In some states, land installment contracts are treated by the courts as mortgages. If this is the case, the homeowners must be given the same rights for reinstatement and redemption that would be allowed if the agreement was an actual mortgage and not just a land contract. This affords homeowners in these states additional protections against the stricter forfeiture process used in other jurisdictions.

If a lender forgives any part of the debt owed on a mortgage, there may be taxable income to the former homeowners. This includes waiving a potential deficiency judgment that may have been pursued after the foreclosure auction was completed.

In a small number of cases, borrowers may be liable for capital gains and forgiveness of debt income. This can happen if the house sells at auction for more than the homeowners' cost basis, but less than the total amount owed on the loan. The sales price higher than the basis will result in a capital gain, while forgiveness of debt on the amount over what the house was auctioned for can result in taxable income to the homeowners.

When homeowners are attempting to prove that they do not owe taxes on any income from forgiven debt, it may be a good idea to produce evidence of a lower fair market value for the property. If the owners have an appraisal or valuation done as of the date of the auction, there may be less of a deficiency that the IRS may treat as forgiven debt and taxable.

However, deficiencies for the majority of families suffering foreclosure may be a moot point for 2007 through 2009. Up to $2 million may be excluded from income for discharged acquisition indebtedness. This may be due to a decline of the property's value or the homeowners' financial circumstances. Furthermore, acquisition indebtedness is defined to include loans used to purchase, construct, or substantially improve a principal residence.

If homeowners dispute the amount of a discharged debt, it may be worth sending a formal dispute letter to the bank. Moreover, a bank may be convinced not to file a 1099-C with the IRS if the homeowners can prove there has been no discharge of debt that is not exempt. The penalty if a bank makes a mistake in this regard is minuscule, only $50. And the IRS does not even impose this fee if the reason for not reporting was due to "reasonable cause and not willful neglect."

With all of the new federal regulations and laws that are coming out to help people in foreclosure and save the mortgage lending industry from itself, it can be difficult both for lending professionals and consumers to keep up. The following is a short update of new rules and laws being put into place by lawmakers and various federal agencies.

In July 2008, the Federal Reserve created a new category of mortgage loans in response to the subprime meltdown. These new mortgages are termed "higher-priced loans," and describe characteristics of the type of lending product that had been referred to as subprime mortgages. These new regulations went into effect on October 1, 2009.

The new Federal Reserve regulations dealing with higher-priced loans include protections for borrowers from lenders who make loans without regard to the ability to pay back the money borrowed, as well as prepayment penalties lasting longer than two years, and mortgages without escrow accounts set up.

Also, lenders are prohibited from engaging in a pattern of making loans to homeowners without taking into consideration their ability to repay the mortgage. Obviously, the lenders knew that they would be covered by the federal government if they made loans that would never be paid back, and the Fed is now attempting to limit this practice after the banks have received their initial bailouts.

The Department of Housing and Urban Development (HUD) has also released new regulations regarding the Good Faith Estimate (GFE) and HUD-1 settlement statement that are used in almost all real estate transactions. The new rules are designed to give more accurate disclosures to borrowers and make the paperwork more uniform.

The Good Faith Estimate will now be a standardized form, and lenders or mortgage brokers will be required to disclose the actual costs of the loan to borrowers. Previously, estimates were allowed to be used, but were often low-balled to make the loan look less expensive than it really was. As it got time to close the loan, the estimated fees would dramatically increase.

The HUD-1 settlement statement will also be standardized so that line numbers on the Good Faith Estimate match line numbers on the HUD-1. Loan term information will also now be included on the HUD-1, as well as detailed disclosures of escrow account requirements. A final page of the settlement statement will show how costs have changed from the initial GFE to the final closing.

As the housing crisis continues to get worse, we can all expect more regulations will be released, requiring more paperwork and disclosures to homeowners. Unfortunately, too few borrowers read and understand these disclosures in the first place, and the cost of following such laws are simply passed from the lenders onto the borrowers. It will still be up to homeowners themselves to make absolutely certain they understand how their mortgage product will affect their financial lives.

The following are some facts and statistics about the real estate market and the government's efforts in putting together effective plans to address the foreclosure crisis. Despite the government's programs, starting in October 2007, and continuing with the latest plan released earlier this year, the foreclosure rate has kept up its dramatic increase.

According to the Mortgage Bankers Association, more than one in every subprime mortgage loan was in foreclosure as of the fourth quarter of 2008. This is 13.71 percent of subprime loans, compared to prime loans in foreclosure at a rate of only 1.88% as of the same time.

Furthermore, more than one third of all subprime adjustable rate loans, as of the final quarter of 2008, were in a state of serious delinquency. This is more than three times the rate of delinquency for prime adjustable rate mortgages.

Under a new incentive program, Fannie Mae has begun paying attorneys who are able to qualify delinquent borrowers for loan modifications, repayment plans, or similar workout solutions as an alternative to foreclosing.

Due to the high rate of foreclosure, most workout plans are taking at least thirty days to be processed by lenders and servicing companies. Homeowners and those working for them should be aware of this significant time lag, especially if a foreclosure sale is on the horizon. It may be best to obtain a delay of any sheriff sale in order to apply for assistance without the threat of losing the home in a short period of time.

As early as October and December 2007, the US Treasury Department was putting together plans to solve the rising foreclosure rates on an industry-wide, voluntary basis. Unfortunately, as the number of people seriously behind in their mortgages kept increasing, no more resources were dedicated to assisting these borrowers, and delays led to more foreclosures.

Thus far, there have been at least five different programs to help homeowners stop foreclosure. These have been the Making Home Affordable Modification Program (HAMP), Making Home Affordable Refinance Program, Hope for Homeowners (H4H), HOPE NOW also known as the American Securitization Forum Plan, and Project Lifeline. Thus far, all have failed to seriously affect the foreclosure rate.

As foreclosures keep rising, the cheap money policies of the Federal Reserve, combined with the poor to nonexistent lending standards of the banks have proven to have far more negative impacts on the economy than any bureaucrat or regulator anticipated. Unfortunately, more cheap money policies have been some of the only fixes proposed and provided by the government, which has caused further downward pressure on the economy.

For mortgages owned by HUD (not just insured or guaranteed by the agency), a type of nonjudicial foreclosure may be pursued even if the