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Legally Speaking

 

Issue: April, 2009
Author: Danette R. Baldacci

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No Place Like Home: Is Wyoming Part of the Foreclosure Crisis?

EDITOR’S NOTE: The information contained in this article was accurate at the time of submission; however, details of the moratoriums and the Making Home Affordable plan are being released almost daily, so this information may have changed prior to the actual publication date.

A logical cause and effect of the recession has been a nationwide situation dubbed as the “foreclosure crisis in America.” In 2008, the number of home foreclosures nationwide jumped 81%, which means that 2,330,483 homes were in some stage of foreclosure. Like numerous other national trends, Wyoming was behind the times.

In 2008, foreclosures in Wyoming increased 60% from 2007. This places Wyoming 47th in the national foreclosure rankings and puts us in good company with our South Dakota and Montana neighbors at the bottom of the list. The direct relationship between the strong economy in Wyoming and the nominal amount of foreclosures is clear. While unemployment rates remain low and housing prices have experienced only minimal declines, Wyomingites continue to boast foreclosure averages per capita well below the national averages. Expect, however, that foreclosure numbers will increase proportionately with cuts in the energy and construction industries looming on the horizon.

Presently, the majority of foreclosures in Wyoming fall into three categories: those who have hit hard times and can no longer make their payments, those who own multiple homes where the homes are used for profit such as condos or flip homes, and those who have completely over-extended themselves by purchasing a house they could not afford.

The number of mortgagors who experience a life changing event varies little from year to year in a stable economy. The catalyst that makes them unable to pay looks different for each person and may include death, divorce, sickness, unemployment or a variety of other problems. Clearly, if the national unemployment trend reaches Wyoming, foreclosures in this category will increase, as unemployment is the number one cause of foreclosures nationwide. For now, jobs are holding steady, so these types of foreclosures are rising only slightly.

Foreclosures of homes owned by people who have multiple homes or condominiums that they use for profit are increasing significantly. Generally, the larger counties such as Laramie, Natrona, Campbell and Sweetwater have the largest populations and the most foreclosures. In 2009, however, counties such as Teton, Sublette, Sheridan, and Lincoln experienced an increase in foreclosures, and many of them are property that is not the primary home of the owner. It seems that owners are, understandably, more concerned with paying their own mortgage than the mortgage on the secondary home properties.

Likewise the number of foreclosures of homes purchased to “flip” is increasing as well. Compared to the rest of the nation, flipping homes is not as popular in Wyoming as it is in other places, but many individuals and companies purchased homes amidst the housing boom that they perceived as a low price and often times with an adjustable rate mortgage (ARM). They then made improvements to the property to sell it for profit prior to the ARM increasing. As with other owners of multiple homes, many are finding that the value of the market has decreased slightly, post flip, so it takes longer to sell and it is not as much of a profit as they had anticipated. The problem arises when the property won’t sell and the ARM increases such that the homeowner is strapped with a large house payment that is often a second home.

Lastly, the number of foreclosures in Wyoming on properties where the owners had over-extended themselves is increasing as well, although not as rapidly as the secondary home foreclosures. Many people took advantage of the real estate market and the eagerness of lenders to support that market over the past 4-5 years, but because many of our financing options are local, the financing was not nearly as creative in Wyoming as it was on a national level. Nationally 12% of the nation’s loans in 2006-2007 were subprime loans and that same 12% represented 50% of all the foreclosures. In Wyoming, 8% of loans were subprime and they represented 60% of the foreclosures here. Again, however, many of these subprime loans were not on primary residences and those are the ones that are more likely to be in foreclosure.

Prior to President Obama’s announcement of a nationwide foreclosure plan in February 2009, many servicers as well as investors such as Fannie Mae and Freddie Mac instituted foreclosure and evictions moratoriums. The first of these was announced on November 24, 2008, and has been extended numerous times—the most recent extending through April 6, 2009, depending on the lender or investor. These moratoriums allowed borrowers to remain in their homes during the holidays and explore loss mitigation opportunities. The national foreclosure plan significantly expands the efforts of the lenders and servicers and provides additional options for the interested borrowers.

The impact of the Making Home Affordable initiative (“Plan”) on foreclosures in Wyoming will be loan specific and as a result, only some homeowners will be eligible. The Plan is designed to separate borrowers who have been diligent in their effort to keep their home but were the “victims” of creative financing, falling house prices, or those whose monthly income can’t keep up with their monthly payment from those who truly can’t afford the home they purchased or who purchased it to turn a profit. While the details of the Plan are still being released, a few standards have been announced with certainty and are beginning to be utilized by the servicers and lenders.

To qualify for assistance, the home must be the borrower’s primary residence, the borrower must be in default or “on the brink of default,” and the loan has to be less than $729,750.00 for the single-family residence. This means that those who purchased their home to flip or rent will likely not qualify. There are no limits on the ratio of the size of the loan to the current market of the house, but Treasury officials have said as a general rule, homeowners who owe more than 150% of their home’s current market value probably won’t be able to be helped under the Plan. However, borrowers in bankruptcy may be eligible.

Upon being contacted by the borrower, the first step the servicer will take is to analyze the standard test set forth in the Plan to decide if investors would lose more money by foreclosing than they would by issuing a new loan with more affordable terms. If the test reveals that issuing a new loan is the appropriate approach, then they will utilize three options available to the borrower to reduce their monthly payment to no more than 31% of their monthly income.

The first available option is an interest rate reduction, possibly as low as 2%. The Treasury won’t subsidize loans where the interest rate is less than 2%, so that is as low as the servicers can go with this option. If, after an interest rate reduction is applied, the 31% goal is not met, the servicer can extend the length of the loan to 40 years for the borrower.

Finally, if neither of the above options can make the loan affordable, the servicer can put some of the unpaid principal into a lump-sum payment that is due either when the home is sold or the loan comes due. This option allows for deferred repayment and may address the losses suffered from current drops in home values.

In addition to the borrower benefits, the Plan pays loan servicers up to $4,500 per loan modification so long as they follow the Plan’s guidelines. Likewise it will allow the servicer to value a home using an automated system instead of an individual appraisal to speed up the process. The Plan lifts previous regulations on Fannie Mae and Freddie Mac so they can now refinance these loans even when the borrowers owe more than the house is worth. In addition to the Treasury’s continued purchase of Fannie and Freddie mortgage-backed securities, there is also money being allocated to these agencies to keep mortgage rates low and have new homebuyers continue to buy, which is crucial to reducing the number of houses presently on the market and stabilizing the overall economy.

The key in utilizing all of these options is that the borrower must be assertive in his or her efforts to keep his or her home. Sitting at home surfing the web for legal advice, or worse yet, throwing up their arms in disappointment, disgust, or disbelief will not help. The Plan does not require mortgage companies to review every loan; the borrower must contact them so that they can work together to reach an amicable solution that fixes the problem permanently. Hopefully effort by all parties will bring stability back to the bank and the family.


Danette R. Baldacci was born and raised in Gillette, Wyoming. She attended the University of Wyoming for her undergraduate degree in Secondary Education/English Communications. She graduated from the University of Tulsa Law School in 1998 and was admitted to the Wyoming State Bar that same year. She worked for Mike Zwickl at Beech Street Law office for seven years before opening the Wyoming office of Castle, Meinhold, and Stawiarski Legal Services in 2006. Her practice is primarily foreclosures and real estate.


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