The Bankruptcy
Frank and Sarah Woodford* have owned their lovely home near a university town in Colorado for over 20 years. In early 2011 they had to file Chapter 7 bankruptcy following several years of serious medical issues and the resultant medical bills. Their bankruptcy was Discharged in mid 2011. Both Frank and Sarah are over age 62. They had both first and second conventional mortgages. Neither mortgage was owned or insured by the Federal government. Following the advice of their attorney, they did not reaffirm either the first or second mortgage.
Both the first and second mortgage notes were Discharged with the bankruptcy. This is a matter of law on the filing itself. The bankruptcy could not, however, remove the trust deeds which were recorded with the county Clerk and Recorder’s office.
As a result of their separate serious medical issues, neither is able to work as both are totally disabled. One is legally blind.
The First Mortgage
Even with the relief of the bankruptcy, the Woodford’s could still not afford their home on their now fixed, limited household income. For more than six months, they worked with the bank’s loan modification department and ultimately received a reasonable permanent loan modification on their first mortgage.
It bears pointing out that this mortgage was not reaffirmed yet it was favorably modified.
The Second Mortgage
This still left the second deed of trust in place which would always pose a threat to the Woodford’s security as the bank owning the second trust deed could, at any time, exercise their rights and foreclose.
It is at this stage, February, 2013 my office entered the case on reference from their bankruptcy attorney. The first thing we did was investigate to learn the second trust deed of had been ‘written off’ in the amount of $55,000. Fortunately, in this case, the bank still held the trust deed in the banks collection department.
To be clear, no payment had been made on this mortgage for several years. The mortgage had been written off and no monthly payments could be made to the bank or would be accepted by the bank.
The next thing we did was get a professional valuation done on the property to see if a reverse mortgage could work for them. Based on the valuation, we determined that it would be close but possible. This professional valuation had nothing to do with automated valuations such as Zillow as they are not reliable.
We then ascertained the Woodfords could obtain a gift from a relative of up to $20,000 to settle with the bank for a release of the second deed of trust.
The Settlement
We counseled the client to offer part of the gift funds in the amount of $15,000 to secure release of the second trust deed in order that the Home Equity Conversion Mortgage (HECM) could be placed. As the bank reviewed the hardship letter and financial documentation, the Woodfords nervously, but patiently waited for the banks reply. Frank and Sarah held tight with our counsel and did not attempt to negotiate further with the bank. They realized to do such would be contrary to their best interests.
Simply put, they awaited the bureaucracy of this large financial institution to make its determination on the facts provided. About five months after submitting their request along with all pertinent documentation they received a request from the bank to prove the settlement proceeds continued to be available. Upon providing a current bank statement showing the funds were available, their patience was rewarded when the bank agreed to release the second trust deed for $6,992.
Peace of Mind
From start to finish this process took more than 220 days (but who’s counting, right). It was necessary for the Woodfords to take two mandatory reverse mortgage home owner classes – their first Housing Counseling Certificate expired at six months.
The upshot is that the Woodfords now have housing stability and peace of mind. They no longer have a concern that the foreclosure shoe could drop at any time.
Due to the benefits of the HECM, they also have the benefit owning their home without having to make another out-of-pocket mortgage payment for the rest of their lives, or for so long as they continue to reside in their home. The only out of pocket payments required of them are payment of the property insurance and real estate taxes.
Should they determine to sell their home in the future they may, it is their home. For more information on the HECM program read: The New Reverse Mortgage and Purchase Reverse Mortgages.
Note: With some exceptions, the bankruptcy must have been Discharged for two years to become eligible for a reverse mortgage. Contact your reverse mortgage professional for further information specific to certain situations.
*The name is fictitious. With that exception this report is factual. Finally, there was no need to name the bank(s) to accurately portray this situation.
Financially Speaking™ James Spray, MLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 | September 8, 2013 ~ Rev. April 27, 2015Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.
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