The dreaded word. DON’T DESPAIR



If you are unable to make your monthly mortgage payment, your bank, mortgage company may extend forbearance by agreeing to suspend payments or accept partial payments for a limited period of time until the bank will be able to begin a repayment schedule. Forbearance is a formal, written agreement between you and the bank to reduce or suspend monthly payments for a specific period of time. This means that for a period of time, you would either pay only a portion of your regular mortgage payment or not make any payments at all. At the end of the agreed-upon period, you would be required to resume regular monthly payments as well as pay additional funds to make up for the past due amount. During the time that the payments are either suspended or reduced, you would have the opportunity to resolve the financial hardship you are facing.


Reinstatement occurs when the loan is brought current by paying the total amount past due. You have an absolute right to fully reinstate you loan within 90 days of being served with a Notice of Default. If you are now able to make your mortgage payments or your income has  returned to its former level, you can negotiate with the bank or lender to bring your loan current by paying off any arrearage. The servicer may be able to arrange an increase in monthly payments until the loan is brought current. This means that each month you would add an additional amount of money (determined by the bank) to your regular monthly payment until the amount that was overdue has been repaid. If you can show the bank that you are able to resume making payments, and that you can make up the past due balance by either a lump sum or over a short period of time (12 to 24 months), then you can reinstate your mortgage and keep your home. A repayment plan can be agreed to bring the mortgage current over time. The terms are generally a payment of ½ of the arrearage as a down payment, and 1 ½ payments a month until the loan is current. The delinquency may include certain legal fees and costs if the mortgage company has started the foreclosure process. Many loan holders require certified funds for reinstatement.


The bankruptcy reform act of 2005 changed the entire bankruptcy landscape as we used to know it. Today most bankruptcy attorneys need at least 3 weeks before any major event such as a foreclosure auction date in order to adequately prepare a bankruptcy petition and file the same with the Court. Homeowners who have waited too long to deal with foreclosure often find out that there is little that can be done to help them by bankruptcy lawyers. The law still permits individuals to file their own bankruptcy petition on a pro-se basis (representing themselves). Unrepresented individuals should NEVER file Chapter 7 bankruptcy without the assistance of a competent attorney.

Bankruptcy is a temporary solution and should always be a last resort option. Most homeowners have the possibility of filing two different types of Bankruptcy, a Chapter 13 Bankruptcy which is merely a reorganization of the debts, and a Chapter 7 which is a discharge of the debts. Bankruptcies can usually only prolong the situation. In rare instances, a homeowner may be able to successfully use a Chapter 13 Bankruptcy as a way of restructuring all of their other debts where they can then free up enough cash in order to make their payments, such as their house payment.Less than 10% of all people who file a Chapter 13 Bankruptcy ever successfully make it through to the end of the Bankruptcy. Filing a Bankruptcy is the only adverse event that lasts longer on an individual’s credit report than a foreclosure action. In order to file a Bankruptcy a homeowner is going to have to engage the services of a lawyer as well as attend various debt counseling classes all prior to being able to file Bankruptcy. In instances where a homeowner knows that they will be unable to make their mortgage payments because their financial situation has changed for the worse, they would be wise to wait to file a Chapter 7 Bankruptcy until after the foreclosure process has come to a final conclusion.

Repayment plan.

The 2005 reform legislation has made chapter 13 the most common type of bankruptcy. Essentially, chapter 13 is a Court-supervised and Court-monitored repayment plan where the debtor provides the Court with a listing of all of their debts and a budget for their monthly needs. Any extra money left over each month is applied to pay the arrearage owed on the debts. One of the benefits of a chapter 13 repayment program is that a lot of the outrageous late fees, interest rates, and other charges can no longer apply on these kind of debts. The typical repayment program usually lasts between 48 and 60 months. The vast majority of chapter 13 repayment plans falter and eventually fail. Plans can falter even where the debtor gets a “grace period” from the Court for additional time to try and catch up for missed payments to the trustee. The typical Chapter 13 plan sends the debtor wages to the Court appointed trustee who pays all of the creditors according to a plan presented by the debtor and agreed to by the creditors. After the bankruptcy reform act of 2005, chapter 13 repayment plans also include partial repayments in what used to be a complete discharge. Chapter 13 bankruptcies can be filed again within a shorter period of time after the last plan, either failed or terminated. However, to prevent abuse, if a chapter 13 plan is dismissed by the Court due to the debtor’s noncompliance, the debtor cannot file a new chapter 13 for at least one year.  Be sure to consult an bankruptcy attorney since they keep up with current laws and for all states may vary.


