The mortgage crisis that sparked a wave of foreclosures is now responsible for a rising tide of bankruptcies….

“Rising tide…” That’s another one. Real estate markets have tanked before, and bankruptcies filings have risen before. What seems to be the source of wonder in the present series of events is the willingness of homeowners to walk away from the homes they own. Personally, I don’t find it all that surprising.

One of the reasons for the foreclosure crisis was the selling (and over-selling) of the American dream of home ownership. One might even say “hyping.” People who had never been eligible for mortgages before were sold on the idea of owning their own homes. Now the same people who did the selling and didn’t bother to explain what would happen to those mortgage payments, or reassured homeowners that they would qualify for better terms down the road, express surprise that those same homeowners, buried under a mountain of debt (sorry, there’s another one) would give up their homes.

It isn’t surprising when those of us who live in the real world, have incomes that are not boundless, and expenses we have no choice but to meet, would choose to give up a home we can no longer afford. If that is the situation, that decision is a sound one. It’s better to make a clean break, rip off that Band-aid, throw out that bad apple–well, I’m doing it again. But before you get talked into making that decision (the same way you may have been talked into that mortgage in the first place, without enough information) put yourself the trouble of getting some expert advice on whether surrendering is the only option. Some of the increase in bankruptcy filings is no doubt due to the large deficiencies many homeowners face after bankruptcy. But many more people are filing Chapter 13 in order to reorganize their debt and keep their homes. There may also be defenses to foreclosures or other options available. I spend a fair amount of my time talking to homeowners about their homes, mortgages, and budget. If it’s silly to try and keep a home, I’ll tell you that. But what’s really silly is to walk away without talking to someone who can explain all your options.

Many mortgages are set to begin adjusting in the next couple of years. Even if you’re okay now, but you see trouble coming in the future, it’s a good idea to see someone who can advise you now. I agree with New York foreclosure defense lawyer Jay Fleischman: “I really think things are going to get a lot worse before we see any light at the end of this tunnel.“ (See, he’s doing it, too.)

In addition to the qualifications for that program, some observers have noted the purely voluntary nature of the program, and are pessimistic about it achieving its stated goal.

However, there is one potential pitfall that should be highlighted, heavily underlined, and flagged with red. In order to get the newly guaranteed loans, your existing lender has to be willing to write down the loan to 90% of the home’s value, as established by a current market appraisal. Once that new loan is in place, when you sell your home, or refinance it again, you must share any appreciation (read “profit”) with the government.

At first, that share is computed on a sliding scale. If you sell in the first 12 months after refinancing, the government gets 100% of the profit. If you sell after one year, but before the two-year anniversary, the government gets 90% and you get 10%, until after the five-year anniversary of the loan, you split any profit with the government 50/50.

But here’s the rub–it doesn’t change after that. So, if you continue to pay for 15 years, for example, and you go to sell your home after all that time, 50% of the profit, based on that appraisal you got in connection with the Hope for Homeowners Act, will go to the government.

I read two different summaries of the act which left me with the impression that the percentage shared with the government would continue to go down. It wasn’t until I read the actual legislation that this potential pitfall became clear. (H/T to M.S.)

Say, for example, that you have a house that appraises now for $100,000, and you refinance through the Hope for Homeowners program for $90,000. Now, look into the future. You faithfully make your payments for 24 years or so, and your mortgage has been paid down to $35,000. To keep the math easy, let’s say the house is now worth $250,000, but your kids have left the nest and you want to downsize. You sell the house, and what happens? Yep, the government gets $75,000 (50% of the appreciation from $100,000 to $250,000).

So, what should you do? If the initial write-down of the mortgage debt is significant enough, it may be worthwhile to take advantage of the program, even if you have to split your future profits. For example, let’s say you have a $130,000 mortgage now, and your house appraises at $100,000. You refinance at $90,000. Over the next five years, your property appreciates to $120,000. Without refinancing, you’d still be underwater at this point, so splitting the $20,000 profit with the government still puts you ahead.

On the other hand, start out with that same $130,000 mortgage, but the initial appraisal on the property is $125,000. You refinance at $112,500, and have the same 20% appreciation over five years. In that scenario, the government’s take of your profit is $12,500, but you only saved $5000 on the write down. Obviously, there are some other factors that play into this analysis, such as whether you would lose the home to foreclosure without the writedown/refi, but sharing potential profit is a big deal and should be carefully considered.

I also think it would be wise for virtually anyone who takes advantage of this new program to work toward re-financing or selling at or about the five-year mark, but that too will be influenced by the market. If you find yourself in a swiftly rising market, you may be better off to pay a larger percentage sooner, and keep a greater benefit for yourself down the road. Any homeowner considering this loan program should monitor changes in market value and plan ahead, to maximize profit and minimize the long-term cost of the program.

The new legislation, or now, as it is more appropriately called, the new law aims to help distressed homeowners; however, it has no teeth. The “Hope for Homeowners Act” creates a new program within the Federal Housing Administration (FHA). The new program is temporary and its purely voluntary. In other words, the Banks do not have to participate.

