Housing /Foreclosure Prevention

Steps That Advocates Can Take To Help Prevent Foreclosure
Prepared by the National Consumer Law Center, September 1993. Visit their website at www.nclc.org.

Foreclosure rates have increased nationally by more than 200% since 1980 and show no signs of abatement. More than 600,000 homes were foreclosed in 1989.

Older homeowners fall behind on their mortgages for many reasons: sudden decreases in income due to the loss of a spouse; poor financial management which contributes to nonpayment of utility bills, service shutoffs and liens against the property; failure to perform necessary repairs and maintenance which make the property uninhabitable; second mortgage scams which make impossible demands on the homeowner's limited resources. 

All of these contributing factors can be addressed by skilled advocates -- if homeowners turn to them in time. This issue of Consumer Concerns for Older Americans examines some of the measures that legal and non-legal advocates for the elderly can take to defend homeowners at risk of foreclosure. 

How Foreclosures Work
Foreclosure procedures vary from state to state. The procedures are established by state statutes, by case law, and by local practice. In about half of the states, foreclosures are court proceedings. First the creditor files a suit in a court located near the property. 
Unless the homeowner files an answer successfully contesting the foreclosure, a judgment is entered for the creditor. The home is then sold under court supervision. 

Other states have "non-judicial foreclosures." Creditors foreclose by simply advertising the home for sale, using a legal notice in a newspaper.
If homeowners want to contest this type of foreclosure, they must file a lawsuit and ask the court to stop the sale. Sometimes if the homeowner wants the court to stop the foreclosure, the homeowner must file a bond to protect the creditor. Unless the homeowner initiates a court proceeding, there is no judicial involvement in such a foreclosure. 
Some states allow both types of foreclosure, judicial and non-judicial. Practicality and local custom usually dictate a creditor's choice of one type over the other. 

Consumer Strategies When Foreclosure is Threatened 
When a homeowner first becomes worried about meeting mortgage payments, advocates can recommend that a series of steps be taken to reduce the risk of foreclosure:

Get Legal Advice
Because foreclosure is a harsh legal process, homeowners threatened with foreclosure should immediately obtain legal help. Possible sources of legal help are the neighborhood legal services office, a bar association panel of pro bono attorneys, or a program providing legal assistance for the elderly. A competent attorney can determine whether there are legal defenses to a foreclosure. Too often, homeowners either postpone consulting a lawyer until after the time to assert their legal rights has passed, or walk away from their homes in frustration, leaving themselves without any equity and vulnerable to deficiency claims. For each foreclosure situation, a counselor or lawyer must carefully evaluate the homeowners' objectives and interests. Homeowners should, however, avoid "quick Fix" attorneys who may advertise or solicit through the mail from published foreclosure lists. Many times these practitioners will push the homeowner to file a bankruptcy prematurely. A bankruptcy may be necessary at some point. But, as with many things, proper timing may be critical.

Keep Current on Home Payments
The consumer should not pay credit card debts, doctor bills or other low priority debts ahead of home mortgage payments. Skipping payments on low priority debts for several months will have little or no bad consequences, but skip one or two home mortgage payments, and the consumer risks losing the home. Sometimes the default can usually be cured by simply paying the amount in arrears. 

Apply for Income Maintenance, Tax Abatement and Public Assistance Programs 
Benefits provided by government and non-profit agencies are a key source of assistance for individuals in financial distress. These resources can help older homeowners free their income for home payments. Benefit programs to apply for can include fuel assistance and weatherization assistance, food stamps and emergency home repair programs. Most municipalities also offer property tax abatements for reasons of age or hardship. For very low income homeowners, particularly those who are recently widowed, advocates should also determine the homeowner's eligibility for Supplemental Security Income. The process of obtaining these benefits is often slow and difficult. When necessary, shepherd individuals' applications through the bureaucratic maze, ensuring that application procedures are understood and that all documentation is properly assembled and delivered.

Negotiate a Temporary Delay in Payments 
One of the most important strategies today for homeowners in financial trouble is to work out with the lender a temporary delay in payments or a period of reduced payments. More and more creditors are realizing that foreclosure is a losing proposition for the lender, and that they are better off keeping the consumer in the home making whatever payments the household can afford. Some forms of forbearance that lenders are increasing likely to accept include:

• Skipping one payment (that is, letting the consumer remain "30 days down"); 
  
• Extending the grace period for making late payments; 
  
• Skipping two to six payments for a year or two; or 
  
• Accepting reduced payments for anywhere from one to eighteen months.

