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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.

The Housing Crisis: What Can You Do to Survive?

As we are all acutely aware, and the news media has been reporting on with front page news and televised specials, the housing market, coupled with the mortgage industry, is in a serious slump, many say recession, others say “housing depression.” Why did this happen and how can you survive in this current housing environment?

Put simply, a huge correction has taken place in both the financial and real estate markets to counter balance the rampant growth and investment in products which were over valued, but easy to obtain. 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 may take time, perhaps up to 2 years or longer, 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 can request 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.

If you have an FHA insured you may be able to request a one time payment from the FHA Insurance fund to bring your mortgage current. Your loan must be at least 4 months in arrears and you must be able to resume making the full mortgage payments due. If you qualify, you will be asked to execute a Promissory Note, and a lien will be placed on your property until the note has been paid in full. The note is interest free and is due when you pay off your first mortgage, or sell your property.

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. 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.

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