Chicago Tribune real estate columnist Mary Umberger recently asked me to offer advice to homeowners who are behind on their mortgage payments. From this morning’s Chicago Tribune:

Making the most of workout
Mary Umberger

April 13, 2008

Options exist for homeowners behind on their mortgage payments—if they act quickly. Lisle attorney Steven Bashaw and Michigan real estate broker Ralph Roberts offer these:

• A forbearance agreement may help borrowers with short-term financial problems, Roberts said. It’s a payment plan with a set pay-back period, and the bank will want proof you can live up to it. “If you owe $3,000 in back payments, for example, the bank may allow you to pay an extra $250 per month for 12 months,” he said.
• Reinstatement entails paying all past-due payments, costs and fees to bring the account current. This may be a good short-term solution, Roberts said, but homeowners have to make hard decisions about whether they can keep paying the loan in the long haul.
• Mortgage modification means working out a new loan, with many possible variations. The bank may agree to roll the amount owed in missed payments, penalties and interest into the total loan amount, for example, Roberts said. Or a modification might lower the interest rate or change the loan’s term.
• Sell the house in a timely manner, pay off the loan and fees, and end the problem, Roberts and Bashaw said.
• A short sale occurs when a lender agrees to take a loss by selling the house for less than the amount owed. “I don’t encounter those as much as you’d think,” Bashaw said. “They’re not the panacea that speculators and investors and real estate agents want you to think they are.”
• Bankruptcy. “It can give you more time to restructure your debt,” Roberts said. “Bankruptcy takes you off the market, the collection proceedings can’t keep going. The clock just stops running.” But it’s extreme, and a lender might get court approval to proceed with the foreclosure anyway, Roberts said. Plus, it poisons your credit-worthiness.
• Redemption. In Illinois, a foreclosed borrower has a certain amount of time after the house is sold at auction to redeem it by reimbursing the purchaser for the sale price and other costs.
• Rescue plans can come from all manner of folks. They are too varied to describe here—except to say that homeowners must be wary of scams.

Bottom line: Don’t sign a quit-claim deed to someone who says this will “fix your problem,” Roberts says. It may be a ruse to steal the house. Check with a lawyer before you sign.

Maryland’s Governor has signed into law emergency legislation that may help thousands of Maryland homeowners who are at risk of losing their homes. The emergency bills signed late last week include:

• The Real Property – Recordation of Instruments Securing Mortgage Loans and Foreclosure of Mortgages and Deeds of Trust on Residential Property bill. This legislation significantly lengthens the foreclosure process from 15 days to approximately 150 days, making it fairer for homeowners and providing them with more time and notice before a foreclosure sale. It also requires lenders to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action. Additionally, the bill requires personal service when notifying a homeowner of impending foreclosure actions and requires that a sale may not occur for 45 days after service. A lender must produce proof of ownership when filing a foreclosure action. The bill codifies the right to cure, which will allow a homeowner to stop foreclosure by paying what is owed up until one business day before the sale.
• The Real Property - Maryland Mortgage Fraud Protection Act is a comprehensive criminal mortgage fraud statute that makes mortgage fraud in Maryland a crime for anyone involved in the mortgage transaction. The bill provides for significant fines and imprisonment for violators and gives the court authority to order restitution and forfeiture and enhanced penalties for cases involving vulnerable adults. The bill also authorizes the Attorney General, a State’s Attorney, and the Commissioner of Financial Regulation to take action to enforce the statute. The bill allows victims of mortgage fraud to bring private action against violators.
• The Protection of Homeowners in Foreclosure - Prohibition on Foreclosure Rescue Transactions – Enforcement is an emergency bill that bans foreclosure rescue transactions that scam homeowners out of their homes and the equity they’ve built. The bill also provides additional consumer protections for people who are trying to sell their homes because they are in default.

