As too many Ohio residents have recently found, foreclosure is no longer the unthinkable. Loss of employment, spiking adjustable rate mortgages, and high rates of debt have put many local homeowners at risk of losing their property. Finding a new job can take time, but the monthly obligation to pay the mortgage does not stop. When one or two mortgage payments are late, it puts a borrower in danger of default, and raises the problem of repaying the arrears while also making future payments on time. If mortgage payments fall behind three or four months, the threat of foreclosure looms.
The recent rash of foreclosures, however, is not a sign of greed on the part of financial institutions. Neither lender nor homeowner benefits from foreclosure, a costly legal process by which the mortgage lender obtains ownership of a property whose mortgage is in default. Foreclosures and abandoned residences have scarred not only Cleveland-area communities, but have become a problem on a national scale. It may be helpful to remember that foreclosure today does not carry the stigma it once did.
The good news is that there are a range of defenses to such a threat. These include:
When both mortgage lender and borrower agree to new terms for the loan, the transaction is called a loan modification. Typical changes in terms include increasing time to repay (for example, from the original fifteen years to thirty years), reducing the interest rate, and altering an adjustable rate of interest to a fixed rate. In some cases, the principal balance owed may be reduced.
Another tack is to sell the property itself before the bank forecloses. If a sale is completed before foreclosure, the proceeds go first to pay the mortgage lender, but the owner may keep the difference. Because of the current backlog of houses for sale, however, many sellers are finding such a sale hard to accomplish rapidly enough. In such cases, it may be possible to arrange for a short sale, which means selling the property for what a seller will pay, even if it is less than what is owed on the mortgage. A short sale requires permission by the mortgage holder, or bank. It is important to obtain an assurance in writing that if the short sale results in a shortfall, that the bank will forgive the difference and promises not to pursue the homeowner for the deficiency.
As a last resort, a homeowner may consider a deed-in-lieu, in which ownership of the property is exchanged in place of repaying the mortgage. In this kind of deal, the bank simply takes the property, forgives the mortgage, and the former owner moves out and moves on. Although this arrangement does not save one's home, it offers a faster resolution to the mortgage impasse, and results in less damage to the owner's credit report than foreclosure does. This in turn would make it easier to obtain a mortgage loan in the near future. The obvious disadvantage: loss of equity and of a place to live. It's important to note that this kind of exchange is not always possible, as for example when a lien or second mortgage is in default on the property, or if a second mortgage is now held by a different lender.
Americans have an important right: that of declaring bankruptcy. Bankruptcy offers important protections to debtors that allow financially-troubled citizens to put a bad financial period behind them, and eventually to reestablish good credit. The two kinds of bankruptcy for individuals, Chapter 7 and Chapter 13, have different implications for homeowners in danger of foreclosure. In Chapter 13, the bankruptcy court oversees the reorganization of debt so that the debtor may make payments over time while enjoying a discharge of debts. In Chapter 7, however, a debtor's assets are liquidated, lenders are partially compensated with no future claim on the borrower. The implications for one's mortgage and ownership of a residence are complicated, and it is advisable to consult an attorney for help.