Recently Laid Off? What Do You Do About Your Mortgage?

Homeowners Take Caution - Layoffs Are Back!

Sadly, the 4th Quarter of 2023 is experiencing a rise in job layoffs across a vast array of industries (with forecasts of more to come in 2024).  Many of these employees experiencing termination are also homeowners who have mortgages.  

What Can Homeowners Do With Their Mortgages?

If you have not yet been laid off, but you anticipate the possibility of this happening to you, there are a couple of proactive measures that you can pursue.

1. Consider a Cash-Out Refinance to consolidate your debts, lower your outflow of monthly payment obligations, and perhaps obtain some cash to utilize for reserves moving forward.
2. An alternative to a Cash-Out Refinance (especially for those who locked in historically low rates during the pandemic) is to pursue a new 2nd Mortgage.  The 2 types of 2nd Mortgages are:
   • Home Equity Lines of Credit (HELOC's) - which are revolving lines of credit (similar to a credit card, but with larger limits)
   • Home Equity Loans (HEL's) - which are installment loans featuring fixed rates and fixed payments.

Be Proactive!

It bears noting that the above programs have strict qualifying guidelines, so waiting until you are no longer employed before applying is not likely to lead to an approval.  With that in mind, you are encouraged to be proactive if indeed these dynamics apply to you.

There is an expression that "Banks will give you an umbrella when it's sunny, then ask for it back when it rains." In other words, it is significantly easier to qualify for a mortgage when you don't need a mortgage than it is to seek a mortgage when you are already in trouble. Applying for a new loan when you are unemployed is a perfect example of seeking financing when you are not looking as strong "on paper" as you were when you were gainfully employed.

Understanding Loss Mitigation

If you are experiencing a financial hardship and are unable to make your monthly mortgage payments, there is a department within your Mortgage Servicer called Loss Mitigation. This department will seek to find resolution whenever possible in an effort to avoid foreclosure (which is the worst case scenario).  There are a couple of terms you should be aware of if/when you contact the Loss Mitigation Department of your Mortgage Servicer:

• Financial Hardship - is typically defined as an "increase in expense and/or a decrease in income, brought upon by an unforeseen circumstance" (including, but not limited to: job layoff, prolonged illness, etc.).
• Performing Asset - if you are paying your loan on time, the Mortgage Servicer will not have you on their radar for concern, as they consider you a performing asset (i.e. a client who is paying as agreed, and not someone to worry about).
• Imminent Default - Even if you are a performing asset, you are encouraged to be proactive in your efforts to remedy the situation you amidst.  Should this be the case, I encourage you to learn the phrase "imminent default" and use it when speaking to the Customer Service Representative at the Loss Mitigation Department.
  • Example of Imminent Default - Let's say you earn $5000 per month, but your debts are now $6000 per month.  You are operating on a $1000 monthly deficit, which is clearly not ideal. Up until now, you routinely pull the $1000 deficit out of your savings account in your efforts to pay your bills on time. The problem is, you now only have $3000 left in your savings account. This is an example of imminent default. While you are still a performing asset, there is clearly an issue which is imminent, and you should not be penalized for proactively seeking solutions BEFORE you fall behind on your bills.
  • NOTE: During the 2008 Housing Crisis, many Lenders would flat out tell their Borrowers that as long as they were on time with their payments (i.e. as long as they were a "performing asset"), the Lender would not consider Loss Mitigation remedies. Ultimately, the government intervened as stated the importance of considering imminent default as opposed to forcing consumers to ruin their credit before their cries for help were addressed. Typically the mere mention of "imminent default" when speaking with a Loss Mitigation Specialist will allow your voice to be heard much louder (without the need for you to actually yell at anyone).

Loss Mitigation Remedies

• Forbearance - a temporary postponement of your monthly payment.  During the 2020 global pandemic, forbearance instantly became a recognized term (as homeowners across the country seized the opportunity to "pause" their monthly payments as part of the CARES Act). This remedy is typically considered during an anticipated short-term period (commonly ~3 months), and might be suggested in the event you find yourself temporarily unemployed. 
• Loan Modification - as the name suggests, this remedy is a modification (change) of the originally contracted loan terms. During the 2008 Housing Crisis, loan modifications became a household name amidst one of the most challenging economic periods in American history. Many homeowners had their loan terms altered for 5+ year periods.
• Short Sale - also common amidst the 2008 Housing Crisis, short sales were sought when the homeowner agreed to cooperate with the sale of the subject property knowing the sales price would be too low (short) to pay off the existing mortgage(s). Essentially this remedy is in place when there is a perceived "negative equity" between the present market value of the home versus the payoff of the existing lien(s). While not common in 2020 (due to the vast majority of homeowners having sufficient equity in their homes), this term is good to know (as history sometimes has a way of repeating itself).
• Deed-in-Lieu of Foreclosure - often described as a "mutual surrender" where the homeowner agrees to relinquish ownership of the home (and hand in their keys) in exchange for the Lender not reporting the action as a foreclosure, and not seeking post-closing damages as a result.

Please note that each of the above referenced remedies requires approval from the existing Mortgage Servicer/Lender. In some circumstances, you might find yourself with the need to supply more documentation for your Loss Mitigation request than you did when the mortgage was originally created. One of the biggest challenges with this process is the lack of any publicly published approval guidelines. In fact, during the 2008 Housing Crisis, we found repeated situations where homeowners who were truly in need of Loss Mitigation remedies were declined, while many homeowners were approved without the need to document a true financial hardship. Although steps have been taken to prevent such chaos in the future, it is still very difficult to ascertain who will be approved for Loss Mitigation remedies, and who will not be approved.

From a credit scoring perspective, any mortgage payment that is over 30 days late will produce a significant reduction to your credit score. Should the late payment venture above the 60 & 90 day periods, the drop in corresponding credit scores is much greater.  If the late payments go beyond 90 days, we start to have foreclosure on the radar. CLICK HERE for a sample timeline of foreclosures in California.

You are highly encouraged to avoid foreclosure by any means necessary (especially if you have sufficient equity in the home). In those situations, please consider hiring a Real Estate Agent to help you sell your home at top dollar, ideally avoid any late payments in the process, while hopefully maximizing your "net proceeds" (aka "profits") once the existing mortgage has been paid off and all expenses to sell the home are calculated. Should you need an introduction to a local specialized Real Estate Agent in your area, please feel free to contact me and I will be happy to help match you up with someone qualified.

In summary, layoffs (or any other issues causing a financial hardship) are unfortunate. That said, remember that if you have a mortgage, you are amidst a pending contract that states your agreement to pay the mortgage as originally agreed. Your contract (i.e. Promissory Note) does not list any exceptions to paying back the existing mortgage as agreed. Proactive measures from the consumer (you) are critical in preventing excessive late fees, damaged credit history, and/or foreclosure from becoming a burden that exacerbates the financial hardship you are battling.