Michigan Collection Law Blog

If you need a loan modification, you will have to prove that you qualify for one. There is an excellent article in today's USA Today that talks about the requirements that many lenders are asking of borrowers in connection with a loan modification.

When we get involved in loan modifications for our clients, we ask for many of these documents in advance. Looking at this information and talking with our clients, we like to see if the reason that the the client cannot pay their mortgage loan is a temporary or a permanent condition. This is something that the lenders are keenly interested in as well. For example, if the reason why someone is unable to pay their mortgage is due to a temporary condition such as a job loss, then he may be a better candidate for a loan modification than someone whose adjustable rate loan just rose to a point that they can no longer pay. The documents that the banks are looking for are helpful in in answering this questions.

If you are even thinking about asking for a loan modification, start getting your documents together. I would advise against asking the bank for a face to face meeting and then starting your hunt for the documents.

Michigan's new foreclosure law becomes effective on July 5, 2009. I think it will be a great help to home owners who are facing foreclosure. While there are other programs at the federal level, the items contained in the new law should be very helpful. Until this law was passed, foreclosures in Michigan were streamlined. A foreclosure by advertisement, for example, was designed to quickly and as cheaply as possible, return the property to the lender. In light of our current economic mess, the new statute appears to reconsider Michigan's long standing policy of returning the property to lenders. The policy is poised to make both lenders and borrowers think about new alternatives to foreclosure such as loan modification.

The new law has some very good features such as:

1. Lenders must send a new notice to borrowers. In this notice, the lender must cite the reason for the foreclosure, the identifying information for the mortgage holder as well as the contact information of the person who, on behalf of the lender, has the authority to enter into any loan modification. This feature, alone, is totally awesome. I have worked on a some loan modifications and I can tell you that trying to reach some lenders is just impossible. I had received automated answers to their telephones such as "All of our agents are busy, please call back later." Hell, if I ran my business like that, I would run it directly into the ground. Nevertheless, these days are now over (or should be). In any event, if you receive such a notice, you should keep a log of every time you have tried to contact the lender's contact person.

2. The notice referred to above also will include a list of housing counselors. This list is prepared by the Michigan State Housing Development Authority. Within 14 days after the notice is sent, a homeowner may request a meeting with the bank's contact person to discuss a loan modification. If the homeowner requests such a meeting, then foreclosure may not be started until after 90 days from the date of the original notice.

3. The homeowner can contact a housing counselor within 14 days of the letter, and the housing counsel will contact the lender's representative to set up a meeting. If the homeowner requests a meeting, then foreclosure may not start for a period of 90 days from the date of the letter. The meeting has to take place in the county where the property is located.

4. Beware, however, that after the borrower has requested a meeting, the lender has the right (and most likely will) ask the homeowner to produce certain financial information. The borrower must provide the requested docs. Most likely, this document request, at a minimum, will include tax returns, pay check stubs and bank account statement statements for the past three years.

5. If no agreement is reached between the lender and homeowner on the loan, then a separate analysis must be prepared to show whether the homeowner may have otherwise qualified for loan modification under a modified version of President Obama's Home Affordable Modification Plan (HAMP). Under this analysis, a homeowner may qualify for a loan modification if one's housing related debt ("HRD") is 38% or less of one's gross income, on an aggregate basis. HRD is determined by:

a. The interest rate may be reduced to a floor of 3% for a period of 5 years;
b. The loan may be amortized over a period of up to 40 years from the date of the loan modification;
c. Part of the unpaid balance of the loan may be deferred, up to 20%, until maturity, refinancing of the loan or sale of the property;
d. Late fees may be reduced or eliminated.

This new legislation will undoubtedly slow down the foreclosure beast that has beset, if not blind sided the residents of our fine state.

If you are a homeowner that is facing foreclosure and you receive a notice under this new statute, you must take action if you are going to avail yourself of the benefits of this law. Contact a housing counsel. Have that housing counsel make an appointment to discuss loan modification with a lender's representative. DO NOT GIVE UP HOME AND HOPE FOR A MIRACLE. I say this because in times of crisis, I am sometimes guilty of doing this. Don't do it. It usually does not end well. Take the bull by the horns, and make that phone call.

Get your financial documents such as your tax returns, pay stubs and bank statements so that you are prepared to meet with the lender's rep and your housing counsel and make some good things happen.

