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A History of Suspension
Q: Both Fannie Mae and Freddie Mac recently said they would suspend foreclosures for about six weeks. Have such large-scale suspensions happened in the past?
A: Yes. Foreclosure moratoriums have probably been more common then most people realize – and more discomforting than lenders would like. As examples:
• Active-duty military personal generally cannot be foreclosed under the Soldiers’ and Sailors’ Relief Act of 1940.
• A number of states have enacted foreclosure moratoriums. As one example, Maryland added 135 days to the foreclosure process – not a “moratorium” in the usual sense but an effective stall for troubled borrowers.
• The Supreme Court ruled in the 1934 Blaisdell decision that states can stop foreclosures.
• It’s a common practice to suspend foreclosures in regions declared disaster areas by the president.
• Lee J. Alston, in his 1983 Journal of Economic History article “Farm Foreclosures in the United States During the Interwar Period, says farm foreclosures were banned in 26 states during the Depression years.
• During the 1980s, the Farmers Home Administration created foreclosure moratoriums.
Foreclosure moratoriums raise several important questions:
First, what happens after the moratorium ends? Is the missed payment or payments added to the loan? Due immediately? Forgiven?
Second, is the lender making negative reports to credit bureaus? (Usually not, but ask.)
Third, when is your next payment due?
If you may qualify under a moratorium, you must contact your lender. Do NOT assume that a payment can be skipped. Take notes and record whom you spoke with and when. Get the lender representative’s direct phone number and e-mail address. For additional help, speak with an attorney or community housing organization.
Q: Recently you answered a question that asked what happens if a borrower makes an additional payment when the loan begins. You’re answer was good, but it raises a related question: What happens if someone makes one additional payment a year, every year?
A: Imagine that you have a $200,000 mortgage at 6.5 percent over 30 years. The monthly payment for principal and interest would be $1,264.14.
To answer this question I tried two different approaches:
First, I went to the prepayment calculator at HughChou.org and added $105.33 extra per month to each payment – that’s 1/12th of $1,264. Using this approach the loan would be repaid in 290 months (24.17 years).
Second, I used the amortization calculator at HSH.com and added one additional payment of $1,264.14 per year. Using that approach, the loan would be repaid in 25 years and 4 months – that’s 304 months in total.
What these examples show is that prepayments will reduce loan terms and thus potential mortgage costs. They also show that when and how you make prepayments can impact final results.
Q: I’ve seen several homes that have had huge price reductions. What happens when a home is bought for $800,000 and then re-sold for $600,000?
A: Unfortunately this is not a rare event. Zillow.com reported in November that “over the past 12 months, 30.2 percent of homes sold were sold for a loss, up from 23.7 percent at the end of the second quarter. In 17 markets – 14 of which are in California – more than half of homes sold in the past year were sold for a loss.”
It went on to add: “One in seven (14.3 percent) of all homeowners across the country has negative equity,” says Zillow, “and of homeowners who bought in the last five years, almost one-third (29.5 percent) are underwater.”
In your example, there’s an apparent $200,000 loss on the sale. In fact, the loss is likely to be greater because the purchase price does not reflect closing costs and the sale price does not show marketing costs and other settlement expenses. Also, we don’t know if the owners were forced to make “seller contributions” to get a sale, a polite term which means the sellers gave the buyers cash or credit make the sale happen.
But, let’s take the transaction at face value. There’s a $200,000 loss. One option is that the sellers get the cash from savings or investments and bring the money to closing. This, to be polite, is unlikely.
The more frequent outcome is that the lender eats the loss. In California, for example, an owner’s liability with a “purchase money” mortgage – the loan used to acquire a prime residence –generally is limited to the value of the home. However, if a prime residence has been refinanced then the owner can be made responsible for the loss.
While the rules in most states allow lenders to go after borrowers for unpaid balances, in practice it doesn’t often happen. The reason? The residential owners have no money. Why pay for lawyers when the end result is pre-ordained?
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to email@example.com.View Foreclosure Article Archives
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