Florida Foreclosure Myths

04Aug09

Myth #1: The bank can’t foreclose on my house because I have homestead.

Truth:  Florida homestead law only prevents unsecured creditors (those with uncollateralized debt, such as credit cards or student loans) from foreclosing on your home.  When a homeowner uses his/her home as collateral for a loan, the lender can foreclose on the property if the loan is not paid back as agreed. With a mortgage or home improvement loan, the property itself is used as collateral for the debt, which serves as a kind of security blanket for the lender. This is why credit card limits are low, relative to mortgage amounts.

 

Myth #2: I have to do everything I can to save the house – it’s all I have!!

 Truth:  This is the first time in history we have seen this many homes going down in value. Americans are used to picturing their home as an investment, not as a place to live.  They see home ownership as a right, and are sometimes irrationally attached to keeping the home. That’s why most are reluctant to part with it, even when it makes no sense to continue owning it. If you owe $200,000 and your house is only worth $100,000, that’s called negative equity. You don’t “have” anything. In order for your house to be considered an asset, it has to be worth more than you owe.  If you own a car that is paid for – even if it’s only worth $500 – that car may be worth more than your house!  It will take years for the percentage of homes with negative equity to start decreasing, and it will take longer still for homes to reach values seen during the market peak of 2005/06.

 

Myth #3:  All I have to do is file bankruptcy, and the mortgage company can’t take my house.

Truth:  Bankruptcy is not a protection from foreclosure. At best, in some cases, it may temporarily delay foreclosure proceedings. But even if you qualify for Chapter 13 bankruptcy (not everyone does), you have to make your mortgage payments. If you don’t, the mortgage company can foreclose. Bankruptcy judges may be able to modify the terms (interest rate on credit cards) or reduce the amount owed on other bills, but not on your mortgage. If you can’t pay, you don’t stay.

 

 Myth #4:   Foreclosure costs the bank lots of money. They’ll come to their senses and let me pay whatever I want and won’t foreclose as long as they are getting some money.

Truth:    Almost every day, there are stories in the media about banks being in bad financial shape because of customers defaulting on mortgages. They’re in such bad shape that the government has to bail them out!!  So, doesn’t it make sense for the bank to modify loans and make mortgage payments affordable? Something is better than nothing, right?  We look to banks as institutions with integrity, but even if a bank acts without integrity, we think we can count on the bank acting in its own best interest, financially speaking.  It will cost the bank way more money to foreclose than to let the owner stay there and pay what s/he can every month – so why are they shooting themselves in the foot by not doing that?  It has been speculated that some loan servicers have a financial disincentive to modify loans because they receive additional fees from investors/lenders for managing delinquent mortgages. 

If the bank forecloses on your house and kicks you out, they own the house and can choose to sell it…or not sell it. Selling the house brings the bank a larger amount of cash in a shorter period of time than reduced mortgage payments.  But let’s say the bank forecloses on your house, and lets it sit empty for a year.  They may have lost 12 months of revenue, but the house is now recorded on the bank’s books as an asset. The more assets a bank has, the more money it is allowed to lend and; the more loans a bank makes, the more money the bank receives. In either case, the bank can try to collect from you at the same time.

 

Myth #5: When the bank forecloses on my house, they can never bother me again.

 Truth:  Foreclosure can follow you forever. Florida is a recourse state, which means that, if the bank forecloses and then sells your house, you will still owe them the amount of the “deficiency”, meaning the difference between what they got and what you owe (includes late charges & legal fees). They can still get interest on that, too! What’s worse is that they aren’t required to take immediate action after foreclosure; lenders can wait up to five years to collect on the debt. They know you’re broke now, but they assume you won’t stay that way.  Down the road, your wages can be garnished and/or liens placed on other property(s) you may have acquired. 

 Also, having a foreclosure on your record means that, anytime you apply for a mortgage in the future, you will have to answer yes to the question, “Have you ever lost a home to foreclosure?” Recent Fannie Mae guidelines say that you may apply for a mortgage seven years after your foreclosure or after bankruptcy has been discharged. However, you must have a credit score of 620, and a minimum 20% down, and only if purchasing a primary residence (not a 2nd home, cash-out refinance, or investment property).

  

Myth #6:  My neighbor hasn’t made a mortgage payment in over a year & they haven’t foreclosed on his house — I have plenty of time.

Truth:  Even if you and your neighbor send your mortgage payments to the same company (e.g., Countrywide, Wells Fargo, Litton), that doesn’t mean your houses are financed by the same company.  Most mortgage owners use mortgage servicing companies to handle their payment processing & collections. The true decision maker regarding foreclosure is the investor(s) that owns your mortgage. And your mortgage’s investor may have a more aggressive foreclosure policy than your neighbor’s.  The longer you delay, the fewer foreclosure alternatives will be available to you.

 

Myth #7:  The homeowner’s association can’t foreclose on my home.

 Truth:   Not true! Homeowner’s and condo associations can foreclose because they have a legal interest that is secured by the property. Since the real estate bubble burst and the economy flattened, the number of homeowners behind on their association dues has skyrocketed. As a result, associations have gotten more aggressive in their collection efforts. Some go all the way and exercise their right to foreclose on the property. When that happens, the association evicts the owner (former owner), and rents the property out in order to pay for current and past due fees.

 

Myth #8: When a judge hears my sad tale they will not kick me out.

Truth: Foreclosure hearings last less than 30 seconds. If you go to court for the hearing and ask to speak to the judge, the judge will ask if you are behind on your mortgage payments.  All the judge wants is a Yes or No, not a Yes, but… The judge has no interest in your explanation; s/he is merely acknowledging the amount owed to the bank and that the legal contract between you and your lender has been broken due to non-payment. If you don’t pay, you can’t stay.

 

Myth #9: The bank messed up one of my payments and I have proof! They can’t kick me out, in fact, I want to sue them and I’m going to collect big!

Truth:  People often focus on the wrong things, waste time and lose the main objective while focusing on the trivial details. If you owe the bank $10,000 and they say you owe them $10,500, even if you are right, a $500 error will not mean anything in terms of a judge stopping the foreclosure or awarding significant money to you. Concentrate on stopping the foreclosure by dealing with the $10,000 you admit you owe and deal with the $500 error as a secondary subject.

 

Myth #10: This is not my primary residence, so foreclosure is my only option.

Truth:  Not true! Foreclosure is expensive for the lender, regardless of the type of home owner. Mortgage companies can allow investors to do short sales or, in some cases, loan modifications.

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