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Learn about Mortgages

Learn About Mortgages

Are mortgages secured or unsecured debt? Find out the difference. Can a mortgage be modified, or even cancelled? In some circumstances. Find answers in this Mortgage Information Resource.

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Good News: Mel Watt Confirmed as Fannie and Freddie head

FHFA Director Mel Watt Swearing In
Mel Watt

The Senate voted 57-41 on Dec. 10, to confirm Rep. Mel Watt, D-N.C., to head the federal agency overseeing Fannie Mae and Freddie Mac, ending a year-long battle by the White House to install a regulator

Mel Watt, a liberal Democratic congressman from North Carolina, favors  mortgage write downs. Watt will replace Edward J. DeMarco as director of the Federal Housing Finance Agency who has opposed allowing Fannie and Freddie to reduce the principal on mortgages they own or guarantee and has thereby made it tougher for you to get a principal reduction while modifying your mortgage.

This is good news but I’m not sure how long it will take Mel Watt to have his views make any effect on the current situation of mortgage lenders reluctance to reduce principal in home loan modifications.  Only time will tell.

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Secured vs Unsecured Debt

The two basic types of loans are “secured debt” and “unsecured debt.”

Secured debt is a loan underwritten by an asset used as collateral. These loans include mortgages, car loans, and some kinds of consumer loans for durable items such as TVs or furniture.

Unsecured debt includes credit cards and bank lines of credit,

After foreclosure or repossession, that portion of the loan balance unpaid by the proceeds known as a “deficiency” is another form of unsecured debt. It’s the portion of collateralized debt remaining after the underlying asset has been sold. Assets such as cars and other durable consumer goods decline rapidly in value after purchase. In the event they’re repossessed and sold, the proceeds of the sale are usually not enough to cover the balance on the loan, creating the deficiency, for which the borrower will be held responsible.

A deficiency can be discharged in a bankruptcy filing, if it’s created before the filing.

Real Estate can appreciate in value. Historically, it has, at an average rate of 5%/year over the last 100 years – but it can enter periods of decline, as it did precipitously from 2006 to 2011, leaving millions of homeowners “underwater,” owing more on their property than the property can be sold for in today’s market.

Although mortgages are considered secured debt, it is possible a foreclosure sale may bring less than the outstanding balance on a mortgage, creating a deficiency –for which the buyer can be held responsible under certain circumstances. Read more about deficiencies here.

Todd Murphy Law are experienced at restructuring, managing, and in some cases discharging debt.

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What Happens if I Walk Away from a Mortgage?

“Walking away” involves making a deliberate decision to stop paying the mortgage, while giving up hope of holding on to the property. It’s a choice to let the foreclosure process proceed.

With foreclosure, your credit report takes a hit of 125-240 points (depending on delinquencies or other factors) for seven years. With a short sale, the hit lasts for 3 years. After you stop paying your mortgage, other options such as loan modification may still be possible, and it’s best to act sooner rather than later to explore these. A qualified law firm such as Todd Murphy Law can help explore your options and review them with your creditors. If all else fails, or your home is difficult to sell for some reason, then walking away is the last remaining, least-desirable choice.

There have been millions of foreclosures in the United States over the last decade—you are not alone. Although it’s not what anybody intends when they purchase a home, it may become necessary at some point to take the hit, if the home has become unaffordable.

In some cases there may be tax consequences for walking away, although the first $1 Million (or $2 million if filing jointly) was exempt under the Mortgage Forgiveness Debt Relief Act of 2007 (for primary residences).  Congress failed to renew the law in 2012.

Another potential consequence is a “deficiency” suit brought by the lenders, in an attempt to recover the difference between the loan amount and the foreclosure or short-sale proceeds. Some states have complete consumer protections against deficiency suits, (known as “non-recourse” states). New Jersey doesn’t.

The lender must file their deficiency suit within 3 months of the Sheriff’s sale in New Jersey. Invoking the fair market value of the property is a common defense against deficiency. If a judgment is awarded to a lender, the borrower has bankruptcy as a last resort option to wipe the judgment.

Deficiency judgments are relatively rare when borrowers have few assets and poor credit, with lenders choosing instead to issue a 1099 to the borrower. The IRS views deficiencies as income to the borrower – unless the 1099 was filed in 2007-2013, in which case it is tax exempt. If a buyer is doing a “strategic default” such as walking away from an underwater second home – and has other assets and relatively good credit – the likelihood of a deficiency action increases substantially.

Todd Murphy Law can help defend deficiency actions, and also assist consumers with bankruptcy filings. When financial affairs get out of control, bankruptcy is available as a legal tool to gain a fresh start for the consumer.

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What is a deed-in-lieu of foreclosure?

Now also known as a “Mortgage Release” (courtesy of Fannie Mae), a deed-in-lieu of foreclosure involves giving the deed of the property to the mortgage holder – that is, the bank.

The surrender of deed takes place at a closing, similar to a standard purchase or sale.

A deed-in-lieu can offer some flexibility in the timing required in vacating the property, with options such as three months continued occupancy, a lease-back from the bank for as long as a year, or up to $3000 in funds for immediate relocation paid by the bank.

The mortgage company will need to see supporting documentation regarding your financial condition, and will need to be persuaded that this is indeed the best option for your circumstances.

Similar to a short sale in one aspect, a deed-in-lieu exposes the borrower to the possibility of a “deficiency judgment,” wherein the mortgage holder can sue for the difference between the amount of the proceeds and the amount outstanding on the loan. Your attorney should insist on a deficiency waiver in a deed-in-lieu agreement, if at all possible.

Find out more about Deficiency Judgments here.

At Todd Murphy Law, we can help. As a third party, we can discuss the particulars of your situation with your lender, make sure that all supporting documentation is in order, and obtain the most advantageous possible terms for your departure from your residence in a time frame suitable to you.

 

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What is a Short Sale of Real Estate?

Short sale is a real estate transaction with the sale price less than the remaining balance on the mortgage – that is, the sale of a house at a loss, realizing its negative equity.

If other options are not available—a homeowner is unable to qualify for a refinance or loan modification due to loss of income or a high debt-to-income ratio—a short sale may be the last alternative to avoid foreclosure.

Similar to an ordinary sale, but with the acknowledgment of the bank that no other option exists, the home is listed with a real estate agent and the sale proceeds as an ordinary sale would. The bank needs to approve a short sale, and to see supporting documentation regarding your financial cirucumstances.

It is important to be aware of the possibility of a “deficiency judgment,” wherein the mortgage holder can sue for the difference between the amount of the proceeds and the amount outstanding on the loan. Your attorney should insist on a deficiency waiver in a short-sale agreement.

Read more about Deficiency Judgments and how they can affect you.

At Todd Murphy Law we can help in this process, negotiating with the bank to obtain approval for the short sale, ensuring that the application is complete, and negotiating a waiver of deficiency.