A Bankrupted Second Mortgage Can Foreclose

Be aware, sleeping dragons can awaken.

The second mortgage can foreclose even after the Promissory Note was eliminated with a Chapter 7 Bankruptcy Discharge. Quite simply, the second mortgage initiates the foreclosure process under the rights of the second mortgage Trust Deed subject to the rights of the first mortgage trust deed.

By foreclosing under these circumstances, the holder of the second mortgage, following a specific legal action starting with the posting of a three day notice, may evict the residents. Should one be threatened with a three day notice to quit the property, you may wish to immediately call your attorney as this is a serious invitation to professionally negotiate a short settlement immediately.

By way of background, once the payments to the second mortgage aren’t made, the mortgage is in default. The mortgage holder has four separate options to protect its interest. First, it can do nothing and sit on its rights. Second, in Colorado, it can initiate a Public Trustee foreclosure. Third, it can file for a judicial foreclosure, although this rare in Colorado. Fourth, it may buy-out the first deed of trust and thereby perfect its position. If the junior (second) mortgage selects either the second or third option, it is most likely that the first deed of trust will also foreclose.

The Basics

A mortgage consists of two legal documents: the Promissory Note and the Deed of Trust or Trust Deed (TD). The second TD lives on, in virtually all cases, following the Chapter 7 Discharge.

Equity is returning to many real estate markets throughout the country. Among the markets enjoying substantial equity growth are several areas in Colorado, particularly along the Front Range as well as many mountain and resort counties.

Statute of Limitations

The Statute of Limitations (SOL) on a second mortgage is 15 years following the original due date; however there are exceptions and particular legal nuances which apply to this SOL. To determine how the SOL may or may not apply to a particular set of facts, you are advised to consult with legal counsel well versed with both bankruptcy and real estate law. One needs to understand that TD that has been written off continues to be a collectible debt for so long as the SOL hasn’t run the term. Written off is merely an accounting term, nothing more or less. Written off is not a ‘get out of debt free’ card.

The Short Payoff

Let’s discuss possible solutions to this situation which is becoming more common as equity returns to certain real estate market.

A short payoff occurs when a borrower cannot pay the mortgage on the property and is allowed to sell the property for less than the full amount due. This results in a loss to both the lender/servicer and the investor. All parties must agree to the mortgage being paid “short”. Providing there is a ‘make sense deal’, the lender will do this so as to avoid the expense and time of the foreclosure process. Given there are several parties involved in this decision making process, reaching consensus can take quite a lot of time – often months.

Short Payoff Settlement -Financial Negotiation

Typically the least successful negotiator is the one with an emotional involvement in the negotiation. The saying, often attributed to Abraham Lincoln, describes this situation quite well: “A person who represents himself has a fool for a client.”

This is a business transaction which may involve disclosing your income, assets, liabilities as well as proof of your ability to pay a certain amount to obtain a Release of the Trust Deed. It is suggested that by having a well prepared Comparative Market Analysis coupled with a professional Home Inspection Report to submit with your proof of ability to pay will be beneficial to reach a decision. You may expect the lender/servicer will pull a credit report in addition to thoroughly investigating your request for a short payoff settlement. They must and will investigate and verify who you say you are and your circumstances. Short Payoff Fraud is of great concern to lenders and investors alike which explains, to some degree, how difficult these negotiations can be.

Short Payoff Settlement – Hardship Negotiation

Hardship criteria include: involuntary unemployment; divorce; long-term disability; a change of employment that is more than 50 miles from the current home; a business failure; death of the primary or secondary wage earner; or a natural or man-made disaster.

I had the opportunity to assist a senior couple negotiate a hardship short payoff on a “written off” second mortgage last year. This second mortgage had been discharged in a 2011 Chapter 7 and had been “written off” a few years before the bankruptcy case was filed. The principle balance due on this second was $55,000.00; the final settlement to Release the Trust Deed was just under $7,000.00.

From the time this negotiation process began until it was successfully completed took 220 days. The hardship in this situation was long-term disability with both borrowers. We documented both of their hardships with letters from their physicians as well as photographs and x-rays documenting specific medical procedures. Finally we documented their ability to pay the negotiated short payoff by providing evidence of the gifted funds in a bank checking account.

Like us on Facebook

Image attribution

Financially Speaking™  James Spray, MLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | April 15, 2014

Notice: 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.