I tip my hat to Ms. Michelle McLean, an associate with the law firm of Klyczynski, Girtz and Vogelzang in Grand Rapids. Ms. McLean is a lawyer who wrote a great article about resources available to consumers who face foreclosure, in the Michigan Lawyers Weekly of May 25, 2009.
In her article, Michelle suggests that homeowners facing foreclosure should consult the following free resources:

Michigan State Housing Development Authority has established a "Save the Dream" program that can be reached at (866) 946-7432. They will connect you with a local housing counselor.

Another resource is the HopeNow Alliance. This is a non profit organization comprised of some of the largest lenders in the United States. Most lenders want people to stay in their homes because the cost of owning a home for a lender is extraordinary. When a lender takes a property back, it must still pay the taxes and utilities on it. Further still, it has to hire a property management company to go through the house, clean it up for resale and then periodically check on the property to make sure that nothing has happened to it. These costs only drag a bank's profits downward which makes for very unhappy shareholders and a nervous FDIC.
It is a great idea to consult with these free resources in conjunction with a credit and collection attorney. If you simply do not have the resources to stay in your home, you should think about the following:

a. Is there any deal that you can make with the bank that will allow you to keep your home:
b. If you cannot keep the home, how much time can you expect to stay in the home before you absolutely have to leave;
c. an exit strategy that causes minimal disruption to your family and credit;
d. new housing for your family in light of your future income prospects and expectations;

I don't want to sound like an infomercial, but these items should be discussed and decided in advance of approaching your lender for a loan modification. Gary Nitzkin at Nitzkin and Associates can help you through these issues.

Lessons to be learned

1. If you are a homeowner facing foreclosure, do not go it alone. There are valuable resources out there to help you stay in your home...USE THEM. Remember, the lenders want you to stay in your home as much as you want to stay there. The banks do NOT profit from taking your home and evicting you.

2. In conjunction with working with these free resources, it is wise to consult a credit and collection attorney. He or she can help you formulate a negotiation strategy and if necessary, an exit plan. These are your best resources.

I am working with a few clients that are suffering through a mortgage foreclosure. As soon as they received the sheriff's notice, I sat with them to discuss their options. In both cases, we put together an exit strategy that I would like to share with you.

First, we had to prioritize what was important in a new home. In our case, we decided that keeping the kids in the same school system was paramount so we knew we had to look for a new home in that area.

Second, we had to look at resources we had to move into a new home. One option to consider is moving into an apartment. Another option was to consider purchasing a home on a land contract. The land contract should have a 5 year balloon which should be enough time for someone to reestablish one's credit. The third option is to rent a house in the same area as the current home. I was amazed to learn that even though the area that we were looking was very well heeled with expensive homes, that there were a lot of rental properties. Not only that, these rental houses were fairly large (over 3,000 square feet...large by my standards anyway) with very modest rents. It appears that the mortgage foreclosure crisis has created a glut of these large homes that people need to get some money out of for on reason or another. It may be that the owners have passed away and the kids are trying to get some money from the houses and cannot sell them today. Anyway, it appears that staying in the same area would not only be easily accomplished, it would be quite economical too.

The third part of an exit plan is to calculate is the date that you have to be out of the foreclosed property. Under Michigan law, home owners can be evicted six months after the sheriff's sale unless the property is abandoned. After the sheriff's sale and until the the order of eviction is filed, the use of the property remains exclusive to the former home owners. Hence, you get to live rent and mortgage free for six months. At the risk of sounding like a conniving jerk (a phrase hurled at me t by my wife once in a while), a home owner can use this period to save up money for a down payment on a land contract, or a security deposit and moving costs. Think about it, living rent and mortgage free for six months is a great boon to anyone's finances. You just need enough discipline to save what you can.

Interestingly, the sheriff's sale for my clients' property was scheduled for last month. Although we had our exit plan in place, the bank did not appear at the sale. I cannot tell you why the bank did that, but I can give you plenty of good reasons why the bank made the right move. First of all, when the bank owns the home, it incurs substantial holding costs on the property such as taxes and utilities. Moreover, the bank has to hire a property maintenance company to visit the property to keep out trespassers, squaters, thieves and vandals. It is far more economic for the bank to keep people in their homes and perform these functions than for the bank to start forking out bailout dollars. Third, the banks already own tons of property. They were not supposed to be in the real estate business, but now they are. The banks are unhappy about this. Finally, there is talk of legislation to put a moratorium on foreclosures.

