Steps That Advocates Can Take To Help Prevent Foreclosure
Foreclosure rates have increased
nationally by more than 200% since 1980 and show no signs of abatement.
More than 600,000 homes were foreclosed in 1989.
Older homeowners fall behind on their mortgages for many reasons: sudden decreases in
income due to the loss of a spouse; poor financial management which contributes to
nonpayment of utility bills, service shutoffs and liens against the property; failure to
perform necessary repairs and maintenance which make the property uninhabitable; second
mortgage scams which make impossible demands on the homeowner's limited resources.
All of these contributing factors can be addressed by skilled advocates -- if
homeowners turn to them in time. This issue of Consumer Concerns for Older Americans
examines some of the measures that legal and non-legal advocates for the elderly can take
to defend homeowners at risk of foreclosure.
How Foreclosures Work
Foreclosure procedures vary from
state to state. The procedures are established by state statutes, by case
law, and by local practice. In about half of the states, foreclosures
are court proceedings. First the creditor files a suit in a court located
near the property.
Unless the homeowner files an answer successfully contesting the foreclosure, a
judgement is entered for the creditor. The home is then sold under court supervision.
Other states have "non-judicial foreclosures." Creditors foreclose by simply
advertising the home for sale, using a legal notice in a newspaper.
If homeowners want to contest this type of foreclosure, they must file a lawsuit and ask
the court to stop the sale. Sometimes if the homeowner wants the court to stop the
foreclosure, the homeowner must file a bond to protect the creditor. Unless the homeowner
initiates a court proceeding, there is no judicial involvement in such a foreclosure.
Some states allow both types of foreclosure, judicial and non-judicial. Practicality
and local custom usually dictate a creditor's choice of one type over the other.
Consumer Strategies When Foreclosure
is Threatened
When a homeowner first becomes worried
about meeting mortgage payments, advocates can recommend that a series of steps
be taken to reduce the risk of foreclosure:
Get Legal Advice
Because foreclosure is a harsh legal process, homeowners threatened with foreclosure
should immediately obtain legal help. Possible sources of legal help are the
neighborhood legal services office, a bar association panel of pro bono attorneys,
or a program providing legal assistance for the elderly. A competent attorney
can determine whether there are legal defenses to a foreclosure. Too often,
homeowners either postpone consulting a lawyer until after the time to assert
their legal rights has passed, or walk away from their homes in frustration,
leaving themselves without any equity and vulnerable to deficiency claims. For
each foreclosure situation, a counselor or lawyer must carefully evaluate the
homeowners' objectives and interests. Homeowners should, however, avoid "quick
Fix" attorneys who may advertise or solicit through the mail from published
foreclosure lists. Many times these practitioners will push the homeowner to
file a bankruptcy prematurely. A bankruptcy may be necessary at some point.
But, as with many things, proper timing may be critical.
Keep Current on Home Payments
The consumer should not pay credit card debts, doctor bills or other low priority
debts ahead of home mortgage payments. Skipping payments on low priority debts
for several months will have little or no bad consequences, but skip one or
two home mortgage payments, and the consumer risks losing the home. Sometimes
the default can usually be cured by simply paying the amount in arrears.
Apply for Income Maintenance, Tax Abatement and Public Assistance Programs
Benefits provided by government and non-profit agencies are a key source of
assistance for individuals in financial distress. These resources can help older
homeowners free their income for home payments. Benefit programs to apply for
can include fuel assistance and weatherization assistance, food stamps and emergency
home repair programs. Most municipalities also offer property tax abatements
for reasons of age or hardship. For very low income homeowners, particularly
those who are recently widowed, advocates should also determine the homeowner's
eligibility for Supplemental Security Income. The process of obtaining these
benefits is often slow and difficult. When necessary, shepherd individuals'
applications through the bureaucratic maze, ensuring that application procedures
are understood and that all documentation is properly assembled and delivered.
Negotiate a Temporary Delay in
Payments
One of the most important strategies today for homeowners in financial trouble
is to work out with the lender a temporary delay in payments or a period of
reduced payments. More and more creditors are realizing that foreclosure is
a losing proposition for the lender, and that they are better off keeping the
consumer in the home making whatever payments the household can afford. Some
forms of forbearance that lenders are increasing likely to accept include:
Skipping one payment (that is, letting the consumer remain "30 days
down");
Extending the grace period for making late payments;
Skipping two to six payments for a year or two; or
Accepting reduced payments for anywhere from one to eighteen months.
It is important to contact the lender early, as soon as the homeowner begins
experiencing financial difficulties. Just calling the lender on the telephone
is a good way to start. Immediately follow up all phone calls with a letter
to the lender confirming what has been discussed. The homeowner should keep
a copy of the letter. The homeowner should continue to press the lender for
a response to the offer, and not simply sit back awaiting a response.
Negotiate a Permanent Loan Restructuring
Although a temporary forbearance
is easier to negotiate, for some older homeowners the financial problem
is more long term. To keep the house they will have to have lower mortgage
payments not just for a period of months, but perhaps as long as the mortgage
has to run. And lenders are beginning to realize that permanently receiving
less interest may be a better solution than foreclosing on the home.
