Mending mortgages: an attorney's perspective
Part one in a three part series on mortgage relief
July 07, 2010 - At any given time, James Porritt, a Lake Orion grad and local attorney for nearly four decades, says his office has about a dozen or so clients going through shortsales or foreclosures. He says demand for one office supply in particular increases dramatically with these clients tissues.
Troubled mortgages can be troubling on the mind, and many folks going through financial difficulty are too embarrassed to seek help in saving their house and their sanity, said Porritt. And, though many end up with forgiven mortgage debt, they've ruined the chance for a new start because they've depleted or totally drained money stashed away in savings.
|"I don't think what will happen to a credit score should be the basis of a choice between these different programs."
- James Porritt, attorney|
"Many folks wait to do anything," he said, "but it's happening to so many people. The biggest obstacle right now is to meet with folks to get them to understand their options."
And there are options, whether property owners want to stay in their home or they want to leave it.
The desire to stay or leave really dictates the first step in a sometimes complicated and winding path to mortgage relief, says Porritt, who notes there's no obvious path for one group of people. Mortgage relief programs should be chosen by an individual's set of individual circumstances.
Just don't expect to walk away from a house, Porritt said.
"Michigan is different than other states in that the lender does have the freedom to chase them for the remaining balance. California, for instance, is a non-recourse state, so the articles people read about being able to 'walk away' may be applicable in other states but it's not true here in Michigan. We do have to figure out a way of dealing with a deficiency," he said.
Forbearances and modifications
Getting a forbearance from a lender means reduced mortgage payments for several months at a time. The principal loan isn't reduced. Rather, money saved during the grace period gets tacked onto the end of the loan in a lump sum. Payments are just made easier for a short time. This option allows property owners to stay in their home.
A modification either extends the loan repayment date, which lower payments, or reduces the interest rate, or reduces the principal balance. This option also allows property owners to stay in their home. Porritt strongly advises anyone taking this path to talk to a certified mortgage counselor "who will act as an advocate for (property owners) and try to negotiate the modification, free of charge."
Again, it's free of charge. Counselors are provided by three agencies in Oakland County: Lighthouse Oakland, Oakland-Livingston Human Services and Green Path. Don't ever pay for a mortgage counselor it's a scam, said Porritt.
Counselors provide a variety of services and can tell you exactly what lenders are looking for in say, a hardship letter, to help borrowers get what they need.
Deed in lieu of foreclosure and shortsales
In a deed in lieu of foreclosure, the property owner gives the deed back to the lender in exchange for discharge of the debt.
"Sometimes it will be complete discharge, other times it will be a partial discharge. One of the frequent complications we run into is people having more than one mortgage on the property (from different lenders)," said Porritt, like borrowing 80 percent from one lender and 20 percent from another through a mortgage broker. In this option, property owners leave the home and the lender is responsible in finding a buyer.
Porritt says banks are not approving this option for many people these days.
"Banks don't want to property back and don't want to take your situation over. While you're still there and trying to sell the property, you're still there paying utilities, paying taxes, paying the insurance and maintaining it. If they take the property back, now they have to do it," he said.
For shortsales, property owners also leave the home, but they are also responsible for finding a buyer, not the bank. Those seeking a shortsale may be required to go through a modification process only to be turned down.
"In my mind, that doesn't make sense," said Porritt. "People who are looking for a loan modification are people who want to stay. People who are looking to move out of state to find employment are nonetheless going to go through the loan modification program in order to qualify for a shortsale. We're constantly finding well-intentioned legislative programs that screw things up."
|A quick search of the Web produces a whole list of Lake Orion homes in foreclosure. (click for larger version)|
Any of these programs modifications, forbearances, shortsales, deed in lieu of foreclosure depend on the lender deciding "you're worth it," said Porritt. In applying for the programs, expect lots of paperwork, changing financial systems and the potential for delays. And keep a close watch on the application.
"It's a very frustrating experience," for many clients, he said.
