In our real estate practice of working with distressed homeowners, we have the opportunity to interact with many of our clients’ attorneys. Recently, we sat down with James Foley, who practices in Fort Worth and specializes in debt defense and bankruptcy. As such, many of his clients are experiencing some degree of financial distress. Therefore, he is often speaking with people who are behind on their mortgages. He was happy to share his perspective.
James’ primary observation is that the further behind a borrower is on their mortgage payments, the more difficult the lender becomes. The borrower’s payments are declined and their calls are transferred multiple times with no resolution. Commonly, the borrower is told they are not eligible for work out solutions until they have missed several payments, leading the borrower to consider continuing non-payment. James feels this is bad advice. These homeowners are at risk of becoming even further behind in the event the work out solution is unsuccessful
Our clients share these experiences. By the time we meet our short sale clients, most are extremely frustrated by their mortgage lenders. Although regulatory agencies such as the Consumer Financial Protection Bureau and the Office of the Comptroller of Currency exist to protect consumers from abuse by financial institutions, many people continue to have negative experiences when they are behind on their payments. A delinquent homeowner, after months of struggling to make payments and dealing with the bank, can find themselves tens of thousands of dollars behind in their mortgage payments with little hope of catching up. Often, these delinquent payments are enough to create a negative equity situation. Without assistance, the homeowners are looking at foreclosure as their only option.
Even so, the foreclosure process is often considerably lengthy. James warns that during this time, the homeowner is still legally responsible for maintaining the property and the insurance policy. The homeowner is at risk of receiving fines or liens from city or county agencies or the HOA for violating yard maintenance standards should they choose to abandon the property. The HOA may assess a lien against the property for unpaid HOA fees. These fees can add up quickly to place an additional burden on the homeowner.
A typical homeowner’s insurance policy may not provide coverage for an abandoned property, James warns. Vacant property coverage is usually more expensive due to the risk to the insurer. Abandoned homes invite trespassers, yet the homeowner is fully responsible for any injuries that may occur on the property. Even more dangerous is an abandoned home with a pool. Not only does it pose a drowning risk to neighborhood children, it can become a mosquito habitat and a nuisance due to the threat of West Nile and other mosquito borne diseases.
In spite of financial difficulties, some homeowners desire to keep their property. James offers bankruptcy protection to his clients in this situation. He says a Chapter 7 liquidation may discharge enough medical and credit card debt to free up cash for monthly mortgage payments. A Chapter 13 reorganization will allow the homeowner to catch up on their mortgage over a three to five-year period. A client who is able to comply with the requirements of the bankruptcy may be able to retain the home.
For those who do not want to keep the home or are unable to do so, James says a short sale will put the homeowner in control. They can sell the house, limit their liability to the mortgage lender and cut their liability to the city, HOA and insurance company. James recommends initiating a short sale sooner rather than later. The quicker the bleeding is stopped, the sooner the client can begin financial recovery. While it is difficult to calculate the ramifications to a credit rating because of the multiple factors involved, quick action will limit damage.
James recommends that a client facing foreclosure consider either a short sale, a bankruptcy or both. While the value to one’s personal finances is evident, the value of putting oneself in control again is immeasurable to the distressed homeowner.
We’d like to thank James Foley of James Foley, PLLC for his contribution to this piece. Brenda Houghton and Diana Squires