Word came late on a Thursday afternoon. The bank planned to sell Lynette Neidhardt's house two weeks later, on a Friday. The place she had called home for 23 years, a two-bedroom Craftsman on a hilly street in Oakland, California, would be auctioned at the county courthouse.
Neidhardt, 63, was worn down. She'd been battling to save her home for two years — ever since the sputtering economy had sideswiped her one-woman graphic design business and she could no longer keep up with her mortgage payments.
See also: Picking the right mortgage options.
Illustration by David Cowles
Still, she kept fighting. That Friday morning Neidhardt and more than a dozen friends and neighbors strode into a downtown bank branch, chanting : "Stop the auction; stop the sale today!" Her bank agreed to postpone the foreclosure, and in January 2011 it put her into a trial loan-modification program that cut her monthly payments almost in half.
In the wake of the housing crash, millions of older Americans like Neidhardt are struggling to pay their mortgages. A 2010 survey by the National Community Reinvestment Coalition found that 45 percent of distressed homeowners seeking help through its counseling services were older than 50.
Homeowners have also lost tens of thousands of dollars in home equity — money they were counting on to bankroll retirement. Nationwide, home prices are down more than 30 percent since their 2006 peak, according to the Case-Shiller housing index. Some 11 million homeowners are underwater — owing more than their homes are worth.
The news isn't all bad. Economists expect home values to recover, though in some places it may take 15 years or more. In the meantime, "help is available and there are ways to try to make it work," says Bill Druliner, a housing counselor at GreenPath Debt Solutions in Milwaukee. Read on to learn about three common scenarios facing older homeowners — and a range of creative solutions.
THE CHALLENGE: You're struggling to make payments
Step two: Think carefully before informing your bank that you're struggling, advises South Florida consumer attorney Margery Golant. "The things [ banks] tell people are wrong or misleading," she says. Many banks, for instance, have told homeowners they must be in default to get help, even though that's not true. Instead of calling your bank, contact a government-approved, nonprofit housing counselor at MakingHomeAffordable.gov or by calling 888-995-HOPE; using this service is free.
Deals to modify loan terms get a lot of attention, but a counselor is likely to start with something much less flashy: your budget. Absolutely everything in your budget is negotiable, Druliner says. You might cut back on food, cable, or entertainment. Or you might increase your income by taking in a roommate or getting a part-time job. Jennifer Wallis, vice president of Consumer Credit Counseling Service of Central Oklahoma, recalls one family who kept their home by moving out. Rental houses were in demand in their neighborhood, so they became landlords and found a cheaper place to rent for two years.
If your credit is still good — generally a FICO credit score of 740 or above — you may get relief by simply refinancing and stretching payments out for 30 more years. Over the long run you could owe a lot more interest — and you would need to buy private mortgage insurance (PMI) if you have less than 20 percent equity in your home — but you'll address immediate cash flow problems. The Home Affordable Refinance Program (HARP) — one component of the government's mortgage-rescue program — will let you refinance with negative equity. (If you have PMI now, you'd still need PMI with your HARP loan.) To qualify for HARP, however, you must not be in default.
If your credit rating is below 700 or you've missed a payment, your options are more limited. You can pursue a loan modification — when the lender changes the terms of your existing loan so it's easier for you to pay — but there's a lot of paperwork involved and no guarantee a lender will provide a modification. "Be persistent," says Odette Williamson, a staff attorney with the National Consumer Law Center. Keep a record of everyone you talk with and every document you send. The Home Affordable Modification Program (HAMP) — another component of the government's mortgage-rescue plan — can reduce your payments to 31 percent of your monthly pretax income. Most home-loan-modification programs offer a trial period: several months in which you make reduced payments. Generally, if you don't miss a payment during this time, you will receive a permanent loan modification.
Even among those whose loans are modified, though, about half fall back into delinquency, studies have shown. (Those with HAMP modifications fare a little better.) That's usually because underlying budget problems remain, says Wallis. "A mortgage delinquency is the symptom of a problem. It's not typically the problem."
Homeowners who are 62 or older have one other option: a reverse mortgage. With a reverse mortgage, you can tap into your equity to pay off your home loan and thus be free of monthly mortgage payments. (You'll still need to pay property taxes and insurance, though.) If there's any equity left over, the lender might make monthly payments to you, offer you a lump sum, or set up a line of credit for you. You will be allowed to stay in the home until you die or move out, at which point the loan becomes due. If there's any equity left at that point, it will go to you or your heirs.
