By Ilyce Glink and Samuel J. Tamkin
Friday, March 18, 2011; 7:23 PM
Q. We built a spec house in 2007 as the market declined. We've tried to do everything to get it sold and recently received a short-sale offer on the home.
At first, our bank agreed to change the loan into an interest-only loan to help with cash flow, but we can't manage to cover those payments. Then our bank went out of business and was taken over by another bank.
We approached our new lender with the short-sale offer and agreed to pay most of the difference between the amount offered by the buyer and the amount owed to the bank by using our retirement savings. But they declined to accept the offer because of a loss-sharing agreement they have with the government.
Now my husband has stage 3 cancer, and he's unable to work. All our cash reserves have been depleted to keep up our payments.
We are in our 50s, have always been fiscally responsible and want to do the right thing. Foreclosure is not an option for us because of what it would do to our credit. We feel the bank has acted very irresponsibly and this loss-share agreement is working against the taxpayer and for the bank. The bank has no incentive to work with us.
Do you have any suggestions, and do we have any recourse for complaints?
A. We read your letter and felt sick. It reminds us of a story that was circulating a year or two ago that showed that buyers of banks that went under were raking in millions by taking over those failed banks.
They weren't making this money as a result of their wise lending or better skills in making loans, but in large part from guarantees made by the U.S. government to the banks taking over the failed lenders. The worse a loan performed, the more money the bank made. It didn't quite make sense to set up a situation that allowed banks to make billions of dollars with no risk, but it seems to follow directly with what you are saying.
In your situation, you could make the bank whole (or very nearly whole) by having the buyer put up most of the money owed on the loan while you put up the difference. Yet if the bank forecloses on you and gets half that amount from the sale, the bank might make out better.
How would that work? Well, if your bank purchased the loans on the books of the bank at, say, 70 cents on the dollar, and the government has a formula to guarantee the difference or a formula on the basis of the difference, your bank might make more money taking the loss than being made whole by you.
If your loan balance were $500,000 and you got the buyers to offer $400,000 plus $50,000 from you, the bank would get close to the amount it was owed. At that point, you'd think the bank would be ecstatic to get this lousy loan off its books. But the bank might get more money by foreclosing and having the government pay them the difference.
It's awful to think that the financial system actually works that way, but strange things have happened in the bank bailout.
It seems that our representatives in Washington along with banking regulators would, and should, know what has happened to you.
However, if the agreements with the banks are such that they are not under a legal obligation to take your deal, then only a political solution can pressure banks to take a deal that is better for taxpayers and not so lucrative for the buyers of failed banks.
Unfortunately, your complaints may fall on deaf ears. In that case, you must do what is best for you, which may be to let the home go into foreclosure. Keep in mind that if the lender has reported your payments to the credit reporting bureaus, your credit history may have been damaged quite a bit by now.
If the home goes into foreclosure, your credit history and credit score will suffer more, but your main priority now must be to take care of your husband. After you and your husband make it through that fight, you can work to rebuild your credit history and credit scores.
If the bank is willing to work with you, then work with it. If, as you have said, you have done all that you can to get the home sold, found a buyer and offered to take money out of your retirement accounts to pay the lender, and yet the lender rejected that offer, you've done as much as you can.
Q. You must be very secure and able to see into the future, but to recommend to others that they shorten the term of their mortgage is inviting trouble.
What happens if one of a married couple loses his or her job? What if both spouses lose their jobs or get sick? Any number of things can go wrong and have an adverse effect on a family's income. What do you do, ask the bank to reduce your payment and extend the amortization schedule when your income is reduced and you are in no position to qualify for credit?
However, if you take the longest amortization possible on your loan, you will be protected on the downside. You can pay down the loan as much as you want over the years. Oh, I can hear you now: Most people don't have the discipline to pay extra on their mortgage. Well, in that case, they don't have the discipline to have a short-term mortgage, either.
I paid down my 30-year mortgage in six years. As a self-employed person, I am more aware than some of what can go wrong, and I always leave myself breathing room.
I suggest you rethink your plan of shoving people into short-term mortgages, especially in our current depression.
A. First, congratulations on paying off your loan in six years. Good for you.
Our advice has been the same for years. There are three primary ways to tell if you're getting a great deal on a refinance: if you lower the interest rate; if you lower the monthly payment; or if you shorten the loan term.
The only way to save the most money (and know for sure you're getting a good deal) is for at least two of these to be true. The best scenario is when you're lowering the interest rate, lowering the monthly payment and shortening the term of the loan.
While renewing for a 30-year term might make sense for some people, you're not maximizing the amount of money you can save.
If you have already paid down eight years of the loan, you'll actually lose money in almost every scenario if you stretch the loan term back to 30 years. For example, if you have 22 years left on your loan, shortening the loan term to 20 or 15 years (preferably 15) means you save years of payments on the mortgage. That translates into thousands of dollars.
The reason to go with a 15-year loan over a 20- or 30-year loan is the interest rate you'll get. You'll pay a lower interest rate (by maybe a half a percentage point) by choosing the shorter-term loan. That's how the finance world works. It's less of a risk for a lender to do a 15-year loan than a 30-year loan, so the borrower pays less.
That extra half a percent translates into thousands of dollars of savings. Even if you make several extra mortgage payments per year, you'll be paying more in interest on a 30-year loan than on a 15-year loan.
I agree that if you're in a financially precarious position and don't know if you'll have a job or if you'll have to take a pay cut, getting set in a 15-year loan might be a stretch. But cutting back on the number of years you pay your mortgage is simply a good way to save money.
Q. My wife passed away last April. We are joint owners of our house, purchased in 1975. I understand it is not a "transfer deed." Would it be wise for me to obtain a certificate of title transfer now so my children will not need to deal with it upon my death?
A. Our condolences on your loss. When husbands and wives own property jointly, they generally own the property as joint tenants with rights of survivorship. As joint owners, when one of them dies, the survivor becomes the sole owner of the home.
Even though the deceased spouse's name may still be listed on the title records for the property, the surviving spouse is the only owner of the home. Yes, you could have a deed executed by your wife's estate conveying any interest the estate may have to you, but that might not be legally necessary.
In certain cases, you can get a deed to change the name on the records for the property, but you would want to do it that way only if the expense is low and if it would not cause other adverse issues relating to the property's real estate taxes.
You should talk to a real estate lawyer to go over some of these issues. You can also go to your local real estate tax collector or treasurer's office to determine whether, from a real estate tax perspective, recording a deed would cause you problems down the road.
If you and your wife took title to the home as joint tenants with rights of survivorship, you shouldn't have to take any additional steps to ensure that you are the sole owner. Certainly, if you make sure that your name is the only one on the title, your children will not have to deal with the additional documentation relating to your wife.
If there are no adverse real estate tax issues, if the costs are low in recording a deed to put your name as the sole owner of title, and if you are inclined to do it, you certainly can, and it would be of some help to your children down the line.
Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "Buy, Close, Move In!" Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022, or contact them through Glink's Web sites, thinkglink.com and expertrealestatetips.net.