John and Melanie’s Foreclosure Workout – Didn’t Work Out

From 2004 to 2009 John and Melanie were your neighbors. Like

you, in 2009 they were struggling to make their mortgage payment each month.

In fact, some months they added as much as $1,500 to their credit card debt just

to have enough to make the mortgage payment. They were both on the title and

both on the loan. Neither their 1st nor their 2nd mortgage included private

mortgage insurance (PMI).

Financial troubles started for these two when Melanie’s hours were reduced at work resulting in a $1,200 per month decline in household income. Also, the monthly mortgage payment on their ARM had

increased by $900. Add to that, the fact that their home was now worth

$100,000 less than they owed on it…and you have a financial “perfect storm”.

Sound familiar?

In September of 2009 they decided they could not take this financial beating

any longer. They contacted their lender to advise that they would be unable to

make the October 1 payment.

October 2

John and Melanie became delinquent on their loan and in default. Almost all

lenders allow a “grace period” of 15 days, but they are not required to do so.

Because they had always paid on-time they did not receive any correspondence

or call from their lender.

A “Friendly” reminder call and letter showed up during the time after October

15, when they incurred late charges, and November 1, when they became 30-

days late. The call was to inquire about the missed payment and attempt to

schedule a payment for some time before November 1.

John observed “They just wanted their money and wanted me to think about

places I could get it…like 401K. I felt like telling them I’d already done that

and extended my credit cards to the max as well!”

November 1, 30-days late

Now things got much more serious. John and Melanie were reported to the

credit bureaus as “30-Days Late” on their mortgage. This caused their FICO

score to slip, although a lot less than Melanie had anticipated.

December 1

Holidays helped to distract them, John says. But the feeling was a little surreal.

John remembers “We knew that we would soon be facing some pretty public

and pretty embarrassing stuff. It made the holidays a bit weird.” The calls

and letters increased, too. John took the calls whenever he could – Melanie

avoided them “at all costs”. She says. “It is SO uncomfortable to have to

explain our hardship over and over again and have some stranger make suggestions

as to how we can get more money – it’s just maddening”.

Avoiding the calls is not a good idea. Better to suck it up and speak

to the lenders as often as you can tolerate. I always advise asking

THEM lots of questions as well. Such as…how are most people handling

this type of situation?

January 1, Notice of Default (NOD)

John and Melanie were now officially in foreclosure. This legal filing, delivered

by Certified Mail, declared the loan in default and triggered a three-month

buffer period. John recalled getting the document – “I had to go to the Post

Office and pick it up because we were never home to sign for it from the postman.”

“I felt like everyone in the Post Office knew what I was getting – theNOD. Looking back, I’m sure it was just my own paranoia. It seemed like theyall knew and judged me for it”

A loan modification was offered (unsolicited) to John and Melanie during this

period. The lender simply sent a modification offer that would have reduced

their monthly payment slightly. However, they had already gone down that

path and determined that they just did not want to continue owning the home

that was so upside down. They found that they could rent an apartment nearby

for significantly less than the modified monthly amount.

The lender suggested that they pursue a short sale of the property and John and

Melanie consulted with a local Realtor to explore this option. Melanie says she

does not exactly remember why they decided not to take this path. She thinks

that, part of the issue was that they were resolved to just toughing it out and

staying in the home as long as possible and, she adds “You know, we weren’t

thinking really clearly about a lot of things then. The stress level was no good”.

During one of these conversations with the lender, John was asked if he wanted

more time to consider their options. He said yes and the lender put a “hold”

on the file, effectively suspending the foreclosure process for a time.

They both agree that they eventually got more comfortable with the situation

during this period. It became easy enough to talk to certain co-workers and

friends about it. Other friends and most family members were “off

limits”…they simply could not discuss it. “Although”, John mentions, “it’s not

like we couldn’t discuss it with some family members. It’s more like we just

did not want to. And, it seemed they (others) felt the same way”.

John and Melanie were now 180 days late on both mortgages. The second

mortgage was especially aggressive in trying to negotiate SOME workout

arrangement and actually offered to accept just $90 per month to prevent the

loan from being “charged-off”. John and Melanie rejected the offer. The loan

was charged-off in May.

Although Lenders (Collections Departments) make it sound like a

big event, the charge-off is merely an accounting practice whereby

the lender is no longer able to consider the loan collectable or

“good” on its books. The lender still retains all rights to pursue

payment.

The charge-off and many more mortgage lates had now been reported to the

credit bureaus. John’s FICO score had declined by over 300 points and

Melanie’s by almost 250. Virtually all their credit cards reduced their credit

limit and increased the interest rates. They did not go late on any of the cards,

making minimum monthly payments.