The good news is, there are no income or employment requirements. The closing costs and fees can be expensive, but they can be rolled into the mortgage. About 80,000 homeowners are expected to take out reverse mortgages this year.
"The beauty of the reverse is that you're able to stay in the home," says Tom Kelly, author of The New Reverse Mortgage Formula. For many boomers who've taken on too much debt, "they're just going to want to have what's left of their mortgage go away."
But to get a reverse mortgage, you must have equity, which is your home's appraised value minus any loans. The amount you can borrow depends on your age, as well as on the amount of equity you have in your home: If you're 62, you could qualify for a lump-sum payout of about $55,000 on a house in which you have $100,000 in equity, according to AARP's Reverse Mortgage Calculator. At 72, you're eligible for about $61,000 on that same house, and at 82, you could get up to $67,000. "It's probably not something that should be used early in retirement," says John H. LeBlanc, a certified financial planner with Modera Wealth Management in Boston. Instead, he advises clients, reverse mortgages are best for older retirees with more equity in their homes.
THE CHALLENGE: You're facing foreclosure
If you're two or more payments behind, your lender will likely send you a foreclosure notice. The lender will also notify you of the steps it must take before it can put your home up for auction. The rules vary by state.
A foreclosure notice can be scary, but you still have options, including:
- Selling your home on the open market. (Be forewarned: You'll have to pay off the loan and any penalties that may have accumulated.)
- Selling your home as a short sale — which means the bank agrees to accept less than the outstanding loan balance. The same government-approved housing counselors can guide you through this process.
- Working with your bank on a deed in lieu of foreclosure, where you hand back the deed without going through the foreclosure process.
If you've received a foreclosure notice, your main goal is to get out of the home without owing the bank additional money. In some states the bank can go after you for the balance of the loan; in others it cannot. Find out your state's rules at Nolo, a legal-information website.
Feeling overwhelmed? Consider hiring a lawyer to walk you through the process. If you don't have the money, check with the pro bono panel of your local bar association.
Golant occasionally advocates something lenders hate: strategic default, otherwise known as walking away from a loan that's underwater. "The mortgage industry tries to tell people they have a moral duty to pay," she says. But she sees no obligation beyond what the law and contract require. (Again, the law differs in each state, so check.)
She recalls a couple whose home was hundreds of thousands of dollars underwater — not uncommon in Florida — while a nearby house was on sale for half what they owed. The couple's house was in the husband's name only, and the wife's income was protected from his creditors. "I told them, in all seriousness, that if it were me, I'd buy the house up the street," Golant says.
The Florida couple's circumstances notwithstanding, most advisers do not advocate strategic default, since it will sink your credit rating. Homeowners who go through foreclosure or who walk away from their homes may not qualify for another loan of any kind for five to seven years.
THE CHALLENGE: Your equity has vanished
What if you're one of the millions of homeowners who are making their payments just fine, but you've lost equity or are even underwater?
"If you don't have to sell, don't panic," advises Rick Kahler, a certified financial planner at Kahler Financial Group in Rapid City, South Dakota. "The equity could come back." That could take a while in Florida or Arizona, where many homes have lost half their value, but less so in states like South Dakota, where prices have fallen less than 10 percent. The credit-rating agency Moody's predicts many homes will regain their peak values by 2021.
If you do need to sell your home, you may have to cut the asking price more than you had planned. But look at it this way, says financial planner LeBlanc: "You might have suffered a lot of equity loss, but so has the house you're looking to buy."
In retirement, he tells clients, cash flow is the important thing. So if you need to improve cash flow right away, you should try to downsize to a smaller home before you retire.
In Oakland, Lynette Neidhardt opted not to downsize, in part because of the close bonds she has made with her neighbors. "I don't want to leave," she says. "I've spent too many years building a community. As a single person, I consider my neighborhood my family." That doesn't mean it hasn't been hard. "The horrible part was never knowing from one day to the next whether I would save my home. On the other hand, the really good part was realizing that a neighborhood is way more than houses on a block — it's people you care about and who care about you."
Which makes keeping your home a goal well worth pursuing.
Maryann Haggerty is the former real estate editor for The Washington Post. Michael Hudson is the author of The Monster: How a Gang of Predatory Lenders Fleeced America — and Spawned a Global Crisis.