March - Mortgage Foreclosures

Mortgage Foreclosures, Mortgage Modification, and Short Sales

            The March program concerned mortgage foreclosures and mortgage modifications, short sales, and deeds in lieu of foreclosure, as possible means of avoiding them. 

            In Indiana, mortgage foreclosures are initiated by court proceedings; there are no nonjudicial “Power of Sale” foreclosures as there are in many other states. Thus, the mortgagor debtors have a variety of important procedural rights. However, if no defense is offered, these proceedings can move very quickly, with a decree of sale being issued only three months after the filing of the complaint, and all rights of redemption and possession expiring at the time of the resulting sheriff’s sale. 

            As noted in previous programs in this series, the pervasive sloppy procedures involved in the origination, “bundling”, and securitizing of millions of single-family residential mortgages during the recently collapsed housing boom may well have created meritorious potential defenses to mortgage foreclosures in a huge number of cases. But few distressed homeowners have the knowledge or wherewithal to raise such defenses. 

            Instead, many Indiana homeowners now benefit from the recently enacted statute governing “Foreclosure Prevention Agreements for Residential Mortgages.” This statute requires among other things presuit notice by mortgage servicers of mortgagors’ eligibility for (free) counseling by foreclosure prevention counselors who are part of or have been trained or certified by the Indiana Foreclosure Prevention Network. The statute also requires the mortgage servicers to participate in settlement conferences if requested by the mortgagors. 

            With the array of mortgage modification possibilities now available to properly advised homeowners and the availability of short sales and deeds in lieu of foreclosure from lenders whose mortgages are FNMA-guaranteed (so that purchases from those lenders can be made whole by the federal government) in cases where mortgage modifications do not provide sufficient relief, there is no longer any reason for financially distressed Indiana homeowners to regard bankruptcy as the only alternative to foreclosure. Substantial help is definitely now available through the Indiana Foreclosure Prevention Network. 

            I should also emphasize that the short sales and deeds in lieu here referred to are ordinarily “nonrecourse,” i.e., without continued personal liability of the mortgagors for possible deficiency judgments. 

            In addition, under federal legislation enacted in October 2008, homeowners whose mortgage debt is thus partially or entirely forgiven may claim an exemption from the ordinary requirement that they recognize the forgiven amount as “forgiveness of indebtedness income,” simply by filing I.R.S. Form 982.