December, 2007

As the mortgage troubles continue to spread throughout the country, nervous borrowers are scrambling to figure out what to do. Increasingly, borrowers, many with adjustable-rate loans, are finding that as their interest rate rises, they are unable to keep up with their mortgage payments. In a Wall Street Journal article entitled “What People Can Do If Foreclosure Looms” Amir Efrati tells the story of Mike Wilt, a marketing director for an Ohio communications firm trying to escape foreclosure as the interest rate on his adjustable rate mortgage is set to rise.
Wilt, like many other homeowners, is concerned that once the interest rate on his $180,000 adjustable rate mortgage readjusts to 11.5% from 8.5%, he may not be able to pay the extra $400 each month. Attempts at refinancing his mortgage had failed because of his credit score. The 31-year-old believes that the tougher lending standards applied by the banks today is what prevented him from being able to refinance the mortgage.
Wilt is not alone. Borrowers throughout the country, many with adjustable rate loans are finding themselves in a similar situation. Under the looser lending standards applied several years ago, they were extended the mortgages, but are now unable to refinance to obtain more favorable terms due to the banks’ tightening of their lending policies.
Statistics released by First American LoanPerformance show that one in five subprime borrowers, or those with poor credit, were at least 60 days past due on their mortgage payments in June 2007. But the problem is not confined to those with poor credit. In June, 1.24% of second mortgages for so-called prime borrowers were 60 days or more late. Alt-A borrowers, those who fall between subprime and prime borrowers are affected as well. Some 4% of Alt-A borrowers were 60 days or more past due in June, an increase of 1.25% from the same month last year.
The government has taken notice of the rising crisis and is signaling its concern. President Bush recently announced a policy change that would increase by 80,000 the number of borrowers who will qualify for new, better loans that are guaranteed against default by the Federal Housing Administration in 2008, bringing the total to 240,000. Meanwhile, federal and state banking regulators are urging lenders and investors to restructure loans of millions of borrowers at risk of foreclosure.
Unlike old days when loans were taken out from local banks, and borrowers who couldn’t make their payments could try to negotiate with a familiar face, now with the securitization of loans, these conversations are getting a lot tougher. Today, borrowers in trouble may need to pursue other alternatives, which include counseling services and legal avenues. Some potential options are:
Calling the loan servicers. If you know you can’t make your payments, call the company that takes your loan payments or your mortgage “servicer”, to try to work out a possible solution. That could include asking for more time to pay back the loan, reducing the interest rate, or switching from an adjustable rate to a fixed one. This process is known as a “work-out” or “loss mitigation.” Due to the declining of property values in many markets, some companies are showing more of a willingness to work out an arrangement with struggling borrowers.
Speak to a housing counselor. Counselors communicate with servicers on behalf of borrowers and can negotiate a loan modification with lenders. Counselors can also give advice on how to delay foreclosure. The Department of Housing and Urban Development’s Web site,, has a nationwide directory of counseling agencies.
File for bankruptcy. If all else fails, consider Chapter 13 bankruptcy, which can at least delay foreclosure and can force the lender and other creditors to negotiate a court approved payment plan.
Although an attorney is not required to file for bankruptcy, the process is complicated, and slight errors can cause delay. Hiring an attorney can help ensure accurate filing, but following changes in bankruptcy laws two years ago, prices increased. For example, in Los Angeles, lawyers fees are as much as $4,000 per application, up from around $2,000, two years ago.
Bankruptcy is not for everyone, and should only be filed after great consideration. A borrower’s credit score will take a big hit after entering Chapter 13, but making timely payments pursuant to the court approved payment plan, can help get it back on track. Once a borrower is discharged from bankruptcy, the bankruptcy stays on their credit report for seven to ten years and will identify you as a “risk” to creditors, lowering chances of getting credit on favorable terms.
Take your lender to court. A growing number of borrowers are turning to private lawyers, to pursue legal relief against lenders who gave them loans knowing they had little chance of repaying. These loans, the lawyers argue should have never been granted. As these cases are sometimes taken on a contingency-fee basis, the lawyers provide the borrowers with an opportunity not only to stop foreclosure and rescind the loan, but also to seek damages for abuses in some cases. These cases seek to prove that the lenders granted fraudulent or “unconscionable” loans with unfavorable terms to the borrowers, or to fight abuses by servicers such as phone fees that cause homeowners to default.
A possible downside to suing is that in some cases, if borrowers lose the suit they may get saddled with attorneys’ fees for the lenders.
Beware of “foreclosure rescue” scams. As foreclosure rates rise, so do incidents of people being scammed by the very companies that promise to help them out of their financial woes. Federal and state prosecutors are investigating companies that offer temporary refinancing schemes in which borrowers get to stay in the home but go deeper into debt because the payments to the “rescue” are higher than their mortgage payments. Although numerous variations of these schemes exist, always make sure that you are dealing with a reputable company to lower your chances of being scammed.

  1. Pay yourself: Build your own equity, not your landlord’s bank account.
  2. Get a government subsidy: Let Uncle Sam pay part of your bills.
  3. Much of your monthly costs are tax deductible. For example, interest on your mortgage and interest on your coop’s mortgage.
  4. Possible work at home credits: Speak to your accountant about analyzing how much tax benefits there can be from buying and owning your coop.
  5. Lock in your overheads.
  6. Never worry about rent increases again.
  7. Never be subject to changes in your landlord’s whims about how much rent you should pay or changes in rent regulation.
  8. Never worry that if you earn over $175,000.00 for two years you would be subject to luxury decontrol.
  9. Build wealth: Earn increases in your equity by the increase in value of your apartment. It is pretty much a guaranty that over the long term, your apartment will be an excellent investment. Merely analyze the trends over ownership of five years or more and you will see that owning your apartment will be a great investment.

We will be happy to analyze purchases and refer you to real estate professionals such as mortgage brokers and real estate brokers who will further assist you in finding the right apartment and financing.
We would like to congratulate Anna Pechersky on her passing the New York State and New Jersey Bar exams.
David A. Kaminsky, Esq. was quoted in a featured article in the December 2007 issue of the New York Apartment Law Insider regarding tenant bankruptcy problems and what landlords should do to protect themselves from tenant bankruptcy filings. If anyone would like a copy of the article please contact our office and we will provide you with a copy.