Searching for an apartment was bittersweet for the couple. They were spoiled

by all the room and the privacy of a single family home. Once they found a

place they wanted they had to go to extra lengths to convince the manager to

rent to them as their credit report was rough.”We explained our financial situation

and the manager was pretty sympathetic. We agreed to an extra amount

for deposit, technically a pet deposit, and she agreed to it. But, when we

showed-up to sign the lease she told us the owner had over-ruled her decision

and they would not lease to us.” The lease was set to begin on June 1.

Melanie says that the bad renting experiences were what started to change her

attitude to more resentful and angry. “Until we were actively looking for a

place to live, we were pretty resigned and mellow about the situation. But,

being treated so rudely angered me and I know John felt angry as well”. They

began to think of themselves more as victims in the housing meltdown and

grew bitter. “I remember a growing sense of helplessness and resentment” says John.

May 1, Notice of Trustee Sale

John and Melanie agree that, as much as they were anticipating this notice, it

still was emotionally traumatizing. At the end of a long work day, “a Thursday”

Melanie recalls, they met at a local restaurant for dinner before going home. It

was after dark before they returned home to find the two paged Notice of

Trustee Sale taped to their front door. The Notice told the neighbors and

passers-by that this home would be sold at auction…on the courthouse steps in

Norwalk, CA…three short weeks later.

There are a number of actions that John and Melanie could have

taken during this period that would have delayed the foreclosure…

some routine and some esoteric. They decided not to..

Melanie says, “We had hoped that this home would be a great investment and

we’d be able to trade-up to a bigger and better place. Instead, we lost money

AND ruined our credit AND went through this tough time, emotionally.”

May 22, the Foreclosure Sale

John and Melanie learned that their home was not purchased at auction so ownership

reverted to the lender. They were now living in an REO, real estate

owned by the bank.

John says the feeling was eerie. “We knew that any day we’d get an uncomfortable

call from the Sheriff or from the bank. We knew we were over-staying our

welcome, to be sure, but we did not care. We were pissed-off.”

May 29, Notice to Quit – eviction has begun

The call actually came from a local Realtor who had been retained by the lender to prepare the home for sale. The agent was professional and inquired as to their plans. “The guy was friendly enough but it was hard to hear the words spoken…that the new owner wanted to put the home up for sale”. Melanie explained that they did not have any place to move to – that they had been

denied rental nearby and that they had no family in the area. The agent

explained that they would soon receive a Notice to Quit (legal notice that they

must vacate or face eviction). He offered Melanie $1,500 to vacate the premises

within one week. Melanie and John had heard about such “cash for keys”

or “cash to walk” deals but had not anticipated the offer so soon. Melanie

recalls “We had talked about getting such an offer…and if it had been $5,000

we probably would have cooled our tempers and accepted it.”

Actually, such offers are getting common in the South Bay, as a way

to ease the transition for the previous owner and to help insure that

the home is left in good condition.

June 15, Unlawful Detainer

Lawyers for the lender filed an Unlawful Detainer complaint against John and

Melanie. The eviction process had now begun. They were served with papers

regarding the complaint and, since they had no legal grounds to contest it, they

did not appear in court.

July 8, Notice to Vacate

The sheriff squad car came to their home two days later put an official notice

on the door that they must vacate the premises by July 13. The Notice to Vacate

made it clear that the Sheriff would remove them and have the locks changed

if they were not out on time.

July 13, Moved to friend’s home, locked out

On July 13 John and Melanie were still moving items out of the home when the

Realtor arrived with a locksmith. The Realtor explained that he had a cleaning

crew scheduled for later that day. John and Melanie told them they’d be out by

noon. The Realtor had the locksmith re-schedule for later in the day.

John andMelanie pulled away from their house without any confrontation with the

Sheriff. Their U-Haul filled with possessions; they drove to a friend’s home

nearby to stay until they found a place to rent in Torrance on September 1…exactly one year since they made their last mortgage payment.

John and Melanie ended this journey with bruised egos but a heightened sense

for the perils of too much debt. They are not bitter. In fact, they say they feel

wiser for the experience.

Their FICO scores are in the low 400′s. They have hired a reputable credit

management company to help them recover. By their estimates it will take

about 18 months to get their scores back to the low 700′s where they began.

They also ended the journey with $45,600 in savings from the missed mortgage

payments. Ironically, this is almost exactly what they had invested in the home

to purchase it originally.

The market in their former neighborhood has already

declined by more than 20% from when they purchased and interest rates are

40% lower. They hope that, when their FICO score recovers, they will be able

to own again…in a more stable market. That would be a happy ending.

Such stories are becoming common. With millions of homeowners

currently in foreclosure, it will become even more common in the

months and years ahead.

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