Foreclosure rates have risen dramatically across the nation, and Maryland has not escaped the trend. In the fourth quarter of 2007, Prince George’s, Montgomery, Washington and Worcester Counties saw the number of foreclosures double from previous quarter. In other Maryland counties, such as Kent, Garrett and Somerset, the numbers nearly tripled. Statewide, Maryland saw 9,722 foreclosures, compared to 7,001 in the previous quarter, an increase of 2,721 foreclosure events statewide.

Earlier this year, Maryland introduced its “Bridge to HOPE” Loan Program, which provides small gap loans at zero percent interest to homeowners facing difficulty, giving them time to get back on their feet or find a solution. The statewide program is administered by the Maryland Department of Housing and Community Development’s Community Development Administration (CDA). Families and individuals facing the possibility of foreclosure should call 1-877-462-7555 or visit www.MDHOPE.org for assistance.

If you or someone you know is currently facing foreclosure, you have options, including:

1. You are not alone. Foreclosure knows no geographic, racial, ethnic, or socio-economic boundaries. We have seen real estate agents, attorneys, and others face foreclosure. Michael Jackson recently filed for bankruptcy. Foreclosure is much more prevalent than you think.
2. Most people facing foreclosure have at least a dozen options. (Many people falsely believe that they have only two options – pay up or move out.) You can reinstate the loan, refinance (consolidate debt), list the home for sale with an agent, sell to an investor (if you have insufficient time to list the property), offer a deed in lieu of foreclosure, declare bankruptcy, negotiate forbearance or a mortgage modification, to name several of the most common options.
3. Banks and other lending institutions do not want to foreclose. They make more money if you can make your payments. When they foreclose, they not only lose your monthly payments, but they also have the expense of foreclosing, rehabbing the home, and then selling it. In today’s market, there’s a good chance they’ll have to sell the home at a loss. This is all good news for you – it means the bank is highly motivated to make a deal with you.
4. Given the current mortgage crisis and resulting foreclosure epidemic, the federal government, your state government, and consumer protection advocacy groups have put more pressure on mortgage lenders and provided them with additional resources to help homeowners in distress. In a way, people facing foreclosure now may be in a much better position to avoid it than they would have been, say five years ago.
5. If you own the home with your spouse or life partner, tell them immediately. Far too many people try to keep their partner in the dark. Eventually, the person will find out. It’s always better if they find out from you earlier rather than from someone else when they have little or no time to do anything about it. Couples that work as a team almost always see much better results.
6. Call your lender – the sooner, the better. As soon as you stop making payments, the foreclosure clock starts ticking. The earlier you know your options, the more time you have to pursue those options.

Stop by before the end of the week for six additional options!

If you live in or around the Phoenix, Arizona, area and are interested in learning more about how to defend against foreclosure, consider stopping by the Phoenix Convention Center this Saturday for the 2008 Real Estate and Mortgage Expo where Lois Maljak and I will be presenting the following workshop:

TOPIC: Foreclosure Self-Defense: The Short Sale and Other Proven Strategies for Surviving a Homeownership Crisis
When: Saturday, February 23, 2008
What Time: 11:00 a.m. - 11:45 a.m.
Where: Phoenix Convention Center

When most people fall behind on their mortgage payments or receive a notice of default or foreclosure, they panic and waste precious time trying to hide the problem. They mistakenly believe they have only two options – pay up or face eviction. Lois Maljak and I, co-authors of Foreclosure Self-Defense For Dummies, know better. In this informative workshop, we reveal over a dozen strategies for keeping your home or selling it and cashing out the equity, including:

• Negotiate a short sale by convincing the lender to accept less than the balance due on your mortgage.
• Ask a third-party to negotiate the short sale on your behalf – if the bank refuses to work with you.
• File for bankruptcy…or at least let the bank know you are considering that option so you gain leverage in the negotiating process.
• Negotiate a mortgage modification, essentially rewriting the mortgage with a more affordable interest rate and terms.
• Sell your home, so you don’t lose your home and your equity.

In this workshop, you discover the truth about foreclosures that the banks don’t want you to know–they need to resolve the problem as much as you do, and sometimes more than you do. Everything is negotiable, including how much you owe them!

