Friday, June 18, 2010

Reinstatement & Payoff

When you attend a foreclosure settlement conference there are a few papers that the you should request from the bank. Two of the most important (depending on your situation) are Reinstatement and Payoff quotes.

What is a Reinstatement Quote and Why/When is it Important?

A Reinstatement Quote tells you how far behind on your mortgage. It gives you a dollar amount that, if paid, would make you current on your mortgage. If you pay this amount your mortgage is Reinstated and you would make next month's payment as if you were never delinquent.
It is VERY rare that someone actually reinstates their mortgage. It is far more common to go on a forebearance to mod agreement (pay a certain elevated amount per month to help you catch up on areas and then have a modification) or receive a HAMP or In-House Modification. It is important to receive a copy of the Reinstatement so you can check the bank's math and make sure that (1) they are billing your account correctly and (2) they have credited your account for past payments. Its also good to know how much is owed because while you are in foreclosure you are typically unable to make mortgage payments so it is sometimes possible to save up enough money to offer a huge chunk up front for a more favorable In-House modification.

What is a Payoff Quote and Why/When is it Important?

A Payoff Quote will tell you exactly how much the bank is owed on the mortgage. This amount is typically larger then the original mortgage (depending on how long you've been in default and how long you paid the mortgage before defaulting). If you pay this amount the mortgage will be satisfied and you will no longer owe the bank anything.
A Payoff Quote is important for a few of the same reasons a Reinstatement Quote is important. You should check the bank's math and have an idea of how you are being billed. A Payoff Quote becomes very important if you are looking to sell the house. If what you owe is more than what the house is worth then you will need bank approval to conduct a Short Sale. If what you owe is less than what the house is worth then you will not need bank approval as this is a normal sale. Keep in mind that you'll need to pay a broker fee and will need to set aside for a few other expense.


When Will I receive these Quotes?

Bank attorneys are instructed to bring these documents with them to all settlement conferences. You or your attorney can request a copy of each at every settlement conference. If the opposing council doesn't have a copy you should request, in front of the court referee, JHO or Judge, for a copy to be emailed or faxed to you.


Thursday, June 17, 2010

The NPV Test

The NPV test should only come up in one specific situation concerning your foreclosure so this post will only discuss the test as it relates to that situation. As I explained in other posts, if you earning a living that is reasonable in relation to your mortgage and you live in your home you will likely qualify for a HAMP trial modification. Once you get through the trial modification you will be reviewed for a permanent modification. If you are rejected for the permanent modification there is a great chance the reason will be that the NPV test failed. There are two ways to explain the NPV test. First I'll give you the short answer and I'll follow it up with the long, detailed answer.

What is the NPV Test? (Short Answer)
It is within the bank's power to determine which is more profitable: (1) Foreclosing on your home, winning the bid at an auction and selling your house to someone else OR (2) Modifying your loan under HAMP guidelines. If the bank determines that they will turn a higher profit through option 1 then through option 2 then they are allowed to deny your modification because the NPV of option 1 is great than the NPV of option 2.

What is the NPV Test? (Long, Detailed Answer)
When determining the Net Present Value of anything (not just your home and your foreclosure) numerous factors need to be considered. Imagine I told you I could give you $100,000 right now or $120,000 next year. You would need to determine which was more valuable to you right now and go with that choice. If you took the cash today you could invest it and at the very least earn interest on the money. You could also pay off student loan debt or your mortgage. I could also die in the next year in which case you may need to hire a lawyer to go after my estate for the money. Therefore it is very possible that the $100,000 makes more sense and its Net Present Value is higher than the $120,000 in a year.
There is convincing evidence to suggest that the $120,000 has a higher NPV. Interest rates are low right now so putting it in the bank wouldn't earn $20,000 worth of interest in a year. You may not have the desire to start your own business with the money. You might now have student loan debt or a mortgage to pay off. So maybe the Net Present Value of the $120,000 is greater. Clearly to make these determinations take time and a careful evaluation of the situation. The bank's determination is no different.
The bank will first evaluation the value of foreclosing on the property. They will need to wait another 6 months - a year to go through the foreclosure, during which time they will take in no money on the property. They will have legal fees and eventually broker fees in marketing the place. During the time they own the property they will pay property taxes, homeowners' insurance and be responsible for repairs. They need to have staff members monitor the property and the foreclosure. The bank will need to determine how much the foreclosure is worth. The most basic way to determine that is by predicting how much the property will sell for and how much the bank will spend to get to that point.
The bank will then need to determine the value of the modification. Remember everyone wants their money as soon as possible. A 30-40 year modification certainly delays the time they will collect their money. Each payment over the time period of the loan will be decreased to determine it's Present Value. All of those payments will then be added together and the bank will determine the Net Present Value of the entire mortgage. The bank will then add the incentive payments that the government provides with a HAMP modification and will compare this number to the Net Present Value of the foreclosure. If the NPV of the foreclosure is higher the bank will reject the HAMP Permanent Modification. If the NPV of the HAMP Permanent Modification is higher the bank will send you an offer and if you sign it the foreclosure will end.


