Limbo and Home Loan Modifications by Feldman Law Center

across the country. The prices for existing homes fell another 16% in May versus the prices one year prior.  The growing backlog of homes in limbo indicates that foreclosure rates are likely to increase dramatically during the second half of this year and into 2010. Some estimates are calling for foreclosures to reach 2.4 million by year end. Bob Bellack, chairman of Zetabid, which auctions foreclosed properties, said “Prices will fall to the point where you have equilibrium, and it won’t reach that until there is no longer this foreclosure overhang.”  
Financial firms that carry mortgages or mortgage-backed securities on their books are scrambling to stem past and anticipated losses with any means possible. Whether a sign of desperation or not, mortgage investors have thrown their support behind  the Hope for Homeowners plan, a leftover from the Bush Administration which was considered an absolute flop the first time around. Intended to help over 400,000 homeowners at its outset, the plan originated only one loan. If the economy doesn’t turn, and without some sort of government assistance, continued foreclosures will result in continuing rounds of losses for investors.

Being in limbo has allowed some homeowners the time to save money while not making mortgage payments and take action through the home loan modification process to save their homes from foreclosure. In general, however, statistics don’t bode well for homeowners once they start missing payments. According to a March report from NeighborWorks America, a large housing counseling group, 60 percent of homeowners go into foreclosure after missing more than four payments.
Normal protocol is for the foreclosure process to start after the third payment has been missed but now it’s common for a foreclosure process to take nine months or more to get started, said Guy Cecala, publisher of Inside Mortgage Finance. “No one is in a rush, lender-wise, to deal with the property,” he said. “If you have to sell at a loss, why rush?”
Another protocol has lenders writing down the value of the home six months after an owner stops making payments, but the total loss is not recorded until the property is sold in foreclosure, said Mark Zandi, chief economist of Moody’s Economy.com. “Some may feel that the property is worth more than the market can bear at this time, and they are willing to wait until the market improves”, he said. “They don’t want to sell it into a completely depressed market.”

The typical foreclosure process varies by state and has been slowed down by the constant incoming volume. The timeline of the process is also dependent on who actually owns the mortgage and whether a bankruptcy has been filed by the homeowner. One of the biggest issues in the process now is that the phase preceding eviction, sale at auction, isn’t happening. Lenders, considering their workload and the costs of each foreclosure, aren’t eager to start a process which isn’t likely to be seen through to completion so limbo is the next best option.  
“During that period, where the property is in limbo, until there has been a sale of the property, the homeowner is still the owner, technically,” said John Rao of the National Consumer Law Center. Despite being seriously delinquent, homeowners can apply for a home loan modification to stay in their homes, even if they were turned down previously. Success after being turned down can be achieved if the homeowner has been hired into a new job, is generating more income, and/or by hiring legal representation to renegotiate the terms of the existing mortgage. The odds of approval are also increasing due to lenders’ reluctance toward taking more properties into foreclosure. Whatever they may have thought about home loan modifications before, at this point they’re a better option than either foreclosure or sitting in limbo.

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