“Project Lifeline:” the bad news and the good news

Sonoma homeowners watching the housing crisis worsening may have felt a glimmer of optimism last week when “Project Lifeline” was unveiled. This sounded like a government program to help homeowners avoid foreclosure, but it is in fact, only a voluntary agreement among six major lenders, Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo, that they will give borrowers with either prime or sub-prime loans, who are at least three months behind on their mortgage, and who arrange to negotiate, an extra 30 days to work out their problems. The reality is that the onus is on the homeowner to save his loan.
According to Gary Kirshner, a public relations spokesman for Washington Mutual, the first step towards saving one’s loan may be difficult, especially for those for whom language may be a problem, or who feel uncomfortable having gotten behind in their payments, or because their loans now so far exceed their equity that they feel hopeless. But they must do it. “They have to call their mortgage servicer,” Kirshner said, “because we can’t help if we don’t know they’re in trouble.” Kirshner advises that the borrower should send a letter to the servicer, saying that they want to stay in their home and they’re wiling to seek counseling and that they want to negotiate. They then must provide updated financial information to the servicer so that together they can work out solutions. During this process, the foreclosure will be held off for 30 days. Then, if the homeowner follows all the instructions, and maintains the required payments for three months, the bank may formally modify the terms of the loan. But they are not required to.
One option already in play is for the bank to allow a “short sale,” that is for the bank, which does not benefit from foreclosure and does not want the responsibility of a vacant property, to let the owner in default sell the house for whatever he can get for it. Bill Darden, owner of The Real Estate Company, in Sonoma, said, “We have a tremendous amount of short sales going on here. But it’s not as easy as it sounds.” At present, for example, he said he is dealing with a property valued at $630,000, which the bank had agreed to sign off on for $540,000, but then has since refused. Should the sale eventually go through, the $90,000 difference would be born by the defaulted owner, and considered by the IRS as income, on which he would be taxed.
Default, therefore, can be a downhill spiral. “I’ve told them [owners in trouble] the best defense is the best offense,” said Darden, “and to go to the lender and see if you can get a modification on the loan. Many have walked away from the properties, which I’ve told them not to. You have break-ins, and that can cause a lot of problems. The owner is still liable for anything that does happen to the property.”
WaMu agrees. The most important thing, Kirshner said, is “if you feel yourself getting in trouble, reach out for help. Don’t let yourself get to the point where you’re beyond help.” Sonoma mortgage broker Stan Pappas said, “I get about 10 calls a day from people wanting to refinance, but for most of them the equity has fallen below the loan, and so we can’t do anything.”
But there is good news. “There’s a window now,” Pappas said, “while the interest rates are low, to refinance and save a lot of money if the home has maintained its value.” Bill Darden agreed. “The City of Sonoma is only three percent down. My attitude towards buyers is, ‘Get in here.’ You have to have 10 to 20 percent down payment, and have excellent credit and be able to quality for a loan, but inventory is up, interest rates are down. And all you have to do is put your best foot forward, shop till you drop, find a reputable broker to work with, and someone that’s going to guide you and give you what you need in today’s market.”