It is important to contact the lender early, as soon as the homeowner begins experiencing financial difficulties. Just calling the lender on the telephone is a good way to start. Immediately follow up all phone calls with a letter to the lender confirming what has been discussed. The homeowner should keep a copy of the letter. The homeowner should continue to press the lender for a response to the offer, and not simply sit back awaiting a response.

Negotiate a Permanent Loan Restructuring
Although a temporary forbearance is easier to negotiate, for some older homeowners the financial problem is more long term. To keep the house they will have to have lower mortgage payments not just for a period of months, but perhaps as long as the mortgage has to run. And lenders are beginning to realize that permanently receiving less interest may be a better solution than foreclosing on the home. 

Where a home's likely sale price at foreclosure is less than the mortgage, the lender is usually better off keeping the consumer in the home and receiving lower mortgage payments. Moreover, more and more consumers are utilizing their rights in bankruptcy, and lenders are discovering that they are worse off if the consumer files bankruptcy than if they negotiate a new repayment plan. Consequently, homeowners report success in achieving the following types of negotiated mortgage restructuring:

• Capitalizing delinquent payments on top of the present principal balance, allowing the consumer to repay these delinquent payments slowly over the whole term of the loan; 
  
• Giving the homeowner up to four years to repay, in installments, delinquent amounts, with no interest accruing on these back due amounts; 
  
• Lowering the interest rate for a certain number of years or even for the remaining term of the loan, thus reducing monthly payments without lengthening the term of the mortgage; 
  
• Lengthening the term of the loan, thus reducing monthly payments (but increasing the total interest payments over the term of the loan); 
  
• Substituting some other more valuable property or asset for the home as collateral for the mortgage, thus putting this substitute property at risk of foreclosure, but protecting the home; or 
  
• Some combination of the above forms of loan restructuring, such as allowing back due payments to be paid gradually, lengthening the term of the loan, and lowering interest.

Consider Filing Bankruptcy
Homeowners who are about to lose their homes should carefully consider filing a petition in bankruptcy. This can stop the foreclosure process and allow them time to regroup and try to work out a plan to keep the home. Bankruptcy may also help them cure past defaults and make future payments. However, the bankruptcy option is complicated and it is a good idea to seek professional assistance from an attorney specializing in bankruptcy.

Deed in Lieu of Foreclosure
Homeowners often will be tempted to turn over their deed to the creditor instead of fighting the foreclosure. This is generally a good idea only if the borrower will receive something from the creditor in return for saving it the trouble of foreclosing. For example, if the home's value exceeds the amount of the indebtedness, the homeowner may want to ask the creditor to agree not to seek further collection remedies. By turning over the deed to the mortgage holder, the consumer may forfeit any right to equity in the home. Similarly, the consumer may have valid claims or defenses against the creditor that would be lost by turning over the deed. If the consumer does offer the creditor a deed in lieu of foreclosure, make sure that there is a written agreement giving them sufficient time to vacate the premises in order to find alternative housing and move in an orderly fashion.

Additional Resources on Foreclosure Prevention
Surviving Debt: Counseling Families in Financial Trouble, National Consumer Law Center (Boston), 1992.
"Foreclosure Defense," Chapter 13 of the 1993 Repossessions Supplement, Consumer Credit and Sales Legal Practice Series, National Consumer Law Center (Boston).
For more information on where to turn with questions on foreclosure defenses, contact NCLC's Boston office at 617/542-8010.

About NCLC
In 1992, NCLC received funding from AoA to launch an Eldercare Initiative in Consumer Law, intended to improve access to and the quality of consumer representation for older Americans. 
Since 1969, NCLC has been providing legal advocates with technical and expert assistance, training and publications that cover all major topics in consumer law. Since its founding, NCLC has established itself as the nation's consumer law specialist, making its legal expertise available to low income clients and their attorneys. These services are now available to advocates representing older Americans. 
The attorneys and policy analysts on NCLC's staff are all specialists in aspects of consumer law. The Center's comprehensive library of consumer law is updated continuously as attorneys conduct research on behalf of clients and revise NCLC legal practice publications. 

Making Use of Consumer Law
Consumer law is powerful but complex. In any given transaction, several defenses may exist against creditor or seller claims, but detailed research and calculations are required in order to spot defenses. With financially burdened clients, it is important to recognize that the emotional stress caused by indebtedness can impair decision making or lead to other difficulties beyond the debt crisis. This recognition can help head off other legal problems that could quickly develop. 
NCLC is available to consult with legal advocates for the elderly on a wide range of consumer issues, providing leading and local case law, analyzing contract documents for federal and state law compliance, defining factual and legal issues, identifying experts and legal resources to strengthen cases and training attorneys in consumer law.


Back to Housing

Back to Consumer Protection