From MGIC’s Internal Loss Mitigation Manual, June 2011 Edition we learn the following with regards to ‘hardship’.

MGIC requires that you determine borrower hardship for certain loan workout options.  We define ‘hardship’ as the borrowers’ long-term inability to maintain mortgage payments due to circumstances beyond their control.

To determine hardship, conduct a thorough review of the borrowers’ financial information.

Here are some examples of how MGIC defines hardship:

• involuntary unemployment;
• involuntary relocation;
• divorce;
• reduction in income used to sustain mortgage debt that was beyond the borrowers’ control;
• serious illness, long-term incapacity or death of a co-borrower; AND
• call to active military duty.

702.06 Deficiency decree; common-law suit to recover deficiency.—In all suits for the foreclosure of mortgages heretofore or hereafter executed the entry of a deficiency decree for any portion of a deficiency, should one exist, shall be within the sound judicial discretion of the court, but the complainant shall also have the right to sue at common law to recover such deficiency, provided no suit at law to recover such deficiency shall be maintained against the original mortgagor in cases where the mortgage is for the purchase price of the property involved and where the original mortgagee becomes the purchaser thereof at foreclosure sale and also is granted a deficiency decree against the original mortgagor.

Florida Deficiency Judgment

HUD.gov – In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

Today, FHA published a mortgagee letter to provide guidance to lenders on how to implement this new enhancement. Participation in FHA’s refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner’s primary residence. And the borrower’s existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower’s combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent. Interested homeowners should contact their lenders to determine if they are eligible and whether the lender agrees the write down a portion of the unpaid principal.

To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

Fannie Mae (FNM/NYSE) announced policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Reuters – Bank of America will on Wednesday announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home’s value or are battling ever-expanding “negative amortization” loans.

According to a summary of the program obtained by Reuters, Bank of America pledged to offer an “earned principal forgiveness” of up to 30 percent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.

The forgiveness can allow a homeowner to bring the loan value back down to 100 percent of the home’s value over five years, according to the plan, confirmed by sources close to the matter.

The plan, to begin in May, is among the first by a U.S. mortgage lender that takes a systematic approach to reducing mortgage principal to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed.

A Bank of America spokesman declined comment.

Announcement of the program in Washington comes as U.S. lawmakers and housing advocates are becoming increasingly vocal about the need for principal writedowns in order to save homes on a large scale. Amid stubbornly high unemployment, homeowners are seen as more likely to simply abandon an unaffordable mortgage when they have no equity or are deep “underwater” on the loan.

The U.S. Treasury’s mortgage modification program has largely relied on reducing interest rates, and has been criticized for failing to address a steep and painful reduction in home values.

The announcement also will come two days after two Washington state residents sued Bank of America for allegedly reneging on a promise it made to modify troubled mortgages when it took $25 billion in taxpayer bailout money.

The lawsuit alleged that the lender has “seriously strung out, delayed and otherwised hindered” modifications because it had financial incentives to do so.

NEGATIVE AMORTIZATION LOANS TARGETED

Under the plan, Bank of America also will slash the principal balance on the worst of the high-risk mortgages written during the height of the housing boom, the so-called “payment option” adjustable rate mortgages that had a negative amortization feature that allowed the principal balance to grow.

On such loans that are delinquent and in danger of imminent default, the lender will announce that it will cut principal to as low as a 95 percent of the property’s value.

Bank of America lender also will expand its modification program to consider payment reductions on prime hybrid adjustable rate mortgages that have floating interest rates after two years and will extend its National Homeowner Retention Plan by six months until the end of 2012.

The bank expects to be operationally ready to start the earned principal reduction plan in May. It plans to identify mortgages that may be eligible for these programs and proactively contact homeowners to request documents to verify eligibility. (Additional reporting by Joe Rauch in Charlotte; Editing by Lincoln Feast)

Housing Wire – In what it is calling a historic trend reversal, credit score provider FICO, is seeing more borrowers with a high credit score preferring to pay their monthly credit card bill over their mortgage.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

The shift to a consumer preference to stay current on unsecured debt, as opposed to secured debt, began last year. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on credit cards. In 2005, credit card delinquency risk was three times greater than today. In 2008, the lower to credit cards being just 1.6 times more likely to become 90 days delinquent than were mortgage loans.

