Foreclosures to Bankruptcy - But Assistance is on the way!

My family, like many others all over the country right now, are facing foreclosure and possible bankruptcy. How has it come to this? Just a little over a year ago, my husband and I were financially sound and had thriving careers. My husband was a mortgage broker with a very successful business and I was an account executive for a large bank. We lived very comfortably in a wonderful home in a great area and still had enough to purchase several investment properties. But then the mortgage meltdown happened.

During this time, interest rates went up and lending guidelines got tougher. My husband worked the hardest he's ever worked but got less than one-third of his borrowers a loan. Meanwhile, banks were collapsing so fast it made a site called mortgageimplode.com, a site that reported the names of the banks that were shutting down, a household name. My colleagues were getting laid off and no sooner than I can feel sorry for them, I was laid off myself. What made this layoff especially bad was that I was 5-months pregnant with high-risk twins and we were not only losing my income, my husband's income was not even enough to cover our basic household expenses.

Like most people who have always had perfect credit, we were not willing to miss a credit card or mortgage payment even if it meant dipping deep into our savings. We were current with all of our payments for several months until we had the twins and realized that we were in trouble. Refinancing our primary residence or investment properties to get cash out was completely out of the question because property values were dropping fast. By this time, not only did we not have any equity left in our houses, we were upside down on all of them as well. We now owed more on our mortgages than the houses were worth. Furthermore, for our investment properties, the mortgage payments were much higher than the market rent. The negative cash flow meant that we had to cover the difference between our mortgage payments and rents received every month. We didn't even have enough money to pay for our family's household expenses. Where would we get the money to cover the difference for these rentals?

At this point, we started asking some of the lenders for a short sale because a successful short sale would not hurt our credit as bad as a foreclosure would. The real estate market was so bad that our investment properties sat on the market for months without a single offer. Now what? For our next step, we asked the lenders to accept a deed in lieu of foreclosure. If the lenders authorized this request, it still would have better for our credit than an actual foreclosure. But they declined our request. We had no idea why but we "...didn't qualify...." The only options the lenders gave us was to get a buyer for a short sale or to go thru foreclosure. With two little mouths to raise, we had no choice but to let each lender file a Notice of Default and move forward with the Trustee Sale, the auction, and eventual foreclosure.

But here was our biggest mistake. We were stubborn. We thought that my husband's business was going to pick up and I was going to be able to find another job as soon as my twins turned 3 months. We were dead wrong. The mortgage industry is still in a slump because homeowners are abandoning their homes, causing the values to continue to decline. Homebuyers are not able to qualify for home loans because lending guidelines have been tougher than ever. Businesses from multiple industries are closing their doors and workers are getting laid off left and right. My husband can send his borrower's loan application to multiple lenders and still not be able to close that loan. I can apply for a job but with so many qualified applicants for the few available positions, the prospect looks grim. In hindsight, we should have talked to a professional about the possibility of filing for bankruptcy before we depleted our savings simply to "save face."

At this point, we have no choice but to let all of our houses go to foreclosure. But what about all those harassing phone calls from the creditors? Well that, we can do something about. We are going to proceed with a chapter 7 bankruptcy filing and we are going to start over. It won't be easy with low income, no savings and having to raise twins but we will survive. After our bankruptcy gets discharged, we will just have to be very proactive about getting our credit back on track. I believe the late mortgage payments will only hurt my credit for 12 months from the date reported so we simply just have to let time pass on a few of these credit items. The actual bankruptcy will remain on my credit history for 10 years but I've heard that due to the number of filings and the state of the economy, it may not hurt my credit score for much more than 3 years. I've also been told that the foreclosures will not hurt my score more than 2 years. What will hurt my credit scores are the "past due" amounts and credit "balances" that should be updated to zero after my bankruptcy but usually don't get done unless I contact the credit bureaus myself. In other words, the liabilities that were included in my bankruptcy do not get cleared up automatically after by BK gets discharged, I need to proactively contact the 3 credit bureaus, Equifax, Experian, and Transunion, and make sure the "past due" payments read $0, the "current balance" read $0, and the "status" read "discharged thru bankruptcy." If I do this, my credit scores will recover a lot faster.

But the only question I'm concerned with now is where will we live and how can we pass the landlord's credit check right now. We can probably get one of our family members to co-sign for the rental application but having to move from a big house that we spent so much money paying for and updating (especially the nursery for the twins) to a much smaller rental is not something we look forward to. But we have no choice because we let our houses go. It's ok, though! It sounds cheesy but we have our health and each other. My husband and I always said to each other when we were successful that it seemed we were "wealthier" when we were "poor." When we were young bartenders living in a small 1 bedroom apartment, we seemed to always have enough to eat and time to have fun with our friends. When we had multiple investment properties and a large 4000 square-foot home, we were always stressed and never had time for even a weekend getaway. The foreclosures and bankruptcy and having to completely start over may be just what our twin boys need for their mommy and daddy to have time to spend with them. My husband and I are honestly not in the least bit feeling sorry for our situation right now.