The Loan Modification includes changing the original terms of the mortgage through several methods. This option provides for either a permanent change in one or more of the terms of a your loan, which allows a loan to be reinstated and results in a payment you can afford. If your mortgage is an adjustable loan, the lender might freeze the interest rate before it increases or change the interest rate to a more manageable rate for you. A lender might also extend the amortization period. This is called a loan modification. Loan modifications are rare. A loan modification can consist of any of these things: A permanent change in the interest rate. Capitalization of delinquent principal, interest, or escrow items. Possible extension of loan term. The use of any three of the above items will result in the re-amortization of the loan. Maximum interest rate adjustment to current market rate plus 150 basis points although at mortgagee’s discretion, note interest rates may be reduced below market. All or a portion of the PITI arrearage (Principal, Interest, and Escrow Items) may be capitalized (added) to the mortgage balance. Foreclosure costs, late fees and other administrative expenses may not be capitalized. The Mortgagee may collect the legal and administrative fees (resulting from the canceled foreclosure action), from you to the extent not reimbursed by HUD, either through a lump sum payment or through a repayment plan separate from, and subordinate to, the modification agreement. No administrative

fees for completing the Loan Modification documents can be passed on to you. The modified principal balance may exceed the principal balance at origination and the modified principal balance may exceed 100% loan-to-value. The following conditions will apply:

All Loan Modifications must result in a fixed rate loan.

  • The Loan Modification must fully reinstate the loan.
  • Subsequent defaults are to be treated as a new default


In July of 2008, the United States Congress passed and President Bush signed into law a bill commonly referred to as “Hope for Homeowners”. In the land of acronyms, it got the nickname of HoHo. HoHo has some characteristics that each homeowner who is thinking about needs to know before they try and access the 300 billion dollar loan guarantee designed to help homeowners who are underwater refinance their homes. The term “under water” is not referencing Katrina, but rather the fact that people now owe more on their house than what it is worth. Under Hope for Homeowners a homeowner who now owes more on their house than what it is worth could apply to the program and receive a write-down of the value of their mortgage to 90% of its current market value. In addition to the 90% of the current market value, then there would be a 3% FHA refinance fee added to the new mortgage amount. The new mortgage would then come at current market interest rates of approximately 6.5% as of the date of this writing plus a 1.5% annual surcharge, bringing the interest rate of 8% as of today?s writing. That interest rate is clearly not competitive in the market. Finally, there is the back-end kicker in HoHo. When a homeowner has accessed the program and then later on realizes some value appreciation in their property due to the market changing then when the homeowner either refinances to lower the interest rate from the high 8% or sells the property, HoHo will take half of any appreciation. Perhaps the following illustration will help

A person bought a $200,000 home five years ago and made a 5% down payment and got a 5 year interest only ARM for $190,000. The home has since fallen in value by 25% down to $150,000. By making the interest only payments since the inception of the loan, she now owes $190,000 entering a repayment amortization reset. HoHo will provide for a writedown of the current mortgage to 90% of the current market value, thus $135,000 plus the 3% refinance fee taking it to $139,050. Then in five years if the homeowner sees the house go up to $165,000, when they sell the property, they will have to split the $26,000 in equity with the Federal government and we can anticipate the Federal government will not split the costs of selling the property.

Finally, since Hope for Homeowners (HoHo) is new, the program will not be available until sometime in October of 2008 and will probably take several months to implement and figure out how to handle it.