This is an archived article that was published on sltrib.com in 2011, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
More than three years after Utah's real estate bubble popped, tens of thousands of homeowners have some tough decisions to make.
An estimated 8 percent of Utah households with a mortgage are behind on their payments. About one in five homeowners in Salt Lake City is "underwater" — meaning they owe more than their homes are worth. Another 6 percent are close to that point, according to housing data firm CoreLogic.
Should they try to get their lender to modify their mortgage? Should they hold on and wait for better times? Is trying to get a lender to agree to a short sale a better option? Or should they just give up and walk away?
Each situation is different, of course, but the solutions are often universally complicated and can be painful.
"A lot of people believe, or hope, there's a government program that can fix everything for them," said Ryan Carver, director of housing counseling of AAA Fair Credit Foundation. "But there just isn't one."
Here are some things to consider:
Is a loan modification for you?
There are programs that can help. One of the most sought-after solutions is a loan modification, but they aren't for everyone. Modifications — changes made by a lender to a borrower's loan terms to lower monthly payments — are designed for those struggling to make payments and are in danger of defaulting. Borrowers can request a modification by calling their lenders or by working with a housing counselor. (Call 211 for one approved by the U.S. Department of Housing and Urban Development.)
"If you're upside-down in your house and have a difficult time making your monthly payment, a loan modification can help," said Carver, who works one-on-one with home-owners in financial trouble. "But if all you are is just upside-down on your mortgage, your lender isn't going to want to help you."
Lenders say they are being inundated with requests from homeowners who want their loans modified but are having no financial difficulty. Those borrowers aren't likely to get help. Lenders agree to modify loan terms in cases where the cost of the aid is likely to be less than the cost of waiting for the property to fall into foreclosure, and when the homeowner has a good chance of being able to make the lower payments.
Although many borrowers hope their lenders will reduce the amount they owe, most loan modifications are accomplished by temporarily lowering the interest rate on the loan, which in turn lowers only the borrower's monthly payment.
If a lower rate doesn't help, a lender may agree to a principal "forebearance," in which part of the principal amount owed is deferred and loan payments are based on a lesser amount. For example, on a $200,000 loan, payments may be refigured and lowered based on a loan amount of only $150,000. But the borrower still owes the full amount of $200,000. Lenders are much less likely to agree to loan "forgiveness," in which the amount owed is permanently reduced and part of the loan is forgiven.
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Will I even get a modification?
Even homeowners who face financial hardship (such as a job loss) aren't assured a modification — or even getting one in a timely manner. Some Utah families have been trying to hold on for years waiting for relief.
Like many seeking a loan modification, Chris Andrews of Sandy purchased his home at the height of the market — in his case March 2007.
He and his wife put down $55,000, taking out a loan for $270,000 on home that appraised for more than $350,000. The couple decided on an adjustable-rate loan, but figured within a couple of years they would be able to refinance into a lower, fixed-rate loan.
But then the real estate market tanked, and those working in the construction industry began to see their incomes shrink, including Andrews, who drives a concrete mixer.
He and his wife have struggled to stay current on their mortgage, which carries an interest rate of 8.4 percent — more than three percentage points higher than today's low rates. If he could refinance into a lower-rate loan, he'd pay only about $1,700 a month, down from his monthly payment of $2,200.
"We've done everything we can to stay current," he said. Initially, the couple's credit wasn't good enough to refinance, the bank said, and later, their home's value — now about $240,000, was too low. Andrews, who estimates he owes $30,000 more than his home is worth, is trying to convince his lender to modify his loan.
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Should you stop making your mortgage payments?
Although Andrews and his wife are confident they are doing the right thing by funneling all available cash to pay their mortgage, they wonder if they would have been more likely to get help if they stopped making payments.
Housing counselors say there's no easy answer for that question. Whether it's a good idea depends on individual circumstances. Although there are relief programs for those who have fallen behind on mortgages, other programs require that borrowers be current on their payments.
One thing is for sure. Falling behind on your mortgage will hurt your credit, making it harder for you to get any other type of loan, and making those loans more costly.
But borrowers such as Hector Dominguez of Salt Lake City figure it's the only way left to get the attention of their lenders. Dominguez purchased his home for $360,000 in 2007. Today, it's worth about $270,000 to $290,000, which makes him upside down on his mortgage by more than $70,000.
A mortgage loan officer, Dominguez could afford his monthly payment of $2,650 when times were good. But since the downturn and the sharp drop in people buying homes he's found that tough to pay. His lender granted him a loan modification, but it reduced his monthly payment only to $2,350 per month — which is still a struggle.
