From Washington Mutual to the local bank on the corner, the government has been busy since the financial crisis began shutting down banks almost every week. Many of these banks are becoming insolvent due to their exposure to the subprime mortgage market and other risky loans that they extended to consumers or invested in to take advantage of exorbitant profits. But with so many banks going out of business, homeowners with loans through these institutions need a plan for staying out of foreclosure.
Especially for homeowners facing foreclosure, when a bank is shut down by the government due to insolvency, the situation can become much more complicated. Typically, the assets of a failed bank are sold to another bank after the government has come in and run the bankrupt institution for a period of time. Loans are considered assets since they represent a potential stream of income. But foreclosed loans may be treated with a little less regard.
The big problem that homeowners in foreclosure will face is that they are already behind on their mortgage and it may be difficult to determine which company or agency to speak with regarding any loan modification, repayment plan, or short sale options. If the bank is out of business and not responding to calls, but has instructed its lawyers to move ahead with foreclosure, borrowers may find themselves in some sort of financial limbo.
The best response to this is for homeowners to begin keeping records of their attempts to stop foreclosure with the old lender, the government, or the new bank. They should keep documentation of their efforts to resolve the situation through the courts or outside the system. These records should note when they call, write, or send faxes to the bank and what information they are attempting to obtain, or what solution they are trying to negotiate with the bank.
If the bank is in bankruptcy right now, there is a good chance the homeowners’ loan will be sold to a new bank in a period of time. That bank will only see that the borrowers are behind on monthly payments and in foreclosure. In some cases, they may send a letter or two offering assistance, but may just move directly ahead with foreclosure, taking up where the insolvent lender left off.
In this type of situation, the borrower’s plan should be to save up as much money as possible during the period the bank is in receivership with the government. If they are able to, they should put away at least the amount of their normal monthly payment and put it in a separate bank account. These extra funds can be used to show a good faith effort to pay back the arrears or as a bargaining chip for a mortgage modification or other plan.
Once the new bank contacts the borrowers, whether it is to pursue foreclosure or not, they should start negotiating with the lender, using the documentation and money in the bank as bargaining chips. If the new bank does not work with the owners, then they should take the matter into court and show a judge how they have been saving up their money to pay down the mortgage and attempting to work out a plan but had never gotten a response.
Foreclosure is supposed to be used as a last resort, so if the bank is not responding to homeowners, they need to show that they have tried to fix the situation outside of the court. Even in situations where one bank goes out of business, is taken over by the federal government, and is then sold to another institution, homeowners can make a good case for stopping foreclosure just by saving up money and keep documentation of their efforts to negotiate with their lender.
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