almost all of your payment goes towards interest payments. As years go by the mortgage payments on your loan are reallocated to pay off a great portion of the principal that is due and owing. Towards the end of the term of the loan the large majority of your payments each month goes towards paying off the principal.
- Refinancing: This is the process involving obtaining a new mortgage to pay off an old mortgage.
- Lock In: This refers to the period of time in which the lender has agreed to be obligated to provide a perspective purchaser with a mortgage at a specific interest rate. Mortgage loans are said to be “locked in” for a specific period of time usually from thirty to sixty days. Lenders sometimes charge a locking in fee.