The moral of my story is to let you know that even though the bank may post a notice of foreclosure on your door, it may not actually attend the sale. It is important, however, that when this does occur, you must circle the proverbial wagons, keep calm and talk with attorney or some calm and detached third party about assembling an exit strategy. You have no idea how much inner peace you will achieve during the storm of a foreclosure, once you have put that plan together. Foreclosure sucks and for many of us, its a fact of life. Embrace it, face it and continue to live....elsewhere.

I debated long and hard about even writing this blog post, but lets face it. There is a white elephant in the middle of many peoples' homes and lives. Many people are facing down a foreclosure and discover that they are making payments on a house that is worth less what they owe. A good friend of mine and fellow lawyer, Lex Kuhne, emailed an article to me today that pushed me over the edge and forced me write this blog post. Kathleen Pender wrote an article entitled "Are you an idiot to keep paying your mortgage?" that speaks to this very issue. She also talks about legislation that has recently been passed that would allow delinquent consumers whose mortgages are held or guaranteed by Fannie or Freddie to reduce their payment via lower interest rates and 40 year amortizations. Her article is wonderful and very enlightening. I recommend that you read it as soon as you are done with this blog post.

Years ago, I began studying Zen Buddhism. Its not a religion, but rather a way of seeing things. I won't bore you with the details other than to tell you that in order to make sound decision as to whether you should refuse to make that next mortgage payment, you must get rid of your ego. I have been counseling many clients in the last few months about whether they should make their next mortgage payment or not. When they tell me that they are having a very difficult time making the next payment on their homes which are worth less than what they owe (sometimes by hundreds of thousands of dollars), I ask them why not just walk away from the home and the mortgage debt. Their first reactions are generally, "what will the neighbors think" sort of thing. I then remind them that many of their neighbors are in the same situation. The clients may retort with "it makes me feel like such a loser or a dead beat." I then ask them if they are responsible for today's national economic disaster. They respond "no.." I ask them if they are a victim of the disaster. They respond "yes." I then ask them since when do we label victims as losers? I then remind them that they have familial obligations to their spouses and kids to keep a roof of their heads although it does not have to be the very same one that they have today. Once we get past the ego/hurdle of what other may think of us or even of what we think of ourselves, we can then talk about the pros and cons of walking away from a mortgage obligation that may be wrecking our lives.

Pros:

1. A large mortgage payment can be cut down substantially to a rental payment for a dwelling of comparable size and comparable location today. This would lead to a consumer savings thousands if not tens of thousands of dollars per year to be used towards other things.

2. Frequently, banks will bid the full amount of the debt that you owe on the mortgage at the sheriffs sale. If the banks bids the full amount that is due, then in Michigan at least, there is no longer any debt that you owe.

3. For many people, being free from a burdensome mortgage payment is the difference between existing and living, not only financially but emotionally. It is definitely an option to consider in many circumstances, especially when the market value of the house is dwarfed by the outstanding mortgage value.

Cons:

1. Your credit report will be wrecked for 7 years. While words such as "foreclosure" and delinquent do not figure into your FICO score directly, future potential credit grantors can and do read these words. They do not look upon the word "foreclosure" favorably. Will they be more lenient with this word in light of our currrent economic mess? I don't know. History tells us no, but who knows. We have never had a housing crisis like we are experiencing now. Perhaps there is room in their hearts for such understanding, but I would not count on it. Derogatory information stays on your credit report for up to 7 years. Bankruptcy stays on your credit report for up to 10 years.

2. Getting a new mortgage on a new residence will be a significant challenge. Plan on renting a dwelling for a number of years until your credit report recovers somewhat form the foreclosure. Better yet, if you have not defaulted on your mortgage yet, but have decided to exit from your home, start looking for a new home and mortgage NOW. You might even want to consider purchasing a new home on a land contract before go into default on your current home.

Things to Consider Before deciding whether to go into foreclosure:

1. The legal environment is changing quickly in favor of the consumer. It started off with at least one judge in Illinois refusing to allow banks to foreclose on homes. Today, Congress has passed legislation that gives certain consumers rights that they have not had before, to lower their monthly mortgage payment. Consider this option seriously as it may save your home.

2. If you do go into foreclosure, you may be able to stay in your house up to 1 year without making any mortgage payments. Banks will generally wait for you to miss 3 payments before putting you into a foreclosure. It might take another 2-3 months before it goes to a sheriff's sale. You then have six months within which to redeem the property. During that redemption period, you have the right to stay in the home. Altogether, you can stay in your property for about one year from the date that you miss your first mortgage payment to the time that you will be forced to leave. If you decide to not redeem the home, you will have saved twelve mortgage payments. You may think this is unethical, but our system allows you this advantage. Go use it.