As you will see, many banks will not participate or will make it very difficult for individuals to qualify. The Act contemplates that new mortgages will replace old ones. The new mortgages, which the FHA will supposedly offer through approved lenders, will refinance homeowners existing loans. These new loans will be deeply discounted depending on the current market value of the home.

Before we look at the guidelines for these new loans, let’s think about something else for a minute: What government program has ever really worked like it was supposed to?

Immediately after President Bush signed the legislation, my phone began ringing with clients who wanted me to use the new law to save their homes and the media who wanted to know what the new law meant and how it could be used to save homes in Southwest Florida. Both groups of people were sad to learn that the new law wouldn’t be of much use in Southwest Florida.

The first part of this blog will give a good indicator of why the new law will not have much impact on the residents of Cape Coral and Lehigh Acres, where the foreclosures just keep adding up. We were all hoping that our elected leaders would do something to change the outlook for the rest of 2008 and beyond.

Who Is Eligible:

1. The individual must be the Homeowner who actually lives in the house, and not be an investor. In other words, no rental properties are eligible to receive a new mortgage.

2. Homeowners must certify that they have not intentionally defaulted.

3. Homeowners must have a mortgage debt of more than 31% of their monthly incomes as of March 1, 2008.

4. Homeowners incomes must be verified.

5. The troubled loan must have been no later than January 1, 2008.

Here is the sad part and it is all opinion on my behalf. I can see our elected officials sitting in their cushy offices in Washington saying to each other that something has to be done to stem the tidal wave of foreclosures. So, they call the mortgage lenders and say what are you going to do about this.

The mortgage lenders have already crunched the numbers and know how to exclude the maximum amount of homeowners and how to exclude the worst loans out there. Then they calculate in some wiggle room by putting eligibility requirements on it. then they slap a name on it that shows they really care about their constituents who are losing their homes on a daily basis. I am willing to bet that more thought went into naming this piece of trash than actually thinking about how it would really help the people that need it the most.

C’mon guys and gals, they are handing us this piece of legislation which is nothing more than trash, and they expect us to sit back and take it. If you don’t think this will be abused, you must have voted for it.

But the cynic in my head says “Yeah, and they called the bankruptcy amendments two years ago a “Consumer Protection” act. So let’s take a quick look at what it may (or may not) do.

Grossly oversimplified, the act offers government guarantees to lenders who are willing to work with you to keep you out of foreclosure. But, you have to be “qualified” for the program. Here are some key points:

• The program goes into effect October 1, 2008. Until then, look for other options.
• Your lender has to be willing to write down your loan to 90% of your home’s value. In other words, your existing mortgage lender has to be willing to reduce the balance of the mortgage so that there’s a 10% equity cushion in the property.
• Your existing mortgage must have originated before January 1, 2008.
• The program is available for your primary residence only.
• You must be devoting more than 31% of your income to your mortgage payments.
• Income must be verified to qualify for the new loan, and you have to be able to afford the payments on the new loan.
• If you sell your home in the five years following this refinancing, you have to share the profit with the government.  The government’s share is calculated on a sliding scale for the first five years; after that, you’ll split the profit 50/50.

Virtually every media report on this legislation says that the bill will save 400,000 homes from foreclosure. Well, maybe. Basically, it is estimated that the funding limits for those federal loan guarantees will make it possible to help that many families. That assumes that the lenders are willing to take a haircut and write down those balances. In theory, it makes sense. Lenders take the write-down, but avoid the expense and risk of foreclosure, and benefit from rebounding property values if foreclosures slow and excess housing inventory is eliminated. And, if they don’t take advantage of this program, there is a good chance that an irate Congress will increase regulation of the mortgage industry.

My problem with that that it assumes that the mortgage industry will act in a logical and thoughtful way. In my estimation, it was the failure of the industry to do exactly that that got us into this mess. At best, it appears to me that the program will offer the most benefit to those who aren’t too far behind, and who aren’t too far underwater.

It remains to be seen whether the Hope for Homeowners Act of 2008 offers real hope, or becomes another infamous misnomer along the lines of “Mission Accomplished” or “Heckuva Job.” At best, it appears to me that the program will offer the most benefit to those who are struggling, but are current enough on their payments to look like a good risk. Hope it helps.

But, as the article notes, there is hope. Not only are you not alone, as foreclosure is now striking one in every 171 households in the United States, there are ways to deal with these issues that can give you time to catch up payments or get a fresh start. Read the article for more information about what you can do to help yourself.

The question that I am most often asked is: With interest rates going down, why are my mortgage payments going up? That is an excellent question. The answer is: Even though Ben Bernacke, the Federal Reserve Chairman, has cut the federal funds rate by 3.25 percentage points over the last year, your mortgage rate is not based on the U.S. Treasury rate, it is tied to LIBOR.

LIBOR is the London interbank offered rate. It is the average rate at which banks in and around London lend money to one another. Interestingly, LIBOR is the rate used worldwide as the rate to set loans. Interestingly, LIBOR has not fallen as quickly as the Treasury Rate. So, if your loan was tied to LIBOR, you did not see your mortgage payments drop.

