The book has been closed on the previous decade’s mortgage crisis, sort of.
In an April 2014 report, the General Accountability Office blasted the $10 billion settlement between the government and major banks. That lawsuit stemmed from allegations of rampant foreclosure abuse in the mortgage lending industry. The GAO said the settlement was based on “incomplete information” and left some wrongfully-foreclosed homeowners with no house and as little as $300. The report also stated that the promises the lenders made to change their processes were so vague as to be essentially meaningless.
The GAO suggested additional action to force the servicers to live up to the spirit of the agreement they made with the government.
The mortgage crisis may have largely dissipated in some areas of the country, but many homeowners in Florida are still in trouble. The negative equity in their homes means that the banks will not refinance the mortgages, so the only hope for these homeowners is a loan modification. Sadly, even if the payments are reduced, many Floridians can no longer afford to keep their homes, at least over the long term.
There are many ways to deal with a situation where the home cannot be saved. Ignoring the problem solves nothing. In Florida, after a home is sold in foreclosure auction, the lender generally has the right to sue the borrower for the difference between the auction price (or appraised fair market value on the auction date if the lender won the bid with its judgment), and the judgment amount. Fighting the lender through the foreclosure process may persuade them to waive the right to pursue a deficiency judgment, let you stay in the home for extra time, and even pay you cash to help you move, all in exchange for your consent to the entry of the foreclosure judgment. If the mortgage was your only debt problem, negotiating a waiver of deficiency may help you avoid bankruptcy altogether.
If you own investment properties you may be able to discharge your liability through a bankruptcy proceeding, and then continue collecting rents while the lenders pursue foreclosure. If you have discharged your liability the lender’s only negotiating leverage left is the ability to offer you cash or an extended sale date (which, for investment property, is essentially cash). Since you have already discharged your personal liability, the rent you collect after discharge remains yours, giving you funds to start over.
This arrangement may even work out to benefit the banks. First, the bank is not responsible for maintenance, carrying costs, and homeowner’s association/condo association fees while the property remains in your name. Second, many real estate investors were great customers for banks when the economy was stable. They tended to take interest only loans, and the cash flow from their properties was sufficient to service the debt, pay the taxes, insurance, association fees, and maintenance costs, and still have enough left over for a good return on their investment. When the investor had fully depreciated the property, they would do a 1031 exchange and immediately take a loan against the new property, minimizing the capital tied up in the investment, adding another deduction (mortgage interest), and again generating cash flow. After recovering from bankruptcy, these investors will again be great customers for the banks. The rent they collect after bankruptcy builds their war chest so they can start rebuilding their real estate holdings, once again becoming good bank customers.
Contact us for a free consultation with attorneys who can help find a path forward.