Last Wednesday, President Obama unveiled his long-awaited plan to stimulate a recovery in real estate and assist homeowners facing foreclosure. Technically called the “Homeowner Affordability and Stability Plan“, the Plan is part of the President’s broad, comprehensive strategy to get the economy back on track.

The plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs.

The key components of the Homeowner Affordability and Stability Plan are:

1. Refinancing for Up to 4 to 5 Million Responsible Homeowners to Make Their Mortgages More Affordable

2. A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac

For complete details, go to the Treasury Dept’s Executive Summary at http://www.treas.gov/initiatives/eesa/homeowner-affordability-plan/ExecutiveSummary.pdf

So… how will this affect you if you are now upside down on your home loan?

First, In anticipation of the Plan, several financial institutions  have said that they will stop foreclosures on owner-occupied properties while they review and discuss the Plan’s contents. These include Fannie Mae and Freddie Mac plus Bank of America, J.P. Morgan, Chase, and Citigroup. This hold should last at least until mid-March and in many cases continues a hold started last September.

This gives some breathing room and hope to many on the edge of a foreclosure sale but… it only applies to owner-occupied properties, not rentals oe abandoned property.

Second, this measure (combined with other State measure such as California’s mandatory efforts to modify before starting foreclosure) should stimulate a more reasonable and pro-active approach to loan modification.

So far, banks have been very unresponsive and inconsistent in dealing with modification. This Plan will require lenders to modify loans if they want any more government assistance.

Third, the Plan calls for Congress to pass the pending Chapter 13 Bankruptcy “cram down” laws which would allow Federal Judges to reduce principal balances and payment rates to affordable levels. Right now, Judges have that power over consumer debts but not home loans.

Many fear passage of this will create a huge increase in Bankruptcy filings. However, whether done voluntarily by Lenders or through the courts, the end result is an owner-occupied home with an affordable loan at today’s market price. This is the same result a Lender would end up with after going through the trauma and expense of foreclosure.

Look to us for updates.  If you have specific questions about the economy impacts on your real estate of business, feel free to e-mail me at sjbeede@bpelaw.com or go to our website at www.bpelaw.com

WHERE WILL THE MONEY COME FROM…

Every week, I consult with property owners who are grappling with over-encumbered properties and running out of money to pay their loans. The key question is “what should we do?”  But the best answer depends on their situation. For an upside-down owner, there are really five choices:

1.  Wait It Out - real estate values move in cycles and already demand is pushing prices up in some markets. Most investors think we’ll see upward movement in the next 2 years, although a return to 2006 prices could take a lot longer.

2.  Modify Your Loan - Most of the recent real estate news concerns efforts to get lenders to “modify” their loans to make them affordable to the borrowers. So far, this is voluntary for lenders and the results have been to reduce payments but not the debt. And these have generally been limited to owner-occupied properties. The key is to connect with the person at your lender that has authority to make a decision. There are Loan Modification companies that can assist you with this process but check their success rates before paying them any money.

3.  Sell the Property - Selling an over-encumbered property requires getting the lenders to take the loss between what is owed and what it will sell for. This is called a “Short Sale”. The key to success is convincing the lender that it is in their best interest to cooperate. This involves a combination of: a)  your “Hardship Package” showing that you can’t pay; b) “Comparables” showing the true current property value; and c) knowing what recourse the lenders would have if the property doesn’t sell. What sinks most short sales is the lender demanding that the borrower sign a “Promissory Note” for any deficiency, although agreeing to pay something may be in the borrower’s interest. Be sure to use a knowledgeable, experienced Realtor to lead you through this process.

4.  Give the Property Back - Sometimes the Lender will be willing to take the property back through a “Deed in Lieu of Foreclosure”. This generally will not work if there are any junior liens plus it requires more investigative work for the lender.  Simply sending the keys back to the lender, ie: “Jingle Mail”, does nothing except give possession back to the lender.

5.  Foreclosure - Every state has laws that may allow the lender to take the property if the loan is not paid. This is called “foreclosure”.  The real issue is whether the lender can get a Judgment against you if they don’t get paid in full. While in most states this is possible, it is not the norm. In California for example, if the lender uses a “Trustee’s Sale” to foreclose (in approx. 4 months), they are barred from getting a judgment against you. In contrast, the “Judicial Foreclosure” required to get a judgment could take 2.5 years. So, step #1 is to check your state’s foreclosure laws. For most borrowers, the real risk of a Judgment comes from those junior 2^nd or 3^rd loans that get “wiped out” by a senior lender’s foreclosure. Depending on when the junior lien was created, the foreclosure might only wipe out their security, not the debt leaving the junior able to sue you for the unpaid loan. So, it is critical to know what loans are on your property and when they were obtained.

No general review can determine what’s best for you. Getting competent legal and tax advice is critical as is your education.

Breaking News for all people facing foreclosure sale.

President Obama will be rolling out a plan to attack the mortgage crisis next week. His target, we’re told will be slowing rising delinquencies and foreclosures by using $50 billion of the bailout monies. In anticipation, several financial institutions  have said that they will stop foreclosures on owner-occupied properties until they see what’s in the Plan. These Lenders include Fannie Mae and Freddie Mac plus Bank of America, J.P. Morgan, Chase, and Citigroup. Since many of these lenders control other lenders, the scope should be very wide. Since BofA has bought Countrywide, we would expect the stoppage to extend to Countrywide loans as well. Although the Plan will be unvieled next, discussion and shaping will last considerably longer. Accordingly, this hold should last at least until mid-March and in many cases continues a hold started last September. This gives some breathing room and hope to many on the edge of a foreclosure sale.