Foreclosure: Crafting Graceful Exit Options and Recovery Strategies

“Not since the Great Depression has an economic downturn and the accompanying foreclosure crisis left so many lives in ruins. How can individuals and families find the resources and support they need to put their lives back in order?” asks A Resource Guide for Foreclosure Recovery, a 25-page handbook published by the Community Affairs division of the Federal Reserve Bank of Atlanta and the Community Development department of the Federal Reserve Bank of San Francisco.

The Federal Reserve distributes the guide at training seminars for housing counselors and other stakeholders in foreclosure outreach. Recent events in Phoenix and Tucson saw housing counselors, servicers, government agencies, and other experts discuss best practices on foreclosure prevention and resources for recovery after foreclosure. Sponsors were the Federal Reserve Bank of San Francisco and U.S. Dept. of Housing and Urban Development.

“We are three years into this crisis. Housing counselors are on the front lines. This is going to be with us for years,” said Jan Bontrager, of the Federal Reserve Bank of San Francisco.

Loan Servicers Adapt to Changing Market Drivers

“The focus of foreclosures has changed every year. It started with subprime lending, it moved to job loss,” said Bonnie Boards, vice-president and senior manager, Community Advocacy, JP Morgan Chase. “Servicers have challenges. We are trying to adjust to the needs of the crisis and the needs of the homeowner. The servicing industry is committed to help save the homeowners sustain home ownership.

“We [loan servicers] have all created special units to work with housing counseling agencies,” she said. Boards points to several dedicated ports of entry for housing counselors — dedicated phone, e-mail, and fax, in addition to HUD’s Web-based LoanPort and new Homeownership Preservation Offices.

Servicers have assigned Relationship Managers (RM) to work with housing counselors and  RMs have instructions to escalate when they are asked when counselors deem they are not getting appropriate service.

“You have to work it [the loan modification system] in order for it to work. You have to escalate it to make it work,” insisted Betty Villegas, Pima County (AZ) Housing Program Manager. “Escalation is often the only way to get attention to a loan.”

Rebecca Ketchum, vice-president of community outreach for Wells Fargo, urged counselors to set realistic expectations for homeowners: “Be honest with them.  Say, ‘I don’t want you to leave with no hope, but I don’t want you to have false hope, either’.”

Ketchum acknowledged the servicer’s lagging processing system and she begged counselors for patience. “If we ask you to resubmit,  don’t complain first. Say, ‘I’ve already submitted it’ and send it again. Then complain,” she said. “Don’t hold up the process!”

Relinquishing Ownership of the Property

Rosemary Ybarra of Neighborhood Housing Services in Phoenix, touts an impressive 55 – 60% success rate with loan modification clients. Still, she said, sometimes it is not profitable for an investor to offer a loan modification. “You need to be ready for Plan B,” she said. “Talk about rentals, how much cash they will need, pet policy. I start preparing them for Plan B. “ Plan B may be foreclosure, delivering a deed in lieu of foreclosure, or a short sale.

“Sometimes people cannot afford their homes,” said Ybarra. “I tell them, ‘Thirty one percent of what you can afford should be going into your back account and not touched. If you cannot afford 31 percent, you cannot afford to be in your home’.”

Life After Foreclosure – Picking Up the Pieces
Foreclosure does not signal the end of the world for homebuyers and their credit, and a careful course of action following a foreclosure will find homeowners eligible to buy a home again in three years, according to Patrick Ritchie, author of The Credit Road Map.
“The stress of foreclosure can seem overwhelming and beyond cure at times,” said Ritchie. “However, no matter what the circumstances may be, it is important to realize there is always a light at the end of the proverbial tunnel. Nothing in our financial lives is forever if we are educated on the protections and policies for consumers.”
Ritchie offered  a set of best practices for homeowners following foreclosure:
  • Get a copy of your credit report and save it forever. This will enable a homeowner to track dates and ascertain that derogatory credit is removed in a timely manner, as prescribed by law. is the only government mandated website available to U.S. consumers for a “free”, no strings attached credit report.
  • Pay expenses with a personal check.
  • Establish credit goals – three lines of credit, on-time rent payments, and nothing negative on the credit report following the foreclosure event.
  • Keep your focus on the fact that time reduces the impact of a foreclosure. In 12-month increments everything  that was negative will have less and less impact until it no longer exists on the credit report.
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