Enough about me and my family, I now want to tell you why I started this blog. Besides wanting to share our story, I wanted to let folks in the same situation as us know that they are not alone. I encourage everyone in similar situations to share their stories as lessons learned. None of us wanted any of this to happen but it did and we had no control over any of it. Let's move on and be happy. I look forward to your stories.

I also wanted to pass on some information that may help a few homeowners who have not lost their homes yet. On October 1st, 2008, FHA will offer FHA-insured mortgages to homeowners who owe more than their home is worth. It's also called a short refinance and it involves cooperation from your currently lender. You also have to meet certain guidelines with regards to your current loan and financial situation. The following information was taken directly from FHA.gov and I hope that it can help some of you who are thinking that foreclosure is your only solution. Moving is no fun so if FHASecure or FHA-insured mortgages can help your family stay right where you're at, then that's a good thing. Ultimately, I believe that this type of program will help the real estate market recover from its losses because if homeowners don't lose their homes, then there will still be pride in homeownership. Homes will be well-taken care of and not run down like all the abandoned homes we see in the market today. Under this program, the lenders will have to realize a considerable loss but the underlying idea is that the loss could be substantially higher and more sustained if lenders elect to foreclose a home rathen than approving a short refinance request.

Please note that I am not an expert and I am not trying to give anyone any advice in this blog. I am simply sharing what I know which may not be totally accurate so please consult with a professional. If you have any questions, please post them in this blog and we will help you get your answer.

The following is from FHA.gov:

FACT SHEET: FHA TO PROVIDE ADDITIONAL MORTGAGE ASSISTANCE TO STRUGGLING HOMEOWNERS

The President has signed into law legislation that will allow HUD’s Federal Housing Administration (FHA) to continue providing targeted mortgage assistance to homeowners. The Hope for Homeowners program will continue FHA’s existing and successful efforts to provide aid to struggling families trapped in mortgages they currently cannot afford. Under the program, certain borrowers facing difficulty with their mortgage will be eligible to refinance into FHA-insured mortgages they can afford. The program will be implemented on October 1, 2008.
Homeowners May Already Be Eligible For Assistance.

Families should not wait to seek mortgage relief. Right now, homeowners can determine if they are already eligible for mortgage assistance through FHASecure, FHA’s existing refinancing program. They can obtain information through either of the following options:

1. Contact a local, HUD-approved housing counseling agency at HUD.gov;

2. Contact the HOPE NOW Alliance at 1-888-995-HOPE

Sustainable, Affordability Homeownership
Hope for Homeowners maintains FHA’s long-standing requirement that new loans be based on a family’s long-term ability to repay the mortgage. FHA only allows owner-occupants to be eligible for FHA-insured mortgages. Borrowers must also meet the following eligibility criteria:

- Their mortgage must have originated on or before January 1, 2008;
- Their mortgage debt-to-income must be at least 31 percent;
- They cannot afford their current loan;
- They did not intentionally miss mortgage payments; and
- They do not own second homes.

Features of FHA-insured loans under the new program include:

- 30-year, fixed rate mortgage;
- Maximum 90 percent loan-to-value ratio;
- No prepayment penalties;
- $550,440 maximum mortgage amount;
- Extinguishment of any subordinate liens; and
- New home appraisals from FHA-approved appraisers.

HUD, Treasury, FDIC and the Federal Reserve will form the Congressionally-mandated Board of Directors and work together to establish additional program standards.

Voluntary Lender Participation
FHA will continue to offer lenders an alternative to foreclosing on borrowers. Similar to FHASecure’s recent expansion, lenders will be encouraged to write-down the outstanding mortgage principal balances to 90 percent of the new value of the property. In many cases, reductions in principle will cost lenders less than the losses associated with foreclosure.
Market Stability and Liquidity.

By continuing to slow the rate of foreclosures, this program will support FHA’s existing effort to stabilize local housing markets. From September 2007 to June 2008, FHA has guaranteed more than $93 billion of mortgage capital.

Funding
FHA will insure up to $300 billion in new loans. Borrowers will pay an upfront premium of 3 percent of the original mortgage amount and an annual premium of 1.5 percent of the outstanding mortgage amount. Any additional costs incurred by FHA will be reimbursed by Fannie Mae and Freddie Mac.

Program Timeline
The program will last from October 1, 2008 through September 30, 2011. Since September 2007, FHASecure has helped more than 290,000 families obtain safer, more affordable mortgages. FHASecure is on pace to help 500,000 families by the end of the year.