3. Banks typically do NOT want your home back. They are in the lending business (or used to be) and not in the real estate business. If they foreclose on your home, the bank has to hire a compnay to make sure that the property stays in good condition, free from vandalism, pipe freezes and such. Moreover, the bank has to pay the taxes on the property. The bank incurs all of these costs while holding the property in this slow moving market. Remember this when attempting to make a new deal regarding your mortgage.

Continue reading "Zen and the art of skipping that next mortgage payment..." »

I am personally sickened by the number of foreclosures that we are experiencing in Michigan. While mortgage foreclosure is at epidemic levels throughout our state, I have decided to do something about it. I may only be one man and my impact may be minimal, but I refuse to do nothing in the face of this housing carnage. Starting with this blog post, I intend to give you, my reader, information about how to stave off foreclosure and work out strategies. I also intend to take on some foreclosure defense cases pro bono. As attorneys in Michigan, we just have to do something. I am hoping some of my sister and brother counsel will step up to the plate with me to keep people in their homes.

My colleague and law school classmate, Jeffrey Weisserman recently spoke about foreclosures at the Institute of Continuing Legal Education recently. Mr. Weisserman was always a brain in law school. He went to work in the real estate department of one of Michigan’s larger and more prestigious law firms. He now works as general counsel to Michigan’s largest foreclosure law firm, Trott and Trott. In his discussion, Mr. Weisserman listed some ideas regarding how one can retain their home in the face of a foreclosure. These include:

Home Retention Programs. Lenders want to keep people in their homes because foreclosures are not only very costly to pursue, but there is a glut of real estate on the market these days and the lender are having a hard time reselling foreclosed properties these days. In a Home Retention Program, lenders may restructure a borrower’s loan if the borrower can put together a feasible plan of repayment. A restructure of the loan may include a reduction in principal or the interest rate. It may also include extending the term of the loan. For example, if you are five years into a 30 year loan, the lender may re-amortize your loan principal for a new 30 year period and thus, lower your monthly payment.

Loss Mitigation Department. Mr. Weisserman advises that if you are in foreclosure, do not talk with the collector. Call the lender directly and ask for its Loss Mitigation Department. This department is in charge of trying to minimize the lender’s losses and may be more willing than you think to restructure a deal with you to keep you in your home. Make sure that you have documents such as tax returns and pay stubs to prove your current financial position. In order to make a deal with a lender, you will need to explain why you got behind in your loan and a feasible plan to show how you can honor a restructure of your loan.

Forbearance Agreements – These agreements generally involve your promise to repay missed payments in exchange for which the lender will not foreclose. These are not used as much today.

Loan Modifications. These are very popular today. This agreement allows a borrower to stay in their home by extending the loan and/or lowering the interest rate. These are used to a great extent with adjustable rate loans that have sky rocketed to the point where people cannot afford the new payments.

Pre-foreclosure short sale. Some lenders will allow a homeowner to sell their home for less is owed on it and will release the mortgage lien upon sale. Lenders do this to avoid the costs associated with a foreclosure. The benefit to homeowners is that this will avoid damaging his credit report with a foreclosure. Homeowners beware…There are tax consequences on such a deal to the extent of forgiveness of the loan.

Deed in lieu of foreclosure. Some lenders will take the deed to the home in lieu of foreclosing on it.

If a home did not fetch enough money after sale to pay off the homeowners loan, this left a deficiency balance. Lenders used to write these off but do not do so as much anymore. Hence, if you are considering “walking away” from the property, you must know that even after the foreclosure, the lender may pursue you for a deficiency balance.

Hope Now is a conglomeration of the larger lenders to keep borrowers in their homes. This organization has lenders, mortgage counselors and loan servicers as members. They realize it is in everyone’s best interest to try to identify solutions to keep homeowners in their home. You can check out their services as www.hopenow.com.

Lastly, Mr. Weisserman advises that the best defense to a foreclosure is to be proactive. When you get a foreclosure notice, pick up the phone and call the lender’s loss mitigation department. Try to make a deal as soon as possible. People frequently get to work on restructuring their loan on the day that it goes to sheriff’s sale. By then, it is generally too late to do anything.