The hardship letter

In the case of short sales or loan modifications, a letter must be written to the lender describing the circumstances (hardship) causing the borrower’s inability to continue paying the mortgage loan according to the original terms.  A hardship letter should illustrate long-term or permanent circumstances that make the borrower unable to pay in order to be considered a legitimate hardship.

A legitimate hardship is when the borrower’s personal situation has experienced a change which prevents the borrower from making payments as originally agreed.  Some examples of common hardships:

  • Death of an income earner in the family
  • Divorce
  • Large loss of income (long-term or permanent)
  • Job relocation or job loss
  • Mortgage payment adjustment that makes the payments unmanageable
  • Health issues

The hardship must be a long-term situation.  If the owner simply had a bad month or still has money in savings and retirement accounts, the bank is less likely to approve a short sale.

As the housing crisis continues, lenders are becoming more flexible with some of their hardship requirements.  With the current stimulus bill, there may be a way for the lenders to minimize their losses in a short sale.  Hypothetically, that would encourage more homeowners to get out of their houses with relatively little damage to their credit.

For a copy of a sample hardship letter, email info@mangledmortgage.com.

Loan Modifications

Some experts, including the smartest people I know, believe the loan modification efforts are delaying the inevitable flood of foreclosures.  Without a major change in strategy on the part of the lenders, it is just a matter of time before the newly modified borrowers become delinquent with their payments.  Recent reports of the first major round of loan modifications are supporting this theory, since over half are delinquent.

Even if the loan terms are modified to be reasonable given the borrower’s current income, it still does not solve the negative equity problem.

The current relief structure provides free money for those who cannot or will not stay current with their mortgage payments.  The unintended consequence of the handouts is an incentive for borrowers to stop making payments.  This is a dangerous road to travel, and my fear is it will not be recognized as a big problem until it is too late.

Given the current loan modification policies, is there really an incentive to stay current with one’s mortgage?

It can be argued that the benefits of being a few payments delinquent far outweigh the benefits of staying current.  Yes, you read that correctly.

People who honor their commitments might feel a little bit of indigestion from that last statement, and I understand.  Look at the long term benefit of intentionally missing a few mortgage payments.  It could allow you to have your mortgage interest rate reduced or your loan balance reduced, or both.  The short term consequence of dings on your credit report might be worth it to some people.  The penalty for your misbehavior is simply not significant.

If I was considering walking away from my house or defaulting on my payments, I would certainly say I should do it as soon as I can.  That way, I can start the clock ticking on my “repaired credit” status so I can buy another house at today’s prices and today’s interest rates.

It may sound a little goofy, but you can see how this would make sense to the less-than-honorable borrowers in the world.  I meet people like this in my market every week.

I am not advocating this as a strategy.

I do not think this is even close to a good idea, but it is not difficult to see the logic.  As long as there are incentives to become delinquent with mortgage payments, this scenario has the potential to fester and grow.

To purchase a copy of Mangled Mortgage, send a message to info@mangledmortgage.com.