Listen to a Podcast on Short Refinancing
A hybrid tool that is generally used to avoid foreclosure is a called a short finance. This term refers to both refinancing and modifying a loan, while discharging the value of debt, which makes a homeowner “upside down”. This tool allows homeowners to refinance their loans, but with some of the debt forgiven. Essentially, if a mortgage on a home exceeds the fair market value of that home, homeowners can now though their attorney negotiate with the lien holder to forgive the debt in excess of what a home could reasonably sell for in today’s market.
Short Sale refinancing is similar to stripping a lien. The difference is that in lien stripping, the entire loan can be discharged, but only if the fair market value of a senior lien “eats up” the value of the secured property. Through a short sale refinance program, a homeowner can partially strip a lien, whether or not there is another lien senior to it.
For example: You owe $225,000 on a condominium that you purchased at the peak of the real estate market in 2001. Over the course of seven years, you have paid off $10,000 in principal. As such, the current value of your principal is $215,000. Subsequently, home values have declined by 15%, and your home is now worth $190,000. The rate on your subprime mortgage has increased, and you can’t afford the higher payments. Rather then foreclosing, the mortgage company agrees to discharge $25,000 of the debt and refinances the mortgage for $190,000 for the next 30 years. This is a loan you can afford as a result of forgiveness of debt coupled extending the time to pay the loan.
What should owners of homes know about dealing with today’s economy? The new words of “Short Sale” or “Loan Mortgage Modification” are new terms that homeowners never thought they would need to hear or understand what they mean in order to possibly save their homes or their credit. No one planned for such a drop in home values and such a rise in costs.With all the new terms and with all the sever changes in this economy, it is no wonder that homeowners fear doing anything when they are faced with financial hardship. Homeowners need not longer fear these terms and more importantly understand why loan modifications and short sale refinancing may make the difference between a homeowner keeping their home, avoiding bankruptcy and saving their credit.
We all heard about the great “bailout” of 2008. We heard both the pros and the cons with our government bailing out several banks, insurance companies, financial institutions and etc. However, the biggest pro for homeowners will come from this bailout. The pro is that mortgage companies are now starting to stop foreclosure sales, short sales and going back to the owners to modify their loans so to allow them to keep their home irrespective of their failure to pay their mortgage payments. Therefore, debtors will begin to see an order of process for homeowners to fight to keep their homes in these unprecedented times of financial suffering.
A loan modification will be likely the first step for homeowners to consider. A loan modification is simply a homeowner asking the mortgage company to modify the current terms of their mortgage. Homeowners will ask a mortgage company to modify their mortgage because of being late on payments, variable interest rates, too high of monthly mortgage payments and etc. Homeowners can seek this relief on their own directly with the mortgage company. However, the process is very time consuming and often frustrating for a homeowner. It recommended that you hire a law firm to help get you through the process.
One final point is that mortgage companies today are requiring that loan modifications be conducted first and attempted by the homeowner before they will even consider a Short Sale.
LISTEN TO THE LOAN MODIFICATION PODCAST HERE
CRAMMING DOWN SECURED PROPERTY PODCAST
An other very powerful tool debtors have at their disposal should they find themselves in a bankruptcy situation is the ability to pay only the value of an asset. This is particularly enticing if you have a lien against secured property such as an automobile, mortgage on income property (but not on a residence) or piece of furniture that far exceeds the value of the property. The common term for this disparagement in value vs. loan is being, “upside down”. In most cases, the value of secured property such as an automobile, boat, or furniture you are financing decreases more rapidly than the loan is being repaid.
For example, most debtors own much more on their car or truck then the value of the car or truck, should they try to sell it. Additionally, you may be able to lower the interest rate on your payments (though not on a mortgage). Many debtors have secured loans where they agreed to pay 18%-35% interest, and sometimes even more. In a Chapter 13 bankruptcy you only have to pay most secured debts at the prime rate plus 1-3%, depending on the circumstances of your case. A debtor in a chapter 13 bankruptcy has the ability to motion the bankruptcy court to lower the amount that you owe on nearly all secured debts to pay only the fair market value of that property and to discharge any amount in excess of that value.
The rub on this is that in most cases, you will be required to pay the entire present value of the secured property at a reduced interest rate, commonly referred to as “Till interest” (as a result of a Supreme Court case where one of the parties to the case was named Till). The relevant interest rate is the Prime Rate of Interest (which varies) plus a Risk Premium of 1% - 3%.
There are certain restrictions or limitations on cramming down a debt. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) places limitations on a Chapter 13 Debtor’s ability to cram down when dealing with Purchase Money Security Interests (“PMSI”). This deals with the situation when the money borrowed was used to purchase the collateral, which is the standard scenario in a car loan. If the collateral for a PMSI debt is an automobile acquired for personal use within 2 ½ (two and half) years prior to the Chapter 13 filing, the debt can not be crammed down to the value of the vehicle. However, if the collateral is not an automobile, the prohibition on strip down only applies if the PMSI debt was incurred within one (1) year prior to the bankruptcy filing.
As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.
