By Elizabeth Razzi
Sunday, July 20, 2008
Is there a right way to lose your home? And is there any good reason to pay for "expert" advice on how best to do it?
The result of a foreclosure or a short sale is basically the same -- a lost home and long-lived damage to your credit record. But the prevailing thought has been that a short sale, in which the lender approves a sale for less than the full amount owed, is worth the hassle because it damages your credit less than foreclosure. I've written as much in previous columns. But I've found that it's not necessarily so.
I've also found a burgeoning crop of for-profit counselors trying to sell pre-foreclosure advice to consumers.
What you don't need, when struggling with an unaffordable mortgage, is to spend scarce dollars on short-sale or foreclosure consultants. Reputable help is available, for free, from established nonprofit groups.
Probably the best solution, if your finances haven't disintegrated beyond rescue, is to work out a loan modification with your lender. As long as the result of a modification is affordable, it's the one option that allows you to stay in your home, and it's much less likely to ruin your credit. Depending on how your lender reports it to the credit bureaus, the loan modification might not even show up on your credit reports or FICO credit score.
A foreclosure and short sale inflict equal damage to your FICO score, according to Fair Isaac, the company that compiles those all-powerful numbers. Either will make you ineligible for three years for a mortgage insured by the Federal Housing Administration. (Extenuating circumstances, such as serious illness or death of a wage earner can justify exceptions, according to the FHA.)
There's not much difference between the two, according to Ira Rheingold, executive director of the National Association of Consumer Advocates, which is based in the District. "Whether you go to foreclosure or not, it does a lot of damage to your credit score," he said. You will always have to report that you lost a home on future mortgage applications. It will limit your chances of getting a new loan for as long as seven years.
Michael Radesky, a collections executive for Bank of America, which recently took over Countrywide Financial, said that when evaluating a borrower who had a short sale or foreclosure in his past, he would probably give a slight edge to the short sale. "With the short sale . . . at least the customer was at the table. In a foreclosure they were not," Radesky said.
The only real winner in a short sale is the buyer who gets the home at a discount, Radesky added. "It is an alternative that some Realtors will push on a customer," he said. "The Realtor still makes a profit on a short sale."
He added that borrowers are often surprised to learn that they may still carry some liability after a short sale. "We will try to negotiate an unsecured note for at least some of it," Radesky said. For example, he said if a short sale left $20,000 of the mortgage balance unpaid, the bank might agree to forgive $10,000 or $15,000 and ask the seller to sign an unsecured note for the remaining $5,000 or $10,000.
And although federal law has been temporarily changed so a seller won't owe tax on forgiven debt that was backed by his primary residence, that tax break is not available on investment properties or vacation homes. A short sale or foreclosure on such property would still trigger a tax bill.
It's tempting to think that a mortgage industry insider turned consumer advocate can offer some way out of these hard choices -- for a fee, of course. But they really can't offer any inside track or easy way out.
Former lender George Hunter Omilan of Vienna, for example, advocates short sales via a two-hour online course on his Web site, http://TheNegotiatedSolution.com. He charges $249 for advice on getting your lender to approve a short sale and $995 to handle the details on your behalf. "Your credit will be less damaged with a short sale versus a foreclosure," he writes on the site, and he claims he knows a way to get customers' credit repaired well enough to qualify for a new mortgage within 12 to 24 months.
But, as noted earlier, the FHA, Bank of America and FICO scores treat foreclosures and short sales the same. And most borrowers will not qualify for a new loan in such a short time.
Then there's the unfortunately named YouWalkAway.com. "Unshackle yourself today from a losing investment and use our proven method to Walk Away," the site says. If you unshackle yourself from $995, they'll advise you on repairing your credit and give you a phone consultation with a lawyer and an accountant.
"We absolutely don't believe in jingle-mail," YouWalkAway.com co-founder Jon Maddux said, referring to a flippant term for deed-in-lieu-of-foreclosure, in which homeowners simply abandon the home. "We think jingle-mail is one of the worst things you can do." Instead, his company recommends that owners stay in the property, without paying, for as long as possible. The company also recommends paying credit card bills and other debts to minimize the number of dings on the borrower's credit profile. Maddux noted that his fee, broken into three monthly installments, "is not a hard payment to make when you're not making a mortgage payment."
In August, the company plans to start selling another service, for an additional fee, to help borrowers negotiate loan modifications. But you don't need to pay for that type of help. It's already available for free from a number of reputable nonprofits.
Take advantage of their help. Loan modifications aren't an easy sell to lenders. Lenders have been rightly criticized for being stingy about the number and effectiveness of the loan modifications they have approved. But a good loan modification is the borrower's best shot at relief. And now there's heavy pressure on lenders from consumer advocates, legislators and federal regulators to shrink the number of foreclosures by offering more -- and better -- loan modifications. Push for one if you're in trouble and you want to keep your home and preserve your credit rating.
You'll have to convince your lender that, if it forgives some of the outstanding debt, lowers the interest rate or stretches out the time you have to pay back the debt, you'll be able to handle it. Be aware, though, that lenders will continue foreclosure proceedings even while they try to work out a restructuring.
Here are a few nonprofit groups that offer free help and counseling:
· ACORN Housing, 866-672-2676, http://www.acorn.org
· HomeFree-USA, 866-696-2369, http://www.homefreeusa.org
· Hope Now, 888-995-4673, http://www.hopenow.com
· Neighborhood Assistance Corp., 888-302-6222, http://www.naca.com
E-mail Elizabeth Razzi atrazzie@washpost.com
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