Are you one of the millions of consumers who opted to do a short sale on your home during the mortgage crisis?  There may be some good news for you as earlier this month, Fannie Mae announced new mortgage guidelines targeted at troubled mortgage borrowers that potentially reduces the amount of time it takes to obtain a new mortgage from four years to two years.

The overwhelming majority of mortgage lenders follow mortgage underwriting rules published by Fannie Mae and Freddie Mac.  So if you lost your home to a short sale or turned it over to the bank and are now thinking of financing a new home, it’s a good idea to familiarize yourself with their guidelines. The new rules are scheduled to go into effect on July 1, 2012.

As they say, the devil is in the details and not all qualification information is available (or easily found).  In summary, you will be required to come up with a 20% down payment to obtain a mortgage in the reduced two-year time period unless you can prove your problems were the result of extenuating circumstances, for example — a divorce, medical expenses or unemployment.  In these cases, you may be able to secure a mortgage in the shorter two year time period with a lower 10% down payment.

It is my understanding that there are also requirements that interested consumers also meet certain credit and ability to pay standards and pass Fannie Mae’s credit criteria screens — which review your credit report and credit scores.

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This could be a substantial challenge for many of the consumers for whom this revised rule is targeted to benefit.

The presence of a short sale information or flag on a credit bureau report is considered negative by most all credit scores, as it predicts future credit risk. The flag can stay on the report for up to seven years.  Generally speaking, the impact on score will be severe.  The exact impact on a given consumer’s credit score resulting from the reporting of a short sale will depend on several factors:

• The information associated with the short sale reported, and
• The current credit profile of the consumer (the other activity being reported on the consumer).

The negative impact on score is more noticeable if this item is posted on a credit file that has no or little history of missed payments and/or derogatory information and has low balances on active credit.  In these scenarios, the points lost can be 100 or greater.  The impact may be less noticeable if there are indications of high risk behavior (missed payments, etc.) on the credit bureau report as the credit score is already lower — reflecting that higher risk behavior.

There are not really any “tricks” to quickly increase the score quickly when this information is posted on the file.  The points lost due to the short sale flag will have (gradually) less impact over time as the date it was originally posted becomes older (and assuming that you have no other delinquency information on your file).

It appears that this rule change will be most helpful to those impacted consumers who have already re-built their credit since they first enacted the short sale, have steady and sufficient income and are deemed capable of successfully handling the new mortgage they are seeking.

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Image: macrofarm, via Flickr

During and immediately following the recent recession, many consumers worried more about paying their credit card bills on time, instead of their mortgages. Now some indicators reveal that trend may be rearing its head again.

The latest Credit Risk Index from the credit monitoring bureau TransUnion recently found that consumer credit risk rose at the end of last year for the first time since 2009, and a major driving factor in that uptick was delinquency on mortgage payments, according to a report from Your Money Matters. This may be a consequence of the nation’s top lenders being more eager to extend credit to consumers who had defaulted in the past, leading more to worry about which bills to pay, not how to pay both bills, and many, it seems, are choosing their credit cards.

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“That’s the reverse of the traditional payment hierarchy,” Charlie Wise, research director at TransUnion, told the site. “Now they’re paying their bank cards first and their mortgages last.”

Wise noted that, in previous years, consumers would default on their mortgages last, allowing their credit cards and then auto loans to lapse first if they absolutely had to, the report said. But because some consumers who had lost access to credit as a result of past defaults may place a greater value on having access to those cards once again, many might prioritize them over their mortgage payments.

However, experts say this type of account management can lead to significant financial problems. First and foremost, missing a mortgage payment instead of a credit card bill can have the negative effect of causing consumers to lose their homes if they fall too far behind. In addition, the bills are typically far larger than those for most consumers’ credit card balances, and therefore, it can be more difficult to get back on track if there’s a mortgage bill that goes unpaid for more than a month.

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Further, facing foreclosure will typically cause considerably more damage than a missed credit card payment or two. However, the ideal plan involves paying both, for obvious reasons. Consumers who find themselves making this type of tough decision even once should take it as a sign that they may need to rein in their credit card spending.

Homeowners who obtain low down payment mortgage loans are often required to pay monthly premiums for mortgage insurance (MI). Mortgage insurance helps protects lenders in case borrowers default by reimbursing some of the lender’s loss. But homeowners who purchase MI may not understand that if they lose their homes to foreclosure, the insurer may come looking to them to reimburse its losses.

“Basically, MI companies cover the lender’s loss during foreclosure.  Since they cover this loss, they later are trying to seek reimbursement from the homeowner.  The homeowner essentially owes the MI company money rather than the foreclosing lender,” explains Troy Doucet, an attorney with Doucet & Associates, LLC and author of 23 Legal Defenses to Foreclosure.

But Doucet isn’t convinced that this is clearly disclosed to homeowners when they obtain mortgages and agree to pay for MI, and he’s been representing clients challenging claims by mortgage insurance companies.  He says private mortgage insurance companies, Fannie Mae and Freddie Mac, and even the federal government (for FHA and VA loans) are going after homeowners for these losses.

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“I’d frame it this way,” he says. ”A mortgage insurance company shouldn’t be able to collect against a borrower any more than her auto insurance company could collect against her after paying an auto claim on her behalf.”

“This is a poorly understood area,” agrees R. Wilson Freyermuth, a law professor with the University of Missouri. But he believes it’s “misunderstood by consumers.” They think, “I am paying this and I must be paying it for my own benefit. But private mortgage insurance is really insuring the lender and not the borrower. When the private insurer has to pay off the lender because it suffered a loss, that loss will typically be passed on to the borrower.”

