There are many factors that must be considered when choosing how to deal with mortgage challenges. A few examples presented as questions can help illustrate some of the many things you need to consider: Are your difficulties due to a temporary employment setback that has been resolved? Can you make all future mortgage payments? Based on what you can reasonably anticipate, is it realistic to expect that you can actually handle your mortgage?
It is particularly important to be brutally honest when answering the last question in the previous paragraph because the temptation is strong to think with your heart rather than your head. It is important to spend some time consulting with an attorney who isn’t emotionally invested in your house, and who can analyze your situation without the emotional baggage than easily can cloud the issue. Well, what about the government’s HAMP program? Does it work?
I. HAMP, The Government’s Chump Program
The Home Affordable Modification Program (HAMP) was supposed to help home owners who were having difficulties making their mortgage payments keep their homes. How has it fared? Michael Hiltzik of the L.A. Times reported that the program has not lived up to its promises. As he put it:
Delinquencies, which mean at least one missed monthly payment, still afflict more than 8% of all mortgages. Yet housing is the area in which the government’s remedial efforts have been consistently the weakest. The gap between the government’s effort to bail out bankers and its effort to bail out homeowners is a national scandal.
The Obama administration’s signature anti-foreclosure effort, unveiled in 2009 with the promise of helping three to four million homeowners modify their mortgages, is such a failure that it now risks “generating public anger and mistrust,” according to a federal audit released Monday.
Far from helping at-risk homeowners, the Home Affordable Modification Program has actually made some homeowners worse off, according to the Special Inspector General for the Troubled Asset Relief Program – also known as the Wall Street bailout. The Treasury Department set aside $50 billion from TARP, plus another $25 billion from taxpayer-owned Fannie Mae and Freddie Mac, to give mortgage servicers thousand-dollar incentives to reduce monthly mortgage payments by modifying eligible homeowners’ loans. But more people have been bounced from the program than have been helped by it.
People who apply for modifications via HAMP sometimes “end up unnecessarily depleting their dwindling savings in an ultimately futile effort to obtain the sustainable relief promised by the program guidelines,” the report notes, putting the imprimatur of the federal government on a claim long made by housing experts and homeowner advocates. “Others, who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further ‘underwater’), and worse credit scores.
In sum, while government officials have talked a good talk, and given the impression that they are “doing something” to help homeowners keep their homes, the government’s vehicle for doing this, HAMP, has done little other than waste large sums of money and make politicians feel good about themselves.
II. Bankruptcy’s Better Alternatives
Bankruptcy can make it possible for some struggling homeowners to keep their homes. How?
In a Chapter 7 bankruptcy you can eliminate unsecured debt, such as credit card and medical debt. This frees up future income that would have been devoted to paying the unsecured debt to make future mortgage payments.
The catch: You usually have to be current on your mortgage payments to keep the house.
In a Chapter 13 bankruptcy you don’t have to be current on the mortgage payments because you can put the mortgage arrearage into the Chapter 13, and spread the paying off of the arrearage over the five-year plan.
The catch: Unlike the credit card debt, which you may end up paying a very small percentage back through the plan, the mortgage arrearage must be paid back 100%, plus contract interest.
Another benefit in a Chapter 13 is the possibility of stripping off a second mortgage and treating it like credit card debt. This means you may end up paying a very small percentage of the second mortgage balance, and when you complete the Chapter 13 plan the remaining unpaid balance is discharged.
The catch: The current value of your home must be less than the current balance on your first mortgage. This means that the second mortgage is de facto unsecured. If that isn’t the case, you are not eligible to do the lien strip.
Another catch: You must complete the plan for the lien strip to take effect.
Yet another catch: If you have filed a Chapter 7 bankruptcy within the last four years, that led to a discharge, some judges will not approve the lien strip. Unfortunately, lien stripping is not available in a Chapter 7 bankruptcy in the Central District of California.
Finally, when you get a bankruptcy discharge – either under Chapter 7, or under Chapter 13 – your personal liability on the mortgage is discharged. This means that if you subsequently become unable to make the mortgage payments and you ultimately lose your house in foreclosure, you will have no resale deficiency because your personal liability was discharged in the bankruptcy.
By the way, this does not mean you’ll get a free house. While your personal liability is discharged in the bankruptcy, the creditor will still hold a security interest in the house – meaning that if you don’t make the payments the creditor can repossess and sell the house. However, after the resale you will have no further obligations associated with the discharged mortgage debt.