How Do I Know If My Modification is At Risk of Failing the NPV Test?
Keep in mind that I am about to make generalizations. Every property is different and if you are concerning about these issues I would consult an expert on your specific situation.

If a property is "underwater" such that the mortgage is worth $500,000 and the property is worth $100,000 it is extremely unlikely that the homeowner's HAMP modification will fail due to the NPV test. If that property is foreclosed on and sold the bank can make a maximum of $100,000 if it has no legal fees or broker fees, pays no property taxes or homeowners insurance and makes no repairs. Once all of those fees are taken into account the bank is probably only collecting around half of that figure. In addition, it will need to wait months to collect. Therefore the NPV of the $500,000 mortgage, even if the interest rates are down to 2% and it is extended 40 years and a third of the principal is pushed to the back end, should always be higher than the NPV of foreclosing. The bank doesn't want your upside down house. They'd rather you pay off the mortgage at a different rate.

If the property is not "underwater" such that the mortgage is worth $250,000 and the property can be sold for $500,000 there is a great possibility that the NPV test will fail for the HAMP modification. In this situation if the bank forecloses and the property is sold at auction the bank will be able to collect its full mortgage amount at the auction. If they purchase it at auction and sell it a third party they will incur broker fees and all of the other fees listed above but they will get the substantial portion of their mortgage within one year as opposed to waiting 30-40 years to be paid in full. This does not mean that you have no options, it just means that your situation is slightly more difficult. Then again if you're having trouble paying your mortgage but you can sell your house for a quarter of a million dollar profit you're in a substantially better position than the homeowner who passes the NPV test because their property is $400,000 underwater.

Friday, June 11, 2010

What is a Foreclosure Settlement Conference?

After a bank files a foreclosure complaint against you the court will send you a notice to attend a foreclosure settlement conference. All of the bank's motions will be held in abeyance until the settlement conference is marked held and the case is referred to a judge or IAS part. In simple words the bank cannot continue to foreclosure on your home until the court is satisfied that the delinquent payments can be worked out through a compromise or a solution. An attempt to reach this compromise or solution is made at this settlement conference.

The following are a few typical questions that I have received in the past:

1. Who is in charge of the Settlement Conference? Who oversees the mediation?
This answer varies depending on the county and courtroom. In Westchester or Queens, for example, one of three court appointed referees will oversee the conference. In Kings (Brooklyn) you may see a judge or a court appointed referee. In Nassau you will meet with a bank attorney and simply report your discussions to a clerk.

2. Is Mediation helpful? Should I attend?
Mediation is generally helpful and you should always attend the conference. The bank attorney at the conference should come prepared with important info on your loan and your delinquency. They will also come with a list of numbers (phone and fax) that will tell you where to send your paperwork and who you can follow up with to ensure it was received. If you don't attend the conference will be moved along and the bank's foreclosure process will speed up. The conference is a great (if not the only) place to learn about your options and receive the correct direction in which to head.

3. Do I need a lawyer? Will one be provided for me?
A pro-bono lawyer may be available to help you. Typically at least one pro-bono is floating around and is scheduled to help homeowners who seek assistance. It is really up to you as to whether you'd like an attorney with you. Attorneys that work mainly in foreclosure law understand the system. They will know what paperwork and information is important. In addition, depending on the court, an attorney can make all of the appearances for you so you don't need to miss work. If you are great with paperwork and fully understand the basics of real estate law and mortgages you can probably handle the conference stage on your own. If you feel uneasy taking on such a task on your own it is probably best to find a foreclosure defense attorney. Make sure they have experience working with loan modification applications and have a firm grasp of foreclosure law.

4. Can the bank take my home during one of these conference?
No. The bank can do nothing until the conferences are over and even at that point there is a 45 day stay imposed prior to the bank being allowed to even file a motion. Once the motion is filed you still have a minimum of a few months before a bank has a final judgment against you or your home.

