35 3. How Buyer-Clients Can Prevent Foreclosure In this module: Educating consumers Choosing the right loan Understanding nontraditional loan programs What to do if payments fall behind

36 Becoming Educated Education is a consumer’s best self- defense. Encourage buyers to take advantage of free pre-purchase counseling offered by agencies and/or organizations approved or certified by HUD and/or NeighborWorks® Center for Homeownership Education and Counseling (NCHEC).

37 Becoming Educated The following consumer brochures are available from

38 Choosing the Right Loan MortgagePlusesMinuses Conventional 30-year, fixed-rate mortgages Good for buyers who want the security of a fixed principal and interest payment and plan to stay in a home long-term. Higher overall interest than 15-year loans. May need to refinance if rates fall significantly. Conventional 15-year, fixed rate mortgages Appeals to buyers who can afford higher payments and want to build equity quickly and pay less interest across a loan’s life. Payments remain the same over the life of the loan. Payments that are 25 percent to 30 percent higher can be a burden if income changes. Bi-weekly mortgages Good for buyers who want to reduce the time needed to pay off a loan. By paying half the monthly payments every two weeks, the approach produces 13 monthly payments, rather than 12, per year. Little flexibility if income changes or emergencies arise.

39 Choosing the Right Loan MortgagePlusesMinuses Adjustable- rate mortgages Low interest in the first year. Good for those who know their income will rise over the coming years or those who are moving in a couple years and aren’t concerned with a rate hike. Allows borrowers to qualify for a higher loan amount. Monthly payments can increase significantly if rates rise, although most adjustables have some form of interest- rate cap. Multi-year fixed, with balloon Lower closing costs than fixed mortgages; low payments. Need to refinance at end of fixed-rate period, no matter what interest rates are. FHA and VALower down payment requirements than conventional loans. Often easier to qualify for those with low incomes. Requires additional inspections and insurance. In case of VA loans, limited to veterans.

40 Staying Aware of Predatory Lending Practices Mortgage fraud practices Ignoring the right of rescission Using inflated appraisals and fake documents Selling to straw buyers Phantom second loans Predatory lending practices Guaranteeing approval and not verifying income Charging high fees and penalties Delaying closing Asking borrowers to sign blank documents or ones they don’t understand

41 Understanding Nontraditional Loan Programs Non-traditional loan products are suitable for certain situations and fully informed borrowers. What is the appeal? Payment flexibility Maximize cash flow Minimize affects of vacancy Leverage to payoff personal bills Leverage to buy more property

42 Interest-Only Loans Appeals to buyers who: have income in the form of infrequent commissions or bonuses expect a significant increase in earning in a future years plan to invest the savings

43 Option ARMs Reverse equity Borrowers are “capped” on $$$, not rates Appeals to buyers who: Have variable incomes Purchase homes they otherwise could not afford

44 2/28 and 3/27 ARMs Gives the borrower a fixed payment for the initial two- or three-year period before adjusting the mortgage up as often as every six months. Promoted as vehicles that allow borrowers to repair their credit until they can refinance to a mortgage with more favorable terms.

45 FHASecure Proposed program will give 80,000 ARM borrowers an option to refinance their existing mortgage. Borrowers must: Have made their mortgage payments for the six months prior to their loan resetting Be delinquent on their mortgage as a result of the interest rate reset Have at least 3 percent equity

46 Discussion Question 2 1.What can you do in your local marketplace to help reduce the rate of foreclosures?

47 What to Do if Payments Fall Behind Contact the lender immediately Be objective about the reason Investigate forbearance remedies available Make partial payments or interest-only payments for a time Catch up the arrearages Add the delinquent amounts to back of loan Re-cast the loan

48 Mortgage Loan Workouts Borrowers and lenders agree to a financial plan (workout) to avoid foreclosures. "We don’t want anybody’s home," says Bill Garland, president of Utah-based Fairbanks Capital Corp., a giant national mortgage servicer. "Everybody loses when there’s a foreclosure."

49 Discussion Question 3 1.What are the benefits for a homeowner? 2.What are the benefits for a lender? 3.What are the opportunities for investors?

50 Deed-in-Lieu of Foreclosure Conveys title to lender to avoid foreclosure Avoids foreclosure, but still affects credit score Advantages: offers a solution, saves time, money, energy Disadvantages: lender must hold property in inventory, likely loss for lender, shows up on borrower’s credit history

51 Discussion Question 4 1.If you were Mary, how would you respond? 2.What position should a seller representative take when counseling a seller on a deed-in-lieu of foreclosure? 3.How does the role change if the buyer representative is representing a buyer- client in a purchase of an unlisted property and the seller is considering a deed-in-lieu of foreclosure?

52 Short Sales Borrower sells the property for less than the mortgage balance owed on it. If the lender cancels a portion of the mortgage debt, the borrower could receive a 1099-form from the lender. That means the borrower will have to pay tax on the “phantom income.”

53 Discussion Question 5 1.Describe at least three options for the Ragsdale’s situation. 2.Which of the options involve the mortgage lender(s)? 3.Should Shar agree to list the property? Why, or why not? If so, what duration?