The foreclosure process in Michigan is done by advertisement (lender publishes a notice for sheriff sale in the newspaper) or by judicial action (lender brings a lawsuit to enforce the promissory note).
Up until a few years ago, if a homeowner was being foreclosed on by advertisement, "typically I could have assured them, 'Well, they're not coming after you for the deficiency, the difference,' because if they did, they would have chosen to go through foreclosure by judicial action so that they'd have a judgment against you for the balance," said Porritt.
Now, in the last two or so years, he says banks are bidding in at the sheriff's sale themselves for an amount less than what is owed.
"There's all kinds of speculation as to why they're doing that. There is some logic to it," said Porritt.
When the bank resells the property at the reduced amount, their books still show an obligation or that they're owed money something they can show auditors or investors.
Porritt said a lot of folks still believe that no one will chase them for that deficiency and "I have to warn them that that deficiency is an obligation that hangs over your head for six years."
What Porritt sees is, three years after foreclosure, people are getting sued for the remaining amount.
"It may be that the (bank's) plan is to take these obligations and sell them to the vulture-type collection agencies that buy them up at pennies for the dollar and then chase after people for them. Or, they're going to wait and see if people are going to improve in their financial condition and then sue," he said.
Also, if a lender had a mortgage insured by an insurance company ensuring borrowers were going to make their payments and a borrower fails to make payments, the insurance company also has the right to come after him/her, too.
"There's a good chance that, down the road, if at the sheriff sale, they didn't bid in the whole amount," said Porritt.
But, from a strictly economic standpoint, sometimes foreclosures are better in the long run.
Porritt says lenders generally don't start the foreclosure process until a borrower is four months behind on payments. Plus, state dictates that borrowers get time to try and modify the loan (three months). Plus, the foreclosure must be published (one month). Plus, there's a redemption period before the sheriff's sale (either six months or a year).
All said and done, a borrower could live in their house for 14 months without making any payments.
|"From an economic standpoint, sometimes the best way for the borrower ... is simply to go through foreclosure."
- James Porritt, attorney|
"From an economic standpoint, sometimes the best way for the borrower to get any compensation out of the money they've invested in the property is simply to go through foreclosure," said Porritt, noting that the monetary value of those mortgage payments a borrower didn't make while still living in the house is a big chunk of change.
But, be sure to respond to any notices left on your door by the bank during foreclosure, says Porritt. A borrower can lose out on the redemption period if he/she abandons the house. If the house is up for sale and the utilities are on, technically it's not abandoned, but if the bank puts a notice on the door, requiring the borrower to respond in a certain time frame, he/she better do it.
What to do?
Don't wait to check out mortgage relief options and weigh them against bankruptcy, says Porritt.
"There are some instances where the forgiveness of debt will create a tax liability," he said.
Say a borrower sell a house for $100,000, but he/she owes the bank $150,000. If the bank forgives the $50,000 remaining debt, that amount can be construed as income, subject to an income tax.
"You might have a $16,000 or $20,000 liability that you didn't count on for monies that you didn't receive," said Porritt.
There are some ins and outs to avoid that scenario, like if the forgiven debt or "income" is used to improve the property, says Porritt, and those nuances should be thoroughly investigated.
Do you have other assets? Do you just want the process over? Consider these and other angles before moving forward into shortsale or foreclosure. For many, it's an emotional issue and many just want what can be a long, drawn-out process over, says Porritt.
"I sometimes find people going through a shortsale despite the fact that they may not end up with the (debt forgiveness) they should get just to get it over with. I can't say the relief of having it done is worth the financial concerns."
But, there's one item that shouldn't affect the decision to move forward, says Porritt a borrower's credit score.
He says it's virtually impossible to predict how any of the processes will affect a credit score. The impact could be anywhere from a 50 to 300 point reduction.
"I can't give a prediction and I don't think what will happen to a credit score should be the basis of a choice between these different programs," said Porritt.
Reporter, Lake Orion Review