Nearly 2.4 million homeowners have lost their homes to foreclosure since the housing market turned south in 2006, and that number is expected to climb to six million before the bust is over.
First to succumb were the investor flippers, who turned their keys in to their lenders to cut their losses. Next came the below-prime adjustable-rate-mortgage borrowers, whose interest rates jumped to unaffordable levels. Now the foreclosure bug is infecting the 12 million homeowners who are "underwater" because they owe more on their mortgage than their home is worth -- a group that includes prime borrowers who had top-notch credit. They all won't lose their homes, but if they suffer a job layoff or other financial hardship, "they're toast," says Mark Zandi, chief economist at Moody's Economy.com.
Simply stated, if you can't make your payments, can't sell and can't refinance, you're flirting with foreclosure. Every state has its own rules and timeline, but lenders generally start the foreclosure process three to six months after you miss a payment.
If you're determined to keep your home, you'll probably need to ask your lender to modify your loan terms. Or you could file for Chapter 13 bankruptcy with a plan to repay your debts, including your mortgage. If you can't make the numbers work, you can give up your home but avoid foreclosure through a short sale or by using an alternate strategy called deed in lieu of foreclosure. Those options may offer a psychological lift and help reassure future creditors about your motivation to repay. They also allow you to qualify for another mortgage sooner than if you had gone through foreclosure.
When plummeting home values sent Lori and Andy Saczynski of Destin, Fla., down the road to foreclosure, they decided to bail. They bought their three-bedroom home in May 2005, just as the local market peaked, for $292,000 with 100% financing -- a 70% first mortgage and a 30% second mortgage. They expected to sell the house for a profit in just a few years so that they could build their dream home. When the market began its free fall, they hung on, hoping it would recover.
Meanwhile, Lori and Andy both worked -- Andy at two jobs totaling about 80 hours a week. They also cut back on everything they could to continue making their monthly payment, which rose twice with interest-rate adjustments. The last straw was when Lori got laid off. Lori says that she and Andy weren't raised to "walk away from our debts," but they also knew they couldn't sustain the mortgage payment.
They asked real estate agent Wendy Rulnick to help them with a short sale -- selling the property for less than the amount owed on the mortgage. It took three months to get an offer -- for $180,000 -- and another couple of months for the bank to accept it. The first-mortgage holder accepted a loss of about $24,000. The second-lien holder was out about $85,000. Since then, the couple and their three children -- Taylor, 11, Nathan, 6, and Noah, 1 -- have moved into a home that Andy's dad bought for them. Lori and Andy are paying him back.
Help From the Feds
The federal government has talked a lot about stemming the tide of foreclosures, and most policymakers agree that keeping people in their homes is better for the housing market. But the feds haven't provided much help so far. The programs introduced are so narrowly focused that they leave out a lot of homeowners who could use help, says Guy Cecala, publisher of Inside Mortgage Finance newsletter.
Last October, the Federal Housing Administration launched the Hope for Homeowners program to help underwater homeowners refinance. But mere hundreds of homeowners have been helped, and few lenders have climbed aboard.
In November, federal agencies and the Hope Now coalition (made up of 27 lenders and nonprofit consumer organizations) announced a program to bring "affordable" loan payments to borrowers who live in their homes, have missed three or more payments and haven't filed for bankruptcy. Any reduction in principal on the front end of the loan modification would be paid at the end of the loan.