Subrogation is the basic principal behind these transactions. Subrogation is defined as:

the act of subrogating; specifically : the assumption by a third party (as a second creditor or an insurance company) of another’s legal right to collect a debt or damages. (Mirriam Webster dictionary)

In other words, the right to collect is subrogated to, or assumed by, a third party, often an insurance company.

[Related Article: Underwater On Your Home? Your Six Options]

Using an auto insurance example, Freyermuth poses a hypothetical scenario:

“Suppose I have a policy with State Farm. You are driving drunk and run into me, and you are uninsured. State Farm pays me off. They become subrogated and can come after you to the same extent that I could have.”  Then why don’t auto insurance companies routinely go after their customers when they have to pay claims?  He explains: “My (own) insurance company can’t (generally) subrogate a claim back against me.”

In the case of mortgage insurance, the insurance is for the benefit of the mortgage company, not the borrower. That’s why a borrower who pays the mortgage insurance premium may be pursued for payment by the mortgage insurer after a claim is paid.

If It Happens To You

What happens if you’ve lost your home and are now being hounded by a mortgage insurer, Fannie or Freddie, or a governmental agency?

“Before taking any course of action, the best advice I can offer is to contact your lender and then consult a real estate attorney regarding your rights,” says Andrew Schrage, co-owner of Money Crashers Personal Finance. He adds, “If you end up owing money, just be sure that you aren’t paying twice. If your original lender received money by filing a PMI claim and later sells your mortgage, there are situations where you won’t have to pay this amount to the new lender.”

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Getting good legal advice is essential, agrees Doucet, who says, “People jump out of the frying pan and into the fire” when they walk away from or lose their homes. Whether or not the insurer or guarantor can pursue the borrower depends on a number of factors including whether the loan is a recourse or non-recourse loan, as well as whether the statute of limitations for collecting on deficiencies has already passed. If a mortgage insurer is threatening a lawsuit, or has already obtained a judgment against the borrower, it may make sense to talk with a bankruptcy attorney.

As the losses to lenders and insurers pile up, homeowners may find that those mortgage insurance premiums they’ve been paying will be used to collect from them.

Image: Krystian Olszanski, via Flickr.com

The number of foreclosures by mortgage lenders experienced by consumers nationwide has dipped significantly in recent months due to a recently-settled investigation by state and federal authorities, but now that the case has been cleared up, those incidents are taking place once again.

The number of foreclosure filings across the country dipped to a total of 206,900 in February, down 2 percent on a month-over month basis and 8 percent from the same month last year, according to a report from the foreclosure tracking firm RealtyTrac. However, that was the lowest year-over-year decline since October 2010, and that’s because the recently-settled foreclosure case between federal authorities and 49 states’ attorneys general against some of the nation’s largest mortgage lenders has been cleared up.

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“February’s numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed,” said Brandon Moore, chief executive officer of RealtyTrac. “Although national foreclosure activity was pushed lower by decreases in a handful of larger states, 21 states posted annual increases in foreclosure activity, the most states with annual increases since November 2010.”

As a consequence, nearly half of all states experienced increases in the number of foreclosures they saw in February, and activity in the 26 states with judicial processes for these actions saw an increase of 24 percent on a year-over-year basis, the report said. In addition, half of the nation’s largest metropolitan areas saw increases in activity on an annual basis. The largest such jumps were experienced by Tampa, Florida (64 percent), and Miami (53 percent). All cities that experienced these increases were located either on the East Coast or in the Midwest.

However, despite those increases, Nevada remained the nation’s leader in foreclosure actions, the report said. For the 62nd month in a row, the state had more foreclosures than any other, even as those actions fell to a low not seen in 58 months. In February, one in every 278 housing units within Nevada’s borders suffered a foreclosure, more than twice the national average.

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Foreclosure is a serious problem that many homeowners may face if they are seriously delinquent on their mortgage bills. With the settlement now behind the nation’s top lenders, many will likely start ramping up foreclosures considerably in the months to come.

Though the housing market is still improving, albeit rather slowly, many consumers live under the threat of foreclosure or have already suffered this type of action. However, more states are now turning to a process that proponents say allows more homeowners to keep their property.

A number of states across the country have now adopted various types of foreclosure mediation as a means of helping consumers in dire financial straits to stay in their homes, according to a report from the Salem Statesman Journal. The latest state to adopt this type of system is Oregon. Lawmakers in the state believe mediation and housing counseling would be able to help some 10,000 residents remain in their homes.

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“It is now clear that these measures have worked,” a report from the National Consumer Law Center in February said, according to the newspaper. “Foreclosure mediation and conference programs can save homes from foreclosure.”

One of the earliest such states to adopt this practice was, perhaps not surprisingly, one that has been plagued by more foreclosures since the housing meltdown than any other state, the report said. Nevada’s program began in 2009, and between September of that year and the end of last year completed more than 15,000 mediations. The vast majority – 82 percent in all – have ended with no foreclosure either because the lender and borrower reached an agreement, or because the lender didn’t comply with regulations.

Of course, every case is different, but experts say that any way consumers can avoid having their homes foreclosed upon is helpful to both bank and lender, the report said. The reason the lender benefits is obvious: they keep their home when they otherwise might not have without the help of the mediation process. And for lenders, there are significant costs associated with foreclosing upon a home that can be difficult to bear, especially in states where the foreclosure problem is widespread.

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Consumers facing foreclosure but living in states where there is no mediation program may be able to find help in other ways, such as by seeking the help of federal programs designed to aid troubled homeowners in dealing with seriously delinquent mortgage debts. However, experts have also criticized those programs as being too difficult for many borrowers, even especially troubled ones, to qualify for.

Image: rokabiri, via Flickr.com