The results echo data released by credit info provider, TransUnion, earlier this month. That study from earlier this month, found the share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108). At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%.

Bloomberg – When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.

“The big dogs get a bailout, and the little man gets no mercy,” said King, 39, referring to the U.S. government’s rescue of banks and other financial institutions.

While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows.

The figures don’t include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on King’s former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights. Judgments such as the one levied against King usually tack on court fees, fines and interest.

‘Next Big Crisis’

Deficiency judgments were rare in the 15 years since the last real estate slump, said Ben Hillard, a former investment banker who now is a real estate and corporate attorney at Hillard & Rogers in Largo, Florida.

“The banks have been too underwater with foreclosures to spend much time on deficiency judgments, but that’s beginning to change,” Hillard said in an interview. “This is going to be the next big crisis.”

Almost 4.5 percent of mortgaged U.S. homes were in foreclosure during the third quarter, the highest rate in the 37 years of tracking the data, the Mortgage Bankers Association said Nov. 19. A record one in every 10 mortgages was at least one payment overdue in the same period, the Washington-based trade group reported.

The Obama administration is seeking to modify as many as 4 million loans by 2012 to prevent foreclosures through the Home Affordable Modification Program, which cuts monthly payments to about a third of borrowers’ income. By the end of December, the program was responsible for more than 850,000 modifications, the Treasury Department said in a Jan. 15 report.

20-Year Window

The federal government spent $230 billion in the year ended in September to support homeowners, according to the Congressional Budget Office in Washington. Those efforts didn’t help people who had already walked away from their houses.

In states such as Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years.

About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

Depression-Era Protections

The laws in states that protect some borrowers stem from the Great Depression in the 1930s, when a lack of bidders at foreclosure auctions caused deficiencies that, with added fees and interest, sometimes were bigger than the original loan amount, according to a 1934 Virginia Law Review article by Sol Phillips Perlman. Today, many courts measure the shortfall using a property’s market value at the time of foreclosure rather than auction results.

The likeliest candidates for deficiency judgments are so- called rational defaults, said Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss.

About 21 percent of American homeowners owe more on their mortgages than their properties are worth, according to Zillow.com, a Seattle-based real estate data firm.

“Walking away from a property comes with a cost, especially for people who otherwise have good credit,” Tolchinsky said in an interview. “The bank is going to pull your credit report, and if you’re current on your other bills they are going to come after you and potentially ruin you.”

Fine Print

It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to Hillard, the attorney in Largo. In a short sale, lenders agree to let borrowers sell a home for less than the mortgage balance.

“Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open,” Hillard said. About 90 percent of people who do a short sale think they are “off the hook.”

That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short- sale agreement.

$20,000 Shock

“We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.”

The money King owes to the Soundview Home Loan asset-backed security that holds the mortgage on his former Coral Gables condominium consists of $38,000 for unpaid principal and almost $6,000 in legal fees and interest accrued prior to the ruling. According to the judgment, the security can charge 8 percent interest until he pays off the debt.

King, who said his default was caused by a reduction in his income, now rents near Fort Lauderdale, Florida, where he teaches ballroom dancing.

“I thought the foreclosure was the worst of a bad situation, but it’s not,” said King. “The people who got sucked into the real estate bubble are still paying for it, even after they’ve taken our homes.”

HousingWire – Fraudulent reductions in Home Equity Lines of Credit (HELOCs), revolving credit collateralized by one’s home, may become the focus of a forthcoming series of state-led hearings in Tallahassee, and the man behind the plan is setting big banks in his sights.

Florida State Senator Mike Haridopolos is calling for a round of investigations to explore claims that banks fraudulently or arbitrarily reduced HELOCs to improve their bottom lines, according to a press statement this weekend.

