Feds Take Steps Against Underwater Mortgages

Over 30,000 distressed homeowners may be eligible for a Federal Housing Finance Agency-sponsored principal reduction to help prevent foreclosure.

The plan is available to owner-occupants who are at least 90 days delinquent as of March 1, 2016, have an unpaid principal balance of under $250,000, and have a loan-to-value ratio above 115 percent. Additionally, their loans must be owned by, or guaranteed by, Freddie Mac or Fannie Mae. FHFA Director Mel Watt called the plan a “win-win” for both borrowers and lenders. “It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises,” he added. The agency characterized the plan as a “last chance” to avoid a “crisis-era” foreclosure.

In most cases, this “principal forgiveness” plan is technically a forbearance that capitalizes the arrearage, reduces the contract interest rate to the current market level, and extends the loan term to 40 years.

Foreclosure Defenses

Underwater mortgages, or “negative equity loans,” are a serious problem for distressed homeowners. In most cases, lenders will not refinance the loan if there is no equity in the property.

Illinois is a judicial foreclosure state, meaning that lenders must go through the courts to go through this process. There are a number of defenses available, including:

  • Origination Fraud: Many times, the mortgage broker promised that certain terms would appear in the loan, and in the mass of paperwork at closing, the buyers did not realize that such terms were absent.
  • Modification Fraud: If the lender approves the homeowner for a loan modification and later rescinds such approval, such action may be a foreclosure defense.
  • Procedural Defects: Illinois foreclosure is a ten-step process, and all these items must be completed in the correct order. Furthermore, in a world of securitized mortgages and other complex financial events, it is not unheard of for the proper paperwork to be absent from the deed records or not be in the correct order.
  • NMS Violations: In 2012, several large lenders entered into the National Mortgage Settlement with state attorneys general. The lenders agreed to end certain practices, like robo-signing and dual tracking.
  • Statute of Limitations: If the lender sends a notice of acceleration and does not either foreclose on the loan or reinstate it within a certain period of time, the judge may throw out the current case and bar the lender from undertaking future foreclosure efforts.

If the case is referred to mediation – which nearly always occurs – the homeowner has a better chance of obtaining a loan modification. At mediation, the lender has a duty to negotiate in good faith, meaning that it is difficult to deny modification applications based on technicalities like absent paperwork, missed deadlines, or a debt-income ratio that is a shade too low.

During out-of-court settlement negotiations, lenders are typically willing to discuss foreclosure alternatives, like:

  • Deed in Lieu of Foreclosure: This agreed foreclosure proceeding often has less of a credit impact than a contested one.
  • Short Sale: Rather than go through an expensive and time-consuming foreclosure, the lender is often willing to allow the owner to sell the property for less than its fair market value.

Other foreclosure alternatives may also be available, like “cash for keys” or a similar program.

Partner with Aggressive Lawyers

To fully utilize the judicial process and help save your home, contact an assertive real estate lawyer in Naperville today. At The Fitzgerald Law Firm, P.C., we routinely represent individuals and families throughout Chicagoland.

 

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