So, what is a consumer to do? Should you shop around for a mortgage tied to the U.S. Treasury rate or should you continue to stick with the LIBOR rate? Again, another excellent question. I am willing to bet that if you asked five experts this very question tomorrow, you wouldn’t get a straight answer from any of them.

As a consumer, the only way you are ever going to be able to retire is to pay off your debt, including your mortgage, as quickly as possible. By this I mean that you have to make a decision right now: Do I want to live in a debt cycle or a wealth cycle? Simply put: you cannot live in a wealth cycle with debt. You can convert your debt cycle to a wealth cycle by paying off your debt and becoming debt free.

In my opinion, it doesn’t matter what your interest rate is right now. If your goal is to pay off the home or credit card as soon as possible and are committed to it, and actually stick to your plan of attack, the interest rate doesn’t matter because you are eliminating it, then moving on to the next debt.

So make the decision today to live debt free and pay off that mortgage.

Using Chapter 13 to buy more time to catch up missed mortgage payments is basic bankruptcy law, and perhaps the biggest benefit of filing for Chapter 13 bankruptcy. Since it can help so many people, I just don’t understand why doesn’t the media mention Chapter 13 bankruptcy in every story that they write about the woes of families about to lose their home? Chapter 13 can give people time to catch up missed mortgage/car payments, and also restructure, reduce, or eliminate other types of debts that may have been sucking up the income needed to make the house payments.

I just read another story on AOL Real Estate about a family that had adopted 12 children who had fallen behind on mortgage payments because they were making payments on their former home, which was now rented. The woman was quoted as saying that they were now able to make the payments, but their mortgage company was foreclosing due to past due payments of $20,000.00. There was no mention of Chapter 13 as an option to help this family. In fact the article sounded as though there was no hope to save this family’s home, despite an ability to pay for the mortgage.

If the family were able to pay the regular payment plus the required cure, there is a good chance that Chapter 13 could help. A typical Chapter 13 payment to cure $20,000.00 would be roughly $500.00 for five years. I don’t know enough about the situation to know if this particular family could afford that, or if there are other debts and factors which would prevent Chapter 13 from being a good option for them, but it sure would be worth a mention in any article discussing foreclosure of a family home.

by Susanne Robicsek, Charlotte NC Bankruptcy Attorney

SPS agreed to reduce the interest rate and fix it at 8% for the remainder of the loan term. Even more important for my client, they agreed to add the defaulted payments and foreclosure costs to the loan prinicpal and allow the resumption of payments at the new rate bringing the loan current. While I am not delighted with the manner in which this agreement was documented, my client went from days away from foreclosure to a current status on the loan with a single monthly payment.

After an entire day of presentations and discussion yesterday at the National Association of Chapter Thirteen Trustees (NACTT) annual convention in San Francisco, it was obvious that no clear path is available with most loan servicers for loan default remediation. My experiences with loan servicers has ranged from the above very satisfactory result with SPS to an hour or more on hold before being told that loan modifiation would not be possible as a solution to the default.

Bay area bankruptcy lawyer extrordinaire Cathy Moran talks about a successful loan modification proposal for one of her clients in a recent article. While she reports that a release of rights was required by the lender for her client, I am pleased to say my client was not forced to give up any rights in order to get the loan modification. The client did agree to the balance due (including fees and costs associated with the foreclosure) but the fees seemed reasonable and were more than offset by the annual difference in interest rate accrual.

The lender proposed to add the very substantial loan default to the principle of the loan and to fix the formerly variable interest rate for the life of the loan.  What made this proposal tolerably attractive was that the interest rate was lowered some three percentage points, such that the monthly payment over the remaining loan life was the same as now.

If the client accepts this proposal, he waives all existing claims against the lender.  He pays some fees of a couple of thousand dollars.  He still has a loan that is larger than today’s value of the house, but he has a shot at keeping the house.  My hope is that this is just the first of many loan modifications that lenders will propose;   otherwise, banks are going to own lots of local houses.

Such sales are often good deals for buyers because there is little competition for the purchase of so many foreclosed homes. Lower auction prices result in mortgage companies incurring greater losses, which are passed on to the homeowner in the form of a deficiency judgment.

In what appears to be a brilliant move, Duval County Clerk Jim Fuller has announced that foreclosure sales will now take place online, in an eBay-style auction.

In an interview with First Coast News, Fuller states, “It’s like eBay or one of the other online type biddings. You can bid on something from eBay in Canada if you wanted it.”

Fuller predicts that the technology will benefit both plaintiff and defendant by enlarging the pool of potential buyers.

The First Coast News interview does not address one practical problem. According to the Duval County Clerk’s website, Chapter 45 of the Florida Statutes requires bidders, upon making a bid, to immediately produce for the Clerk’s view the required deposit equal to 5% of the final bid, in cash or cashier’s check or money order.

How will the new on-line procedure comply with this statutory requirement?