In the wake of a natural disaster or financial crisis, oftentimes the first bill that goes unpaid is the mortgage. Homeowners who struggle to pay their mortgage payments face tough choices—do you stay in a home causing extreme financial hardship or do you walk away from a life you once knew?
On October 29, 2012, Superstorm Sandy pummeled the East Coast, leaving a trail of devastating destruction in its wake. Superstorm Sandy was a major catastrophic event responsible for multiple fatalities and significant damage and disruption. Roughly $80 billion worth of homes across eight states were put at risk by the storm’s surge, according to Corelogic, a residential property information, analytics and services provider (www.corelogic.com).
Just one year after Superstorm Sandy, New York homeowners were drowning under a wave of foreclosure notices. A October 29, 2013 report from RealtyTrac (www.realtytrac.com), a leading sourse for comprehensive housing data, reported that foreclosure activity in the first nine months of 2013 was up 33% compared to the first nine months of 2012 in the seven county region including the five boroughs of New York and Long Island.
Today the interplay of real property devastation along with the delays in homeowners receiving flood insurance proceeds is creating a class of storm-related foreclosures. When a mortgage is in arrears and a homeowner is facing foreclosure, there are options to stop the foreclosure process through loss mitigation, an alternative process in which lenders work with borrowers to mitigate, or arrive at an agreement to resolve, past-due mortgage payments.
In the aftermath of natural disasters, disruptions of traditional communications, devastation or loss of all personal and/or real property can add to the obvious difficulties of distressed residents to meet their mortgage payments on time. In these situations, it is not uncommon for there to be a temporary reprieve of debt obligations until normalcy can be restored.
Under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the President has the authority to declare a national disaster. All the National Disaster Areas identified by the Federal Emergency Management Agency (FEMA) will be subject to a moratorium on foreclosures following the disaster. The moratorium applies only to those mortgages on properties that were directly affected by the disaster, and are effective as of the date the President declares a disaster. The moratorium expires ninety (90) days from that date, unless extended by United States Department of Housing and Urban Development.
The most recent example of this was a moratorium on foreclosures on mortgages in the aftermath of Superstorm Sandy. For those homeowners affected by Superstorm Sandy, mortgage servicers were authorized to take extreme measures, including extending a forbearance for up to 12 months and implementing a 90-day foreclosure sale suspension and a 90-day eviction suspension for properties located within FEMA-designated areas eligible for individual assistance.
When a homeowner is still experiencing financial hardship beyond the moratorium, there are various loss mitigation options including: (1) HAMP modifications; (2) deed-in-lieu of foreclosure; and (3) short-sales.
In February 2009, the Obama Administration introduced the Making Home Affordable Program (MHA), a plan to stabilize the United States housing market and help struggling homeowners get relief and avoid foreclosure. The portion of MHA that addresses loan modification is the Home Affordable Modification Program, also known as HAMP. Under HAMP, servicers apply a uniform loan modification process to provide eligible borrowers with affordable and sustainable monthly payments for their first lien mortgage loans. The end result of a successful loan modification produces a new mortgage agreement whereby the lender and the homeowner are bound by new terms. Affordability is achieved through the application of interest rate reduction, term extension, principal forbearance and principal forgiveness.
For those homeowners who do not qualify for a HAMP modification there are other options to avoid foreclosure. Home Affordable Foreclosure Alternatives (HAFA), is part of the MHA which addresses the need for homeowners who cannot afford their monthly mortgage payment and who would transition out of their home. HAFA provides two options for transitioning out of your home: (1) a deed-in-lieu of foreclosure or (2) a short sale.
A deed-in-lieu of foreclosure is a property disposition option in which a borrower voluntarily deeds their collateral property in exchange for a release from all obligations under the mortgage, to satisfy a loan that is in default and avoid foreclosure proceedings.
The other HAFA option is selling a property as a “short sale”. A short sale occurs when a homeowner sells their home to a third party for less than the total debt remaining on the mortgage. With a short sale, all negotiations are between a potential purchaser and the lending institution, in which the lender agrees to accept the proceeds from the sale in exchange for releasing the lien on the property.
With both a deed-in-lieu and a short sale, a disadvantage to a homeowner is the possibility of a deficiency judgment. In most cases, the HAFA options will release the borrowers from all obligations and liability under the mortgage, but this is not always the case. To avoid a deficiency judgment with both a deed-in-lieu of foreclosure and a short sale, the agreement must expressly state that the transaction is in full satisfaction of the debt and that the lender waives its right to the deficiency. If the agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment.
The widespread mortgage foreclosure threatens the very fabric of families and communities. It is the unfortunate reality that two and half years since Superstorm Sandy, many survivors have still not moved back into the place they once called home, and the risk of them losing their properties to foreclosure is rising.
The Suffolk Lawyer, May 2015: http://www.scba.org/eva/displayFile.php?id=3120