January 14, 2010. Business week reported today that approximately 3 million homeowners will lose their home to foreclosure this coming year. Unemployment and reduced home values have left many people unable to pay their mortgage or to sell. In lockstep with the increased foreclosure rates are the increase in bankruptcy filings across the United States.
According to RealtyTrac, an estimated 4.5 million foreclosure filings are expected this year, including default or auction notices and bank seizures. There were 3.96 million filings in 2009. Many are predicting that this year foreclosures will peak due to unemployment and home prices falling far below the amount of outstanding mortgages.
Loan Modifications at Work
The Government's effort to keep people in their homes through loan modifications is failing to relieve the foreclosure crisis. Banks have permanently modified only 31,382 mortgages, or 1 percent, of the 4 million loans targeted under the Government's foreclosure prevention plan.
The loan-modification program being pushed by the Obama administration does not deal with the problem of negative equity that is causing an increase in foreclosures. The $8,000 first-time homebuyer tax credit and $200 billion given to Fannie Mae and Freddie Mac are additional efforts of the Obama administration to help support the housing market. While lenders are being pushed by the administration to give borrowers loan modifications, the lenders are not doing enough. That only 1 percent of mortgage loans have been modified is a disgrace. This is not the fault of the Obama administration, but rather the fault of the banks in failing to make a good faith effort to modify loans.
The only way that the banks will begin to cooperate is if bankruptcy judges are given the power to modify first mortgages and take off principal based on the value of the home. The different pending bills, which would give bankruptcy judges this power, have all not passed.
Defaults Accelerating
Defaults among prime borrowers are likely to increase greatly, adding to a "huge" inventory of properties that banks take back, according to Robert Shiller and Karl Case, who created the S&P/Case-Shiller Home Price Index.
Increase in Foreclosures will Further Hurt Home Value
A further supply of delinquent loans and houses in foreclosure will weigh down the market further. It makes sense for the banks to start really modifying these loans for homeowners that want to save their home. Reducing principal amounts on loans are the only way that a lot of borrowers can save their house.
December 2009 Data reveal that New Jersey is now in the top 10 states in the nation in foreclosure filings with 63,208 for the month. New Jersey homeowners have the additional burden of the highest real estate taxes in the country.
Strategy with Foreclosure and Different Options
There are various options if you are in foreclosure, including a chapter 11, chapter 13 or chapter 7 bankruptcy. You may be eligible to reorganize or wipe out certain types of debt and save the home. You can also restructure portions of the mortgage and may be able to strip off or cramdown second mortgage or home equity loans. Strip off or cram down is a term in bankruptcy that means to render these loans unsecured and wipe them out or pay them a nominal sum.
Obtaining a loan modification is another potential option, but is difficult and time consuming. We have obtained many favorable loan modifications for clients, but not without much hard work.
Another way to try to avoid bankruptcy is a short sale on a mortgage. This is where the bank agrees to take less that the total amount owed on the mortgage and enables you to sell the house. You do have to be careful to obtain a full release from the bank on the short sale and ensure that there are no tax ramifications.
Giving the bank the deed to the house in exchange for a full release is another potential way to avoid bankruptcy. This is called a deed in lieu of foreclosure.
Furthermore, you may have defenses to the foreclosure action based upon consumer fraud, violation of the Truth in Lending Act, or other defenses.
Whatever strategy you decide to follow, just make sure you consult with a qualified attorney.
Contact one of our New Jersey bankruptcy attorneys to discuss how to best proceed.
