September 19, 2011: Underwater homeowners who have decided to fix their negative equity problem should carefully analyze three (3) things before they determine what to do: 1) the lender’s reputation; 2) the homeowners situation; and 3) the political and legal climate.
Underwater homeowners must (will evenutally) eliminate the negative equity in their homes.
Loan modifications were instrumental in delaying foreclosures by temporarily encouraging the banks not to sell the home at auction, and by lowering the mortgage payments. But loan modifications never addressed the negative equity problem, and as such, don’t work very well in the long-term.
Historically, banks almost never gave principal reductions. But the current litigation trend should change that. Historically, banks almost always gave the homeonwer more time before a foreclosure sale; that trend will continue.
The action that homeowners are required to take to delay the foreclosure process and get a principal reduction depends on the lender, the homeowner and the current litigation and political climate.
LEGAL AND POLITICAL CLIMATE
As the date this article went to press, the U.S. government pummeled the banks with multiple lawsuits based on causes of action steming from faulty foreclosures to improper securitization of mortgages. Those lawsuits can be copied and reproduced as private lawsuits brought by individual homeowners.
In theory, court rulings in the government mortgage litigation lawsuits apply to the private lawsuits (although not exactly because governments have different damages and standing than do private individuals). High profile government lawsuits will force the banks’ attorneys to temporary “drop what they are doing” on the little private lawsuits and focus on the big ones (because that’s where the money is).
Moreover, the lower court judges (where the borrower’s lawsuits are handled), after learning so much about these new government lawsuits, will generally take a “wait and see” approach with the private lawsuits to see how the Supreme Courts handle the government lawsuits. The Supreme Courts will give much guidance to the lower court judges, so lower court judges may wait for the higher court judges’ wisdom before ruling.
The lender’s reputation must be considered. Lenders are faced with different types of pressure. Certain lenders will postpone sale dates more easily than others based on shareholder or investor pressure as opposed to government or lawsuit pressure. Other lenders have more political pressure from congress and the President. For example local small-time credit unions usually have no political pressure and are usually exempt from the government lawsuits. They usually are more aggressive, however, than larger banks because they are responding to the board of trustee pressure- a different kind of pressure. So, smaller banks are usually more agressive than larger banks.
The homeowners’ situation must be considered. Factors to consider are whether the home is primary owner occupied or a rental unit; whether the homeowner wants to short sell the home or stay there; whether the homeonwer is thinking about filing banruptcy; the age of the homeowner; the risk level of the homeowner; the type of loan (i.e. fixed or variable); how long it has been since the homeowner stopped making a mortgage payment (or is still current); the homeowner’s concern about their credit score; and last but not least, the amount of assets the homeonwer is protecting.
Homeowners frequently must use a number of tools to help them with their problem including: asset protection; stop making the mortgage payment; partial mortgage payment; mortgage litigation; postponing the trustee sale; selling the house short; bankruptcy; and sometimes letting the
house go into foreclosure.
Remember, once a house goes underwater the homeowner won’t be able to sleep until that problem is fixed.