Where a home's likely sale price at foreclosure is less than the mortgage,
the lender is usually better off keeping the consumer in the home and receiving
lower mortgage payments. Moreover, more and more consumers are utilizing their
rights in bankruptcy, and lenders are discovering that they are worse off if
the consumer files bankruptcy than if they negotiate a new repayment plan. Consequently,
homeowners report success in achieving the following types of negotiated mortgage
restructuring:
Capitalizing delinquent payments on top of the present principal balance,
allowing the consumer to repay these delinquent payments slowly over the whole
term of the loan;
Giving the homeowner up to four years to repay, in installments, delinquent
amounts, with no interest accruing on these back due amounts;
Lowering the interest rate for a certain number of years or even for the
remaining term of the loan, thus reducing monthly payments without lengthening
the term of the mortgage;
Lengthening the term of the loan, thus reducing monthly payments (but increasing
the total interest payments over the term of the loan);
Substituting some other more valuable property or asset for the home as
collateral for the mortgage, thus putting this substitute property at risk
of foreclosure, but protecting the home; or
Some combination of the above forms of loan restructuring, such as allowing
back due payments to be paid gradually, lengthening the term of the loan,
and lowering interest.
Refinance the Home Debt
If the home was financed at one of
the high interest rates that prevailed during the early 1980s, refinancing
at a lower interest rate and/or with a longer payment period can greatly
reduce monthly payments and bring them within reach. Moreover, refinancing
a low interest first mortgage and high interest second mortgage into a
low interest first mortgage can also reduce payments. Advocates should
keep in mind, however, that many refinancing schemes are frauds. Even
legitimate refinancing options that look like an improvement on closer
inspection are far more costly than the existing mortgage. The major disadvantages
to refinancing residential debts are the increased finance charges that
result from extending the repayment period, the possibility of having
to pay points, the additional closing costs, and prepayment penalties
on the old mortgages. The feasibility of refinancing depends on whether
the homeowner can obtain a loan at a reasonable rate, usually from a savings
bank, a commercial bank, a credit union, or a legitimate mortgage company.
Most finance companies and certain mortgage companies do not make residential
loans at reasonable rates and terms.
When foreclosure is threatened, a homeowner may wish to contact a local realtor
to obtain an appraisal of the home or even list the home for sale. Doing so
provides the owner with information about the home's marketability and its likely
sale price, without necessarily obligating the owner to sell. Most homeowners
do not want to give up their home, and but sometimes no other solution exists.
Selling the house may be painful, but it is always a better solution than letting
a bank sell the house. If they find a buyer, homeowners may sell their homes
privately before a foreclosure sale takes place.
Consider Filing Bankruptcy
Homeowners who are about to lose their homes should carefully consider filing
a petition in bankruptcy. This can stop the foreclosure process and allow them
time to regroup and try to work out a plan to keep the home. Bankruptcy may
also help them cure past defaults and make future payments. However, the bankruptcy
option is complicated and it is a good idea to seek professional assistance
from an attorney specializing in bankruptcy.
Deed in Lieu of Foreclosure
Homeowners often will be tempted to turn over their deed to the creditor instead
of fighting the foreclosure. This is generally a good idea only if the borrower
will receive something from the creditor in return for saving it the trouble
of foreclosing. For example, if the home's value exceeds the amount of the indebtedness,
the homeowner may want to ask the creditor to agree not to seek further collection
remedies. By turning over the deed to the mortgage holder, the consumer may
forfeit any right to equity in the home. Similarly, the consumer may have valid
claims or defenses against the creditor that would be lost by turning over the
deed. If the consumer does offer the creditor a deed in lieu of foreclosure,
make sure that there is a written agreement giving them sufficient time to vacate
the premises in order to find alternative housing and move in an orderly fashion.
Additional Resources on Foreclosure Prevention
Surviving Debt: Counseling
Families in Financial Trouble, National Consumer Law Center (Boston), 1992.
"Foreclosure Defense," Chapter 13 of the 1993 Repossessions Supplement,
Consumer Credit and Sales Legal Practice Series, National Consumer Law Center
(Boston).
For more information on where to turn
with questions on foreclosure defenses, contact NCLC's Boston office at
617/542-8010.
About NCLC
In 1992, NCLC received funding from
AoA to launch an Eldercare Initiative in Consumer Law, intended to improve
access to and the quality of consumer representation for older Americans.
Since 1969, NCLC has been providing legal advocates with technical and expert
assistance, training and publications that cover all major topics in consumer law. Since
its founding, NCLC has established itself as the nation's consumer law specialist, making
its legal expertise available to low income clients and their attorneys. These services
are now available to advocates representing older Americans.
The attorneys and policy analysts on NCLC's staff are all specialists in aspects of
consumer law. The Center's comprehensive library of consumer law is updated continuously
as attorneys conduct research on behalf of clients and revise NCLC legal practice
publications.
Making Use of Consumer Law
Consumer law is powerful but complex.
In any given transaction, several defenses may exist against creditor
or seller claims, but detailed research and calculations are required
in order to spot defenses. With financially burdened clients, it is important
to recognize that the emotional stress caused by indebtedness can impair
decisionmaking or lead to other difficulties beyond the debt crisis. This
recognition can help head off other legal problems that could quickly
develop.
NCLC is available to
consult with legal advocates for the elderly on a wide range of consumer
issues, providing leading and local case law, analyzing contract documents
for federal and state law compliance, defining factual and legal issues,
identifying experts and legal resources to strengthen cases and training
attorneys in consumer law.
