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Sandy Gadow, a featured guest on CNN's "Open House," and a speaker on national radio as the escrow expert, has more than 25 years experience in escrow, title and real estate. A licensed mortgage broker and real estate sales associate, Sandy is a member of the American Land Title Association, the California Escrow Association, the National Association of Real Estate Editors and on the advisory council for the Escrow Career Center. She is the author of The Complete Guide to Your Real Estate Closing. If you have questions for Sandy see our Ask Sandy page.

Surviving Today’s Housing Crisis

As the housing and economic crisis continues to deepen, homeowners are wondering when banks will begin lending again. When will they open the flood gates and allow credit to flow once more? The fear of letting go of their equity, of parting with the banks’ cash on hand, is doing more to restrict the releasing of money for new mortgages than the actual fact of money being available. Re- building confidence is the immediate task at hand, for both banks and borrowers. Negative reports and bad judgments have landed the banks in the situation they are in, but this can be reversed. As history will show, “crises of confidence” have occurred many times over the last 300 years, bubbles have burst, countries have gone bankrupt, and banks have failed. After each critical event, eventually the relationship between debit and credit has been reestablished, and stability has returned. A fascinating book, The Ascent of Money by Niall Ferguson outlines the rise and fall of money (debit and credit) over the centuries, and it’s effect on the history of the world. It is a sobering book, but well written and makes our current economic crisis a bit more understandable.

Lending Crisis 101

Here is a link to a Powerpoint presentation prepared by Robert E. Wright, Clinical Associate Professor, Department of Economics, Stern School of Business, New York University, for delivery on Fox News October 1, 2008.

View the Presentation

To provide a simple explanation of how the housing market got into it’s current situation is not easy, as a number of factors worked together to create the current crisis. Similar to the dot com bubble in early 2000, when the bottom fell as investors gobbled up stocks in companies which had no sound financial backing, investors speculated on companies based on future, projected earnings and growth, rather on actual financial facts. Homeowners, blinded by the astounding rise of property values, financed and re financed their properties, based on the current equity or value of the home at the time. Lenders were offering easy to obtain mortgages, no closing costs, adjustable rate mortgages, 100% financing, with little or no proof of the borrower’s ability to repay the loan. When the market correction started to take place, adjustable rate mortgages went up, homeowners found they often were unable to make the now higher monthly payments, and homes began to fall into foreclosure. In the worst case, many homeowners found they owed more on their home than their house was now worth. Coupled with over exuberant mortgage companies, lack of adequate Federal regulation, and a slowing of the economy, the resultant housing situation occurred. For most borrowers their home is the largest financial obligation they have, so when they can’t meet this payment, the problem becomes critically serious and affects all aspects of their lives.

While there are no easy solutions and a reversal of the current situation will take time, there are safeguards you can take if you find your circumstances have become unmanageable. Contacting your lender is one of the first things you can do and try to work out a repayment plan. No lender wants to take over your home, sell it, and recoup their money, often at a loss. Banks and lenders are in the business of lending money and they earn profits on the interest charged and fees associated with the loan. You may have to work harder to prove your credit worthiness or scale down your expectations, but working with your lender should be your first option.

Citigroup is offering a restructuring plan to borrowers who hold a mortgage with Citi Mortgage. They are offering to modify a Borrower’s mortgage if the Borrower is facing financial difficulty in making the monthly payment. The Borrower can ask for help to get his loan modified if the mortgage related payments exceed 40% of his income. This threshold will most probably be lowered in the coming months. Loan modifications, such as lowering the interest rate or extending the term of the loan are being offered. In some dire cases, Citi Mortgage has even been reducing the amount of the debt owed. Citigroup begun a policy of stopping foreclosure proceedings on many Borrowers who are behind on their loan payments, but who are willing to work out a loan modification and loan repayment plan. It appears that other lenders will be offering similar services in the coming weeks ahead.

If you are having difficulty making your mortgage payment, you should start by requesting a “Loan Modification” a plan which changes the terms of your original mortgage. These changes may include lowering your interest rate, changing the amortization of the remaining balance, or extending the length of the term of your loan. Loan modification plans stop any negative reporting to the credit bureau agencies and gives you a fresh start, similar to a refinance loan. You will be asked to provide financial documentation and a “hardship letter” explaining the cause of your financial difficulties.

Another alternative is to request a “Forbearance,” which is an agreement between you and your lender that reinstates the past due loan by way of a payment of a lump sum amount or via a schedule of payments over a period of time, generally 12 months. You lender may allow a reduction in your monthly loan payment. You will have to prove your financial difficulty, and explain that it will be short-term and you will be able to resume your usual or timely payments in the near future. Under a “Forbearance” plan, however, your late payments will be reported as paid late with the credit bureaus, until you catch up with all your late payments or amount past due.

Consider applying for the new FHA loan program called “Hope for Homeowners” or “H4H loan repayment program”. Under this innovative program, borrowers having difficulty paying their mortgages will be eligible to refinance into FHA-insured mortgages tailored to what they can afford. This type of mortgage will only be offered as a 30-year fixed rate mortgage. The advantage of this type of mortgage is that your monthly payments will remain exactly the same throughout the entire length of the loan. The program is available for owner occupied properties and runs from October 1, 2008 through September 30, 2011.

For borrowers who refinance under HOPE for Homeowners, lenders will be required to "write down" the size of the mortgage to a maximum of 90 percent of the home's new appraised value. In order to qualify, you would need to meet the following criteria:

Your mortgage must have originated on or before January 1, 2008;
You can prove you cannot afford the current loan which you hold;
You have made a minimum of six full payments on the existing first mortgage and did not intentionally miss mortgage payments;
You do not own a second home;
The mortgage debt-to-income is at least 31 percent;
You did not knowingly or willfully provide false information to obtain the existing mortgage, and you have not been convicted of fraud in the last 10 years;
You follow FHA's policy of fully documented income and employment.
You must agree to share both the equity created at the beginning of your HOPE for Homeowners mortgage and any future appreciation in the value of your home.

If your lender is reluctant to participate in helping you apply for a mortgage under the H4H program, be persistent. It is a rather complicated scheme, but it was implemented with the purpose of helping struggling homeowners and it is to the benefit of lenders to help you with this new program. If your lender is not helpful under the new plan, then ask for a Loan Modification, at the very least.

You may consider arranging a “Short Sale” in which the lender allows you to sell your house for less than the outstanding balance due on the loan, and then they take the proceeds and forgive any remaining money you would owe them. Your credit in this instance would not reflect a foreclosure.

Refinancing your current mortgage may also be an option. Talk to your lender, a finance specialist or other professional, and discuss your options. No one can accurately predict how long this slowdown will last or when the housing industry will get back on it’s feet. Financial guru, Warren Buffett, predicts that within 5 years our economy will be back on track. This sounds like a realistic estimation, although real estate prices may not reach the elevated levels of the previous several years for many years to come. You may have to consider putting off the sale of your home, if possible, and waiting it out until property values pick up again. If you do have to sell, you might consider one of many seller financed options (see The Complete Guide to Your Real Estate Closing for a list of options) to facilitate a quicker sale. Alternatively, if you find yourself on the buying side, you may find bargains unheard of only several months ago.

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