What Can You Do When You’re in Default?
Most of us today know of someone who has lost his or her house to foreclosure in the not too distant past. It has become that common. However, here’s a story that’s been told less often.
Jerry and Pat had just bought a comfortable upscale home in the Los Angeles area that they had stretched to buy. But both had good jobs. However, Jerry was in a high-tech start-up company and, during the dot-com bubble craze, his company went belly up. He could not find other work to fit his job skills, but he kept trying.
Jerry had some severance pay and Pat was still working as a computer programmer for a high-tech company, so they managed to get by and pay all their bills, including their rather hefty mortgage payment. However, about a year after Jerry was laid off, Pat’s company closed its doors and she was without work as well. Now they were in a real financial pickle.
For a few months they hung on. But, without Pat’s income, they couldn’t make that big mortgage payment.
On the first day of the first month that they couldn’t make their home payment, Jerry called the lender and asked to talk to someone in their foreclosure department. He explained to a representative of the lender what his predicament was and said he simply did not have enough money to make the loan payment.
The representative checked Jerry and Pat’s payment history and saw that they had never been late. He chuckled and noted that the payment wasn’t due until the middle of the month. “Don’t worry,” he told them. “Something will turn up.”
Jerry was surprised at the lender’s cavalier attitude, so he followed the phone call with a letter explaining his situation. Next, he put the house up for sale. However, they had probably paid too much when they bought and the market just hadn’t caught up. (This was in the late 1990s when housing prices were steadily declining in the area.)
Even worse, they had secured 125 percent financing (and used the extra cash to buy furniture) so they now owed more than their house was worth. They didn’t have the equity in the property to offer a reduced price or even to pay a real estate agent to sell it for them.
Jerry didn’t get a call from the lender until he was nearly two months overdue on his payment. Then the lender’s loan default department called to find out if he knew his payment was late. Had it gotten lost in the mail?
Jerry said he had called earlier and again explained his situation.
He was told he’d be called back. Later that day, another representative called to let Jerry know how serious it was to let payments slip.
Again, Jerry explained his situation and again he followed up the conversation with a letter.
A few weeks later, Jerry got a letter from the lender saying that it had reported him to a credit bureau for late payments. They wanted to know if he disputed the claim. He responded that he did not, but included a letter of explanation.
Things went on in this manner for nearly five months. Jerry and Pat had their home up for sale “by owner,” but had no offers. Then one day Jerry got a call from the lender.
A representative of the lender’s, Bill, wanted to know how he was coming along with finding work or selling his house. Jerry told him the sad news. Bill then asked Jerry if he could send him a copy of the listing agreement showing that the house was for sale. He needed it immediately. Jerry said he was selling by owner because of his lack of equity. But he had prepared a flyer describing the property and he sent that to Bill. Two days later, Bill called back and said he’d like a printout from a real estate agent showing comparable sales over the past six months to ascertain that Jerry was pricing his house at market. Jerry immediately called an agent whom he had talked with before and got the agent to send it out.
A week later, Bill called back and wanted proof that Jerry and his wife were really out of work. Jerry did have an old termination slip from his last job and asked if a recent unemployment check to his wife would suffice. Bill said they would.
A week after that, Bill called again and said that if Jerry couldn’t make up the payments, the lender would be forced to start formal foreclosure proceedings. That meant that Jerry would lose his home in about four months. Jerry and Pat asked for a meeting.
At the meeting with Bill, Jerry and Pat explained the situation as they saw it. Their professional fields were depressed at the moment, there was a recession on (at that time), and they had a loan for more than their home was worth.
Then they began formal negotiating. (Keeping the lender abreast of the situation and communicating was a kind of negotiating too.) Yes, the lender could foreclose, but if it did, it would end up with a house it couldn’t resell for what had been put into it. As it was, even if Jerry and Pat sold, they wouldn’t get any money out of the deal anyway. Then they reiterated, “If the lender foreclosed, it would end up with a house that was worth less than the mortgage amount.”
Bill grimaced at that. Then he offered Jerry a proposition. He said the lender would allow him to skip the next three payments if, after that, Jerry made up all the interest on all the payments he had missed. The lender would even offer him a plan of slightly lower payments to help make up what he owed. Bill said the lender would like to extend the loan to make the payments even lower, but since Jerry and Pat had only recently gotten it, there was no way the lender could do that.
Jerry explained that he didn’t think he could make up any payments until he found a job. But he would try. They agreed.
Three months later, Jerry’s situation hadn’t changed and he asked for another meeting with the lender. After he explained his situation, he asked if the lender could simply forget the payments for a longer period of time, say a year or more, until he got back on his feet.
Bill conferred and said they’d get back to him. The next week he was given official notice that the foreclosure proceedings had started. Jerry began to look for another place to live.
A month later, Bill called back. He wanted to know ifjerry had any nibbles on the house. He hadn’t. Bill also wanted to know how Jerry’s job hunting was progressing. He reported there was no luck there either.
By the end of the next month, Jerry and Pat had made arrangements to move to her family’s home in another state. Hopefully, they both would get a better start there. Jerry called the lender one last time and asked for a conference.
When Bill met with him, Jerry pointed out that there was no way he could make up the back payments, now totaling nearly 11 months. Further, since the house was still worth less than the mort gage amount (if a buyer could be found at any price in this market), there was no way he could sell.
However, it would be two more months before the lender could complete foreclosure according to the rules in his state. Further, Jerry had maintained the house well during that time and it was in great condition right now. At this point, Jerry upped the ante.
He said that if the lender persisted in seeking foreclosure, Jerry would simply “walk.” Chances are the house would be vandalized and it might cost the lenders many thousands to put it back in shape. Plus, there was always the cost of completing the foreclosure process.
However, if the lender would accept a “deed in lieu of fore closure,” Jerry would transfer the property to the lender immediately. Then the lender could try selling the property itself, perhaps with more luck since it might offer much better terms (financing) than Jerry could.
A deed in lieu of foreclosure simply means that the lender accepts title to the property without going through the foreclosure process. For Jerry, it meant no record of foreclosure would appear on his credit report. However, a notice of getting a “deed in lieu” would show up. It was, however, a lesser bad credit mark.
The lender’s representative, Bill, considered and said he’d get back to Jerry. He did the next day and agreed. A “deed in lieu” was drawn up and Jerry was out from under.