The number of homes in foreclosure is estimated to hit nearly 11 million by the end of 2011. A recent article in Bloomberg Business Week states that nearly 3 million homes were foreclosed on in 2008, with another 4 million default notices served during 2009. Current estimates predict that another 4 million homeowners will be affected by foreclosure this year.
There are powerful effects of houses in foreclosure. Borrowers lose their home. Lenders lose money. Property values decline in communities with multiple foreclosed properties that sit vacant and spread out. Communities receive less funding because fewer people pay property taxes. Local governments are forced to make drastic budget cuts that often affect schools, public safety, and infrastructure.
When home values drop, homeowners lose home equity and may end up owing more on their home loan than the property is worth. Mortgages who owe more than the appraised value of their home may not qualify for loan modifications or mortgage refinancing. Those struggling to make ends meet could eventually be forced to file for bankruptcy or become another victim of the foreclosure epidemic.
Many mortgagors who are upside down on their mortgage are choosing to walk away from their home because they believe there are no other options. Moving away from real estate leads to additional financial hardship because mortgagees can obtain court-ordered deficiency judgments to collect outstanding loan balances.
Contrary to popular belief, there are foreclosure prevention options. Mortgages facing bank eviction should be proactive and contact their lender’s loss mitigation department to come up with a viable solution. Although borrowers may not be able to stop foreclosure, there are strategies that can lessen credit damage.
Borrowers who do not qualify for a real estate forbearance, loan modification, or mortgage refinance may be authorized to short sell their property or obtain a deed-in-lieu of foreclosure.
When banks authorize short sales of real estate, they accept less than the full amount owed on the loan. Short selling is complicated and takes four to six months to complete. Most people require the assistance of a short sales specialist or real estate attorney.
Real estate short sales are often the last option available to mortgagors who cannot afford future mortgage payments and have not yet entered into foreclosure. Borrowers are assigned a loss mitigator who will act as a mediator between the lender, borrower, and legal counsel.
Mortgages must undergo a financial audit to demonstrate that they are financially insolvent and have no assets that can be sold to satisfy the mortgage note. Most banks require borrowers to have a pre-approved buyer before entering into short sale agreements. Others grant borrowers time to list their property through a licensed real estate agent.
A word of caution regarding short sales is that many lenders hold borrowers responsible for any shortfall between the sale price and the loan balance. If mortgagors cannot pay the deficiency in full, banks obtain judgments that are reported to major credit bureaus and can cause serious credit damage.
Some mortgage providers accept the sales price as payment in full for the promissory note. Borrowers are released from future financial responsibilities and lose all money invested in the property. Short sales are reported to credit bureaus as foreclosures and remain on credit reports for up to ten years.
The deed-in-lieu of foreclosure allows borrowers to return their home to the lender and walk away. Mortgage lenders may accept the return of the property as payment in full or issue a deficiency judgment if the home is later sold for less than the loan balance.