You Asked, We Answered: How to Report Predatory Lenders, Understand Foreclosure and More

Another option is a "deed in lieu of foreclosure." This is when the lender agrees to accept voluntary return of the property as an alternative to foreclosure. As with a short sale, this may make sense if the lender agrees to forgive any deficiency.

I should emphasize that these are complicated and difficult choices, and some of them may have tax consequences for you. For example, if the lender waives the deficiency under a deed in lieu of foreclosure or short sale, the IRS may treat this as taxable income. For this reason, you should be sure to talk to a nonprofit counselor or attorney before making any decisions.

"Mrs. H" asked: "I bought my home a little over three years ago. At the time I qualified for a good loan due to my good credit. I also qualified for several government grant programs. I am a New York City school teacher so instinctively I thought of my union when it came to my home loan. My broker suggested I did not do that. He knew someone who could get me a better deal. When I saw the loan the mortgage lender told me that they would automatically refinance with no fee to me after one full year and I would get an even lower interest rate. This did not happen. Now I am stuck in the same predicament as so many. For a while I was able to make the balloon payments but began to fall behind. My credit card bills suffered and my credit score was ruined. I have contacted a non for profit who put a packet together and presented it to the bank. What other recourse do I have? Is there anything else I can do?Mrs. H"

Attie answered: Mrs. H, it sounds like you might have been steered toward a high-cost loan even though you could have qualified for a prime loan. Unfortunately, hundreds of thousands of borrowers are making the same discovery. As the Wall Street Journal reported on Dec. 3, 2007, more than half of all credit-worthy borrowers in 2005 and 2006 received subprime loans, when they could have qualified for loans with far better terms. One of the reasons for this phenomenon is that mortgage brokers often receive a cash bonus (known as a "yield spread premium") for placing borrowers in a loan with a higher interest rate than what the lender would accept. The higher the interest rate, the higher the bonus received by the broker.

Without knowing more details about your mortgage and your financial situation, I can't tell you what the best option is for you. You have taken an important first step, though, which is to contact a nonprofit and try to negotiate something with the bank. If you do sign a loan modification with the bank, be sure that it will be affordable. If you are having trouble obtaining a loan modification, you might also want to consult with a nonprofit lawyer to see if you have any legal remedies available to you or whether bankruptcy is an option. Because you live in New York City, I recommend that you visit this page, which lists various organizations that may be able to help you. http://nedap.org/resources/documents/HomeownershipResourceGuide1-08.pdf.

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