For more information about the event, visit the 2008 Arizona Real Estate and Mortgage Expo website.

While Barack Obama’s The Audacity of Hope: Thoughts on Reclaiming the American Dream is all about reclaiming the American Dream, Foreclosure Self-Defense For Dummies shows homeowners facing foreclosure how to reclaim their American Dream of Homeownership.

The American Dream of Homeownership has been under assault for the past several years by numerous threats, including the following:

• Outsourcing of good-paying jobs for middle-class workers, resulting in a shrinking of the middle class and little opportunity for the lower class to climb the ladder.
• Increasing cost of living, with salaries failing to keep pace. Increased fuel prices affect the price of everything, from gas for our cars to food on our tables.
• Lack of sufficient health insurance, often leading to foreclosure or bankruptcy when a family member falls ill with a condition that requires expensive medical care.
• Inflated house values resulting from several factors, including fraud, flawed government policies, and irresponsible lending and borrowing.
• Inflated property taxes based on inflated house values.
• Speculative investing or what former Federal Reserve Chairman Alan Greenspan might characterize as “irrational exuberance.”

I often warn homeowners not to use their homes as ATM machines–cashing out all of their equity to finance a lavish lifestyle–but what is happening more and more is that homeowners are not cashing out their equity to finance a lavish lifestyle, but simply to pay their bills.

Although some people facing foreclosure are primarily responsible for the situation they find themselves in, many are simply victims of stagnant wages and a steadily increasing cost of living. In Foreclosure Self-Defense For Dummies, my co-authors and I advise that regardless of the reason for your foreclosure, you have options, but you have to act quickly before those options dry up.

If there is any good news coming out of the current mortgage meltdown and foreclosure epidemic, it is that more and more lenders are willing to negotiate a deal with homeowners/borrowers. Contact your lender and find out which options are available. You can also contact Hope Now by calling 1.888.995.HOPE to get in touch with a free or low-cost, HUD-approved credit counselor.

Don’t put it off another minute. Have the audacity to hope for and secure a better future for you and your family. Get help and start taking steps to save your home or get out from under a home you can no longer afford.

NPR recently carried a story by Eric Weiner called “ Why Not Just Walk Away from a Home?” in which he discusses the option of simply abandoning the home and letting the lender deal with it.

As I explain in Foreclosure Self-Defense For Dummies, jumping ship when you owe more on your home than it is worth and you will never be able to afford the payments, is certainly a viable option for some. In most cases, the lender will not attempt to collect on the debt if you simply walk away from the property.

I provide instructions in the book on how to pursue this option most effectively. If, for example, you live in a jurisdiction that has a long redemption period, you can legally remain in your home without making payments until the redemption period expires. In Michigan, that’s usually about six months. During this time, you can save some money on rent, so you have a little nest egg to finance your move.

The reason walking away usually works is that in many cases, your home is the only collateral securing your loan. The mortgage you signed when you took out the loan gives the bank the right to take possession of the home in the event that you fail to make the agreed-upon payments.

In some jurisdictions and with some lenders, simply abandoning the home could be a risky move, however. If you signed a promissory note in addition to the mortgage, and if you live in a jurisdiction that allows for deficiency judgments, you are responsible for repaying any debt that remains after the bank takes possession of your property and sells it. So, for example, if you owe $250,000 and you walk out on the home, the bank may foreclose, sell the home at auction for $120,000, and then file a law suit against you to collect the remaining $130,000.

A much better way to walk away without having the bank chasing after you to collect the deficiency is to negotiate with the bank to accept a deed in lieu of foreclosure. With this arrangement, you hand over the deed to the property and the keys and usually agree not to trash the house. In exchange, the bank forgives your debt.

If you are able to negotiate with the bank to accept a deed in lieu of foreclosure, be sure you get the agreement in writing – a signed letter from the bank’s representative stating that you are free and clear of the debt. It’s a good idea to have your own attorney look everything over before you sign any agreement. You want to make absolutely sure that the bank has no legal right to try to collect on the unpaid debt.