Reverse Mortgage After Bankruptcy

 

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.

Image attribution

Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 8, 2013 ~  Rev. April 27, 2015

 

Notice: 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.

Refinance After Chapter 7

US Customs House – Bankruptcy Court Denver, Colorado

 

You filed a Chapter 7 Bankruptcy and all debts were discharged. You selected not to reaffirm mortgage(s). You have continued paying on your mortgage(s) and now you want the payments reported on your credit report. With one exception that is not going to happen. The fact is that there is but one permanent way to get your mortgage payments reported on the credit reports and that is to refinance your mortgage, when possible. When your bankruptcy was discharged, the Promissory Note portion of the mortgage was legally eliminated. As a result, the mortgage payments will no longer be reported to the credit reporting agencies. Consumers, for obvious reasons, cannot self-report their credit history. For further information as to why the bank or mortgage company doesn’t report your payment, refer to an earlier post I wrote on this subject.

How To Get “Credit History” For Your Mortgage Payments In Order To Refinance

How can you refinance when your present mortgage servicer does not credit report your mortgage payment? There are a couple of ways to do this. The least expensive is for you to obtain proof of your mortgage payments for the past twelve (12) month and provide this to your mortgage broker.  A temporary way to pull the mortgage payments onto the credit reports is via a proprietary system such as Rapid Rescore which is available only to mortgage brokers. Your mortgage payment history can be pulled onto the credit reports for the purpose of mortgage refinance by a mortgage originator in cooperation with a credit reporting service through a credit rescoring system. This is a temporary fix only; a bridge to refinancing once all other factors are in place. The only permanent way to get your credit report to reflect your mortgage payments is to refinance if and when you are eligible.

How To Qualify For Refinance After Chapter 7

• You have been paying your housing expenses [rent or mortgage(s)] on time every month for at least the last 24 months – in rare circumstances, 12 months.
• There have been no 30 day late payments on your mortgage(s) since filing bankruptcy.
• The CAIVRS Authorization system  provides a clean report regarding default on an applicant’s past Federal government loans or guarantees.
• Your current taxable income as well as that of the past two years proves you can pay your mortgage and your debt ratio is acceptable to the lender.
• The taxable income used to qualify for the home loan will continue for a minimum of three years.
• You did not have a junior mortgage prior to filing or it is also current with no late payments or see (*) below.
• No other real estate was included in your bankruptcy or was foreclosed, short sold or surrendered such as investment property or second home within 4 years.
• You have no new bad credit whatsoever and no open credit disputes.
• Your present property value is 10% greater than what you owe on your mortgage(s), i.e., the house can be sold to payoff the mortgage(s), in full, including the cost of sale.
• You have minimum 700 middle FICO® Score (not FAKO scores). To get an idea of your score range use the FICO® Score Simulator (garbage in = garbage out).
• All borrowers must have established new good credit and exhibit that they are managing it very well.
• If the property is a Condominium, it must be FHA approved for FHA home loans or VA approved for VA home loans.

Investor Overlays

Investor overlays are measures lenders take to manage risks. You may need to shop around as, some lenders require 36 months from the Chapter 7 Discharge. Most lenders require higher credit scores, say in the plus 700 range before considering a new loans. The higher the FICO® Score, the better the rate and the lower the cost of the rate will be offered. There is much more to be discussed on the subject of lender overlays

Reaffirmation Is Not Necessary To Refinance

If your mortgage lender/servicer/bank insists that the mortgage must be reaffirmed, you simply need to call on a more seasoned mortgage banker or broker. There are those who will tell you that you must reaffirm the debt. Neither your attorney or I would recommend doing this; nor should you, in any case, do so without seeking the advice of your bankruptcy attorney. Keep in mind that the reaffirmation must be done prior to the Discharge and that is only your bankruptcy judge that can approve a mortgage reaffirmation – my understanding is that many will not.

Readers of this blog most often read Credit Union Power and New Credit During And After Bankruptcy too.

(*) The junior or second mortgage lien was legally stripped from the property in the bankruptcy. Note: this is a very, very rare circumstance. Another option is: the mortgage has been settled, such as via a short payoff in which case a further time-out period may be required.

Courthouse image attribution

Graph image attribution

Financially Speaking™ James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | January 12, 2012 | Revised October 5, 2014

Notice: 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.