Efforts to get additional relief were unsuccessful, he said, so Dominquez decided to stop paying his mortgage in hopes of convincing his lender to modify his loan. Although he has been notified his property is in danger of being foreclosed, he still hopes he can work something out with his mortgage company.
"I don't want to walk away from this home," he said "I need a place to live."
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Short sale versus walking away
Short sales are another solution, but like loan modifications, they must be requested and approved, which could take months — even more than a year. The downsides of getting a lender to agree to sell the house for less than what is owed on the mortgage are that you don't get to stay in your home, and borrowers that opt for this route often see their credit damaged to such an extent that all they can do is rent until their credit improves, which could take years.
Because trying for a short sale can be as frustrating as seeking a loan modification, some borrowers end up walking away. In that case, the lender eventually will foreclose and attempt to sell the property at auction. If that fails, it becomes an REO, short for real estate owned, and is put up for sale.
Of all options, a loan modification is likely to impact a borrower's credit score the least, followed by a short sale, then foreclosure, which remains in a credit file for seven years. It all depends, however, on other components of a borrower's credit file and how far behind a borrower has fallen on payments.
Borrowers who have sold a home via a short sale or who have had a home foreclosed often have to wait three years before they can qualify to buy again, said Nathan Pierce, president of the Utah Association of Mortgage Brokers.
"A short sale will have less of a negative effect than a foreclosure," he said.
With either a short sale or foreclosure, there is the specter of a deficiency judgment. Anytime a property sells for an amount less than what is needed to satisfy the mortgage obligation, a lender may try to pursue a borrower for the difference.
All of these things weigh heavily on Jennifer and Marc Schaerer of Draper. She and her husband, who owe $437,000 on their mortgage, are surrounded by short sales. Most homes similar to theirs, which they purchased near the market peak in 2006, are selling for around $335,000, down from the $400,000s.
Despite some financial problems, the couple is current on their mortgage, making a loan modification problematic. A short sale leaves them and their two children without a home and without the credit to buy another one. Walking away? That's against everything in which they believe.
Still, they ponder just how long it will take for the housing market to reach bottom and for normal appreciation to help them out of their $100,000 negative equity situation.
"It's the elephant in the room," she said. "How long will it take to earn that amount back? Ten years, 15 years, or more? No one knows."
lesley@sltrib.com I'm in mortgage trouble but want to keep my home — so what now?
Here is some advice if you are having trouble making your mortgage payment and can't sell your house because you owe more than the home is worth:
Start with your lender or HUD-approved counselor • Call 211 to reach a counselor in your area to help determine your best options. Avoid those who charge hundreds and guarantee results.
Your lender's offer is likely to disappoint • Because lenders are in business to make money and want to do what's necessary to reduce their losses on mortgage loans, be prepared to lower your expectations.
You must prove hardship to get help • Simply owing more than your home is worth is not enough to qualify for most relief programs. For a lender to agree to a loan modification, borrowers must have difficulty making their house payment.
Be persistent • Donna Miller of Salt Lake City, who has been going through the loan modification process for several months, has this advice: "Make sure you are checking in with your mortgage company at least two times per week. Keep track of every call and keep a file of all your documents."
Help is not guaranteed • Even with a borrower's hardship, a lender may elect not to help, taking the chance that a property will fall into foreclosure and result in less of a loss. Banks modify loans in cases where they believe the borrower will be able to make their mortgage payments over time. Because lenders are overwhelmed by problem loans, working with them can be a time-consuming and frustrating effort.
You may have to change your spending habits • If you're asking your mortgage company for help, it likely will want to track your income and spending. A lender may take one look at a pricey cellphone plan, expensive cable TV package or credit card luxuries and figure a borrower is not serious about keeping a home. Before you seek help, you may want to consider cutting back on expenses.
Think twice before stopping mortgage payments • Some homeowners think the only way to get help — and demonstrate financial hardship — is to fall behind on mortgage payments. It's true some loan modification programs are aimed only at those who miss payments. But others are designed for those still current on their loans but in danger of default. The problem with late, partial or missed payments is that they could speed the foreclosure process, damage your credit and make it more difficult and expensive for you to get any consumer loan.
Denied a modification? • Try, try again. A number of borrowers have been turned down, only to succeed on their second, third or even fourth attempts.
Lesley Mitchell —
I just want out. What are my options?
Short sale • In this process, the borrower asks a lender for permission to sell the house for less than what is owed on the mortgage. For example, the market value of a property is $250,000, but $300,000 is owed and the lender is asked to take a $50,000 hit. Short sales hurt credit scores, but not as much as foreclosures.
Foreclosure • Walking away from your property and letting a lender foreclose has the greatest effect on your credit, remaining on your report as a negative item for seven years.