“I have heard the stories of this happening across our state and our country, and the courts are filled with lawsuits,” Haridopolos said. “This needs to be investigated because, if true, it’s outrageous.”

The Republican State Senator is also calling on Congress to conduct national hearings. Specifically, Haridopolos is urging the examination of this alleged practice within banks that received government funds through the Troubled Asset Relief Program (TARP).

“When Congress gave away the taxpayers’ money to the banks, they guaranteed the public that if the banks did not use it to lend money, they would immediately call for hearings and hold the banks accountable,” Haridopolos said.

He added: “Since then, we have seen the President sit down with the leaders of the big banks and refuse to meet with the average Americans who are being hurt by their practices… I can tell you, the banks may control [Washington] DC, but the people control Florida and we’re going to keep it that way.”

Haridopolos is calling for hearings to feature testimony not only from homeowners, but consumer groups and banks, “so that everyone has a chance…to weigh in,” according to the press statement.

Federal regulations allow HELOC suspensions under adverse financial circumstances and in situations where the underlying property experiences a significant decline in value. According to the statement from Haridopolos’ office, homeowners claim banks allegedly use false pretenses in order to freeze their family capital.

Florida is not immune to the substantial peak-to-trough house price declines. And a spokesperson for Haridopolos told HousingWire some borrowers claim banks order no appraisals and make no assessment of actual property value decline before freezing their HELOCs.

Similar claims by an Illinois homeowner recently resulted in a suit against JP Morgan Chase (JPM: 39.21 +0.13%). The suit alleged Chase froze a HELOC without disclosing its valuation methods or explaining to the borrower to what degree the house value fell.

Despite the allegedly fraudulent HELOC freezes and the scarcity of new HELOC lending, consumers in hard-hit areas like Florida are still buying in ways that aren’t measured against the backdrop of local foreclosures and price declines.

Time to get those Banksters.

My husband and I were one week from closing on a house when we got a denial call from the mortgage company. When they check his credit to prequalify they found that My husband has or had 0 credit. When they went back to check our credit before closing, they found a 2600.00 collection debt on my credit. upon some investigating it appears to be my husbands debt. It appears that they placed it on my credit report, instead of his is that legal?

he sublease [without having him sign any papers] his apartment to a friend who moved out oweing rent. I had nothing to do with that. wh and how can they go after me?

Curry (more…)

Hi Paul,

My soon to be Ex-Husband and I bought a home in December of 2008.  We are currently going through a divorce.  I chose to stay in the home with our children, after our seperation.  Now, several months later, I am unable to make the $2,200.00 Mortgage Payment on my own.  We have only owned the home for 1 year and our principal has only decreased by about $6,000 since we purchased it.  This leaves no room to pay a realator’s comission and the closing costs, even if we could get it to sell for the original purchase price.  To make matters worse, our neighborhood builder went bankrupt.  We now have a new builder.  The new homes that are being built are smaller, but also much cheaper.

I have almost maxed out my credit card, taken a loan out against my 401K and borrowed money from my parents, just to pay the mortgage by the end of each month.  I have not yet fallen behind by 30 days, but I am creaping much closer. 

My real estate agent suggested a short sale.  My credit is not super and I am very concerned that by doing a short sale, it will drop my score considerably.  I have three children to support and need to be able to find somewhere else to live.  I want to make sure that my decision is a sound one. 

My lender (Citi Mortgage)offered to lower my payments to $1,450 for twelve months and submit a loan modification request to FHA (I have a FHA Loan – 30 yrs fixed @ 6.25%).  However, Citi Mortgage would expect a baloon payment of $10,000 at the end of the 12 months.  I can’t afford to pay that kind of money.  If I was to request the Loan Modification, would I be allowed to put my home on the market? 

I am having a very hard time figuring out what to do.  I can’t afford to pay the Mortgage and am starting to drown in debt because of it.  Which of these options would you suggest, given my circumstances?  Loan Modification or a Short Sale?  Any advice that you can offer would be great!!

Thanks,
Renee (more…)