5. Do banks really negotiate with me at the conference?
Banks are supposed to negotiate in good faith at the conference. Courts will generally hold them to it. What exactly "good faith" means varies from court to court and situation to situation. Very rarely does a true negotiation take place at the conference because banks need to verify your financials and other information. A bank will have a difficult time stating that they refuse to negotiate or accept packets, however they are not forced to modify your loan or permit a short sale. They are expected to review all of your information and where possible compromise.



I hope this post provides adequate information regarding the Settlement Conference stage. If you have any further questions please email me directly at AFriedman@PulversThompson.com.

Wednesday, June 9, 2010

The Importance of Paperwork

I would estimate that over 95% of all homeowners currently in foreclosure attempt to modify their mortgage. For a large portion of these homeowners the difficult they face in modifying does not come from lack of income but rather from lack of well-organized, properly detailed paperwork.

In putting together a HAMP (or any type of modification) packet you need to keep a few things in mind:

1. Prove Everything. The bank will not take your oral verification of income (personal or rental) as sufficient proof. People lie to banks all the time. Your explanation that you receive $1000/month in rental income in cash is useless. You need to show the bank proof. Any time you receive rental income (cash or otherwise) deposit it in a bank account. Use the same bank account every time. When you submit bank statements highlight the rental income so it is easy for the bank to determine how much you receive. In addition, while the bank statement proof is great a bank statement plus a lease is better. Have your tenants sign on for a certain period of time. It gives the bank faith that you'll continue to receive that income.

2. Profit/Loss Statement. I had a man a few days ago show me his pay stubs. He couldn't figure out why he didn't qualify for a modification because he had already shown the bank everything they requested of him. His pay stub was for $187.45. He is a waiter that earns 90% of his money in tips. All of his taxes are removed from his hourly wages. He claims to be making somewhere around $50,000/year but only "proved" to the bank that he was making $9,000/year. If a large portion (or really any portion) of your income comes from tips or commission, or if you are self employed, you'll need to submit a Profit/Loss statement. You can wait for the bank to request it but they will. So find an accountant or put one together on your own and submit it with your packet.

3. Detailed Bank Statements. The bank does not want to see a snapshot of your ending monthly balance. A friend could loan you $4,000.00 at the end of each month just to boost your balance. Believe me, it happens. What the bank needs to see is everything coming in and out. I realize I keep saying the same thing over and over again, but if you receive cash deposit it first. Create a paper trail. Don't listen to anyone who tells you a snap shot is sufficient. You must produce a detailed breakdown. If you search through you online banking information you'll find it.


If you feel confident handling all of your paperwork on your own be sure to make sure everything is broken down in great detail. If you go to a lawyer or agency make sure they have experience putting together these packets. I have met far too many modification "professionals" who have never heard of HAMP and never worked with a Profit/Loss Statement. There are great people out there who can help you for a reasonable fee. Find them and get your modification.

Monday, June 7, 2010

31% & HAMP

HAMP works on the theory that a homeowner can devote 31% of their pre-tax income towards paying their mortgage payment. Under this program, if a bank modifies your loan the bank will bring you monthly mortgage payment to as close to 31% as possible. So what do you do if your monthly mortgage payment is less than 31% of you pre tax income and you're still struggling to pay?


1. Make sure your math is correct. Have you properly presented your financial situation? Did you say you bring in $1400 in rental income when in reality those two spare bedrooms are still vacant? Lately homeowners have been overestimating their income in order to appear more financially capable to their bank. In certain situations homeowners have flat out lied because they thought a lower salary would cause the bank to reject their modification application. Make sure you've given a true picture.


2. Check with the bank and determine what figures they are using for property taxes and homeowners insurance. In working with the 31% figure the bank will first take homeowners insurance and property taxes off the top. The remaining number is what they expect you to pay in principal and interest. If they think your property taxes are $300 a month when they are actually more like $700 a month then your principal and interest payment may be $400 a month too high. In these situations you'll need to get copies of all relevant bills. Keep in mind that in certain counties taxes may be increasing. If you can get documentation indicating such an increase provide them to the bank.


3. Look to other solutions. Ask the bank about an In-House modification. These modifications will not be bound by HAMP guidelines. Consider listing the property for sale (or short sale). The worst scenario is allowing the foreclosure to reach a judgment. Just about anything else is better in terms of a credit hit. You may even want to fight back against the bank in litigation. I would advise talking with a lawyer or housing counselor.

4. Sit down with your family and figure out if you're over-extended. Is everyone in your household of a reasonable age working? Is there a way to bring in additional rental income? Are you spending too much on vacations, personal property, entertainment, etc. ? If you intend to save your home you mortgage needs to become the priority. Talk with a lawyer experienced in foreclosure law and see what your options are.


Share

Widgets