Balky Lenders: Part 2–What happened to Del Phillips?

July 14th, 2010 by Mike Hinshaw

[Editor's Note: This is the conclusion of a two-part look at the difference between home mortgage delinquencies of the wealthy--which are on a dramatic rise--and alternatives for the less well-to-do. Part 1 is here.]

Maybe ‘shrewdness’ is breaching class lines

One guy who doesn’t care about credit ratings and FICO scores–anymore–is a former public affairs worker named Del Phillips who tried to stay in his Chicago home by working out a loan modification, even after he had lost his job.

This is a from a June 25 piece in the Chicago Tribune, and, boy, talk about sneaky…check out this lender:

Phillips bought the one-bedroom condo, tucked into a Lakeview courtyard building, in May 2007 for $212,500, securing a first mortgage of $159,375 and a $53,125 second note, both from Chase Bank, according to county records. In January 2009, he lost his public affairs job, began drawing on his savings and, in April 2009, after the government began its Home Affordable Modification Program, applied for a mortgage loan modification from Chase.

Customer service representatives with Chase, he said, told him to keep paying the monthly mortgage of about $1,400 while he awaited a decision on his application. In September, the still-unemployed Phillips was turned down for a modification because, as the letter stated, his hardship “is not of a permanent nature.”

It’s a common, Catch-22 tactic that lenders commonly use: pressure the homeowner to maintain regular payments regardless of the personal hardship and sacrifice, only to later deny a loan mod because the homeowner has maintained payments–thereby demonstrating no financial hardship.

And the lender had yet more tactics at its disposal:

Phillips decided to stop paying the mortgage and try to sell his condo in a short sale, in which a homeowner sells the property, with the lender’s approval, for less than the amount owed on the mortgage. A short sale typically does not tarnish an individual’s credit history as much as a foreclosure.

Short sales and second notes

Short sales can indeed be an alternative, but not with a balky holder of a second note as explained here, in May 2009 FindLaw piece: “Going back to the issue at hand, what is a short-sale? We discussed the basics of a short-sale in a blog post last year. A short-sale is a foreclosure alternative for distressed homeowners, whereby a distressed homeowner can sell their home for less than they owe on their mortgage, if the lender agrees to the sale.

“A problem with short-sale solution, however, lies in the second mortgage, where it might not always be so easy to convince the holder of a lesser mortgage (for example, a home equity line of credit (HELOC)) to drop the loan. As a result, the short sale remedy isn’t used as much as it could be, to assist distressed homeowners.”

But, lo and behold, Phillips got a decent short-sale offer and dang if the lender didn’t approve it.

Well, of course, with a catch: “Chase notified Phillips that it would still have the legal right to pursue him at a later date for the approximately $54,000 owed on the second mortgage.

” ‘A short sale may satisfy the first lien, but the customer could still be responsible for the second lien,’ said a spokesman for Chase, while declining to discuss Phillips specifically.”

‘He did everything right’

Finally Phillips sought help from a federally approved housing agency, where counselors brought up the alternatives of filing for protection under the bankruptcy code. He didn’t like the idea and resisted “but after consulting with an attorney, in late February he filed for Chapter 7 bankruptcy, not the Chapter 13 that would have negotiated his debts, including those with Chase.”

In other words, he chose not to try to save the house under Chapter 13 and enter a repayment plan to creditors. Instead, the lender will probably be forced to take whatever it can get for the condo–without any recourse to go after Phillips for the second note. He told the Times he couldn’t stand the thought of not only losing the home in a short sale but also then repaying the lender $54,000 on a home he no longer lived in.

” ‘My other option was to say I’ll roll the dice with the bank,’ Phillips said. ‘Will they really come after me? I wouldn’t put it past the bank industry to do that. It’s going to kill me to pay a bank for a house I no longer owned. I was, like, there’s no way I’m going to pay the bank another dime.’ ”

He now regrets paying in good faith “the more than $12,000 he paid toward his mortgage while he sought a loan modification that never materialized.” The lender sent notice of loan default in late May, but Phillips expects to stay in the condo for several months while the legal system works, using unemployment benefits to pay condo association fees and stay alive while job hunting and considering a move to another state.

” ‘ (Phillips) did everything right. He had good credit, and then he lost his job,’ said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services. ‘If your lender isn’t interested in helping you, or the only thing you qualify for hurts your household, I don’t think you have any moral obligation to stay bound in that mortgage or paying to that company when it no longer makes economic sense for you.’ ”

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Life after bankruptcy: misconceptions can cause confusion

May 4th, 2010 by Mike Hinshaw

Last time we looked at reaction to the “moral failings” argument of critics opposed to people filing for bankruptcy protection. Besides the idea that bankruptcy is how deadbeats game the system, we often hear dire warnings such as, “You’ll ruin your credit score,” or “Bankruptcy stays on your record for ten years,” or “You’ll never get a decent job again.”

Quite often, the people or companies using these scare tactics are pitching products or programs of their own. If you read something along the lines of bankruptcy will “ruin your life,” be sure to investigate what course of action or product is being offered as an alternative to bankruptcy. (As we’ve noted before, be particularly wary of so-called “debt settlement” companies that offer the moon while demonizing the bankruptcy process–more about this in Part 2.)

FTC and credit counseling

For instance, legit credit counseling agencies do exist. Here’s the Federal Trade Commission’s page called “Information About Credit Counseling and Debtor Education,” a thorough overview of the credit-counseling aspect of bankruptcy that also includes a link to “list of approved debtor education providers at www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm or at the bankruptcy clerk’s office in your district.” The page also features a good list of crucial questions to ask of any debt counseling agency or service.

One thing that pops out, though, concerns fees and up-front costs: The FTC says the cost for the initial session should “generally be about $50, depending on where you live, the types of services you receive, and other factors.” Furthermore, “If you cannot afford to pay a fee for credit counseling, you should request a fee waiver from the counseling organization before the session begins.”

Now, if counseling or other research indicates that bankruptcy protection is not for you, then don’t pursue it–and certainly don’t use the protection frivolously.

Bankruptcy ruins credit-rating?

That being said, however, many of the horror stories are just that, scary stories that don’t bear up under research. For example, will bankruptcy ruin your credit rating? Unfortunately, that’s not a yes-or-no answer. True, bankruptcy is the single largest hit a credit score can take. Here’s a recent comparison  (not exact, due to the vagaries if the FICO equations) from CNN.Money.com, showing various effects of mortgage delinquency, foreclosure and bankruptcy: clearly, at a range of 130 to 240 points, bankruptcy is a huge hit.

If you’re 30 days late, expect your rating to drop 40 to 110 points; 90 days late, 70 to 135 points–but if you lose your home, it’s somewhere in the 85 to 160 range. And that’s regardless of whether the loss is through foreclosure, short sale or deed-in-lieu.

For a homeowner, the primary concern often becomes the tradeoff between saving the home (usually through Chapter 13 protection) and the lowered credit rating: If losing the home results in major credit-rating downgrade, what’s been accomplished?

Another consideration involves the “weighting” of the FICO analysis. The way it works is someone with a high credit rating has more to lose, according to the CNN piece:

“Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

” ‘If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,’ she said. ‘For me, one missed payment would just be a blip.’

“The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.”

This comes into play for many who have been struggling for a long time; that is, their credit ratings may already be in tatters.

Making a business decision

The cold, hard business decision, then, becomes “What’s the best way to start over, and begin rebuilding?”

Again from the CNN article: “Despite the problems a poor credit score can cause, Experian’s Sweet recommends that people who are in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem.

” ‘You need to do what you need to do to get your finances back in order,’ she said. “Don’t worry about your credit score.”

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If you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, please know the laws have changed recently. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13