Pam Marron Home Lending

Making the Case for Imminent Default Instead of Delinquency: Allow Underwater Homeowners to Move Forward

For what seems like the hundredth time, I have spoken to another underwater homeowner who is bewildered about how to move forward. Their lender, realtor or attorney is telling them that they must go delinquent in order to exit a home where the amount of mortgage due is greater than the value of the home.

To put this problem into perspective, think about this comparison.

Two homeowners live side by side. Both have comparable incomes and good credit. One owes far more than the home is worth, but does not have the funds to pay the difference between what the home can be sold for and what they owe. The other homeowner owes less and could easily sell their home for greater than the mortgage amount due. Both work for companies that are cutting back employees and both homeowners are looking to relocate in their line of work.

The homeowner with the lower loan amount and equity calls a realtor, puts their home on the market and starts sending out resumes.

The negative equity homeowner is “underwater” and worries about how to exit the home. They question what a short sale is and are often confused and worried about what to do next. They are shocked when their lender, realtor or attorney tells them they need to be delinquent on their mortgage before the lender will approve their short sale.

They worry about credit and getting into a rental, at least.  What about the lingering credit problems they hear about of past short sellers?  They don’t tell friends, family or neighbors what they are doing because they fear being judged, especially by neighbors who will be angry at the lower price they have to ask for to sell the home.

Sending out a resume is the easiest thing these underwater homeowners can do.

They stall on everything else until they have financially wiped themselves out. At the end of their finances and options, they finally give in and ask for help.  

Homeowners that strive to stay current throughout a short sale have a hard time getting short sale approval. Though guidelines for most lenders allow for Imminent Default and some allow for payments to stay current, the reason for the short sale denial is usually cited as the lack of delinquency. Homeowners must fight to convince lenders that they are not “strategically defaulting” and leaving the lender with a loss, just to exit the home with an eligible hardship. Underwater homeowners now anticipate downsizing of income and households, need for larger homes, and a multitude of other logical reasons why a move is necessary.

This is where a broad understanding and application of Imminent Default could work pro-actively. Imminent Default is the preparation of a move before a delinquency occurs, rather than the pre-defined hardship of delinquency which presumes hardship right now. Imminent Default reasons are typically the hardship occurring, or will occur shortly, and will result in a mortgage default. If lenders:

1)paid attention to *ALL eligible hardships (not just the 4D’s: death, disability, divorce and distant relocation),

2)realized that servicing fees can still be paid when homeowners are current,

3)realized there is greater bottom line net when homeowners are current,

applying Imminent Default could go a long way in building much needed positive PR between lenders and future consumers.

The same importance we have historically placed on credit, and serious attention to the destructive loss mitigation practices that lenders currently impose upon underwater homeowners who must short sale and are left with ongoing damaged credit, both need to be addressed. It is estimated that there are at least 12 million U.S. homeowners still underwater that will need to short sale to go forward soon. The economy and the housing market recovery depend on attention to both of these matters.  

*Eligible hardships for Fannie Mae and Freddie Mac loans found on Uniform Borrower Assistance Form 710, https://www.fanniemae.com/content/guide_form/710.pdf

*Eligible hardships for FHA, VA, portfolio conventional loans acceptable to Making Home Affordable: U.S. Treasury Hardship Affidavit, https://www.hmpadmin.com/portal/programs/docs/hamp_borrower/hardship_english.pdf

August 19, 2013 by · Leave a Comment

About Pam

Since 1985 as a loan originator, highly experienced with automated loan approvals on DU, LP, and with USDA GUS systems, thorough knowledge and use of FHA loans including 203K rehab, conventional loans including USDA, Homepath and rehab, and VA loans. After 27 years, I STILL love this business!

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