Michigan Collection Law Blog

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.