Q&A: Should I Challenge a Foreclosure?

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Q: I’m in a situation that hasn’t led to foreclosure yet, but it could. My husband is out of work and we’re just falling further and further behind on our mortgage payments. We just contacted our bank about a loan modification but that hasn’t happened yet (we borrowed the money on an option-ARM loan, and our loan terms have reset to a higher monthly payment). But now I’m seeing all of these reports on banks screwing many foreclosures. Could we use that as leverage — if it comes to that? – K. Carew, Pittsburgh

A: We’d encourage you to keep working with your lender via a loan modification effort (here are some helpful articles from BankingMyWay here and here).

We’d also recommend that you look into loan forbearance, which lets you restructure your home loan until you can get back on your feet, money-wise. That should keep you in your home until your husband gets another job and could help you avoid foreclosure outright.

As far as all the news in the past few weeks over “screwed-up” foreclosures by banks, we’d recommend being very careful about using that news.

Yes, banks have had trouble with the “robo-signing” issue, where some lending company analysts signed off on foreclosures without even having read the loan documentation. Big banks like Bank of America (Stock Quote: BAC) and JPMorgan Chase (Stock Quote: JPM) have already suspended tens of thousands of foreclosures while they review their procedures. Also, many states (like Texas and California) are already calling for their own investigations into the robo-signing issue. Presumably, foreclosures in those states may be put on hold until all of this is cleared up.

Some more good news for homeowners facing foreclosures came yesterday when Wells Fargo announced that it would spend an unprecedented $772 million to modify “underwater” mortgages that originated from loans that might have used “deceptive marketing” to get borrowers to sign loan agreements that may not have been in their best interests.

That move came from a legal settlement involving 8,175 mortgage loan borrowers who owe more money on their loans than their homes are worth. Borrowers claimed that they were lured into so-called “pick-a-pay” loans that allowed them to cut their monthly mortgage payments in the short term, even though over the long term their mortgages would just get bigger and bigger.

Until now banks have refused to cut any deals with borrowers who took such loans. But Wells Fargo has broken the ice in a big way and given hope to thousands of struggling homeowners. Under the terms of the deal, borrowers will not only receive a more favorable interest rate, but will also see a portion of their loan principal forgiven.

It will be difficult for other big lenders not to follow Wells Fargo’s lead. That could work in your favor if your bank takes the same route.

That said, don’t get too excited. While we wait and see what banks do about those problem loans and foreclosures, try the loan modification and/or forbearance route. Or simply look into selling your house before its value goes underwater.

By no means are these perfect options. But they can help you avoid foreclosure and keep your house, which is the ultimate goal, right?

Best of luck.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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