Avoiding Foreclosure: More and Better Options Available Now


If you're teetering on the edge of foreclosure, you may have a much better chance of finding your footing than in years past. Servicers of delinquent or at-risk mortgages appear poised to ramp up their use of alternatives to foreclosure this year, an industry shift that could enable many more homeowners to hold onto their homes through "home retention actions."

Failing that, if mortgage borrowers have to give up their homes, they might at least find an option that's preferable to foreclosure.

The analytics firm CoreLogic recently reported that completed foreclosures and the foreclosure inventory in March 2012 have dropped from last year; that indicates banks increasing use of alternatives to foreclosure, a CoreLogic analyst says. The data release showed that the foreclosure inventory had fallen from 1.5 million in March 2011 to 1.4 million in March 2012. The drop came even as foreclosures have stalled in the last year. (Stalled foreclosures would normally increase inventory if everything else were equal.) Completed foreclosures in first quarter of 2012 numbered 198,000, down from 232,000 in first quarter 2011, according to the CoreLogic news release.

"Compared to a year ago, the number of completed foreclosures has slowed," Anand Nallathambi, chief executive officer of CoreLogic, said in a statement. "Since the foreclosure inventory is also coming down, this suggests that loan modifications, short sales, deeds-in-lieu are increasingly being used as an alternative to foreclosures to clear distressed assets in our communities."

Short Sales Are Heating Up

The short sale is one tactic that banks are using more often to resolve at-risk and delinquent mortgages. In short sales, homeowners sell their homes for less than their mortgages are worth, resulting in losses for banks.

But a short sale is preferable to a foreclosure for both a mortgage-owner and a borrower: It enables a borrower to mitigate damage to his or her credit score, and allows a bank to limit the loss it might incur from a foreclosure. (For more details see AOL Real Estate's short sale guide.)

"Banks have put many foreclosures on hold over the past year and a half while waiting for the robo-signing settlement," says chief economist of listing service Trulia Jed Kolko, referring to the settlement over foreclosure abuses that was finally reached between major mortgage servicers and 49 states in February. And short sales have been increasing, relative to foreclosures, for months now, he says.

Short sales grew at a rapid annual pace last year, according to foreclosure marketplace RealtyTrac. Pre-foreclosure sales, which encompass short sales, rose 33 percent from January 2011 to January 2012. In fact, Bloomberg reports that short sales actually surpassed foreclosure sales in January 2012, citing data from Lender Processing Services (which works with major banks and others in the mortgage industry).

Word on the street corroborates the finding, Zillow chief economist Stan Humphries says: "Anecdotally, we do hear that they're stepping up short sales quite aggressively."

The trend seems likely to accelerate: Twin mortgage guarantors Fannie Mae and Freddie Mac announced timelines in April that require servicers of their mortgages, to respond to short sale inquiries from homeowners within a month, or otherwise face penalties.

And Bank of America recently said that it now intends to approve or reject short sales within 20 days. Both timelines, if adopted, would streamline a process that has been known to drag on for many months, often only to end in rejection.

The timelines may spur an increase in short sales by, Humphries says, reducing "a lot of the uncertainty that has occurred here before, where your experience in heading down that path is highly variable."

Loan Modifications Set to Soar

"Home retention actions," also have ticked up recently, rising slightly in the last two quarters of 2011, according to the Office of the Comptroller of the Currency. Like short sales, retention actions are used to stave off foreclosure. And they also seem poised to increase in coming months.

One home retention action, the loan modification, is a method that market observers are watching closely: Possible industry developments may precipitate a wave of them.

For one, the Obama administration recently tripled the subsidies that are offered under the Home Affordable Modification Program, which provides loan modifications to delinquent or distressed homeowners. Experts say that may incentivize banks, private investors and even mortgage guarantors Fannie Mae and Freddie Mac (all of whom have put up some resistance to HAMP modifications in the past) to participate in the program.

Among other qualifications: To be eligible for HAMP, you must prove a financial hardship, be at-risk or delinquent on your loan, and have enough monthly income to support a modified payment. (See the rest of the requirements by visiting makinghomeaffordable.gov.)

Then there's the mammoth sum of principal reductions, which often are a part of loan modifications, that the nation's five biggest servicers are compelled to perform in the next three years: The banks may forgive well over $30 billion in mortgage debt in order to satisfy credits that they agreed to pay -- in the form of principal reduction -- as part of the robo-signing settlement.

We should see "an uptick in principal reductions and loan modifications there" for mortgages backed by the five banks involved in the settlement, Humphries says.

Bank of America, one of the banks that agreed to the settlement, has said it will reduce about 200,000 mortgages by an average of $100,000 each.

If you think you may qualify for a loan modification under the settlement, contact your lender or visit nationalmortgagesettlement.com for more information. But keep in mind: Mortgages guaranteed by Fannie Mae and Freddie Mac (which underwrite about 60 percent of U.S. mortgages, as well as mortgages insured by the FHA) are not eligible for modifications under the settlement.

Another possible development could also boost the number of loan modifications in 2012. The Federal Housing Finance Agency may approve principal reduction as a home retention action for Fannie Mae and Freddie Mac-backed loans. Increasing pressure from policymakers, and a recent study that found that this strategy would save the mortgage giants money, may pressure the FHFA to finally give permission to the twin mortgage guarantors to allow servicers of its mortgages, typically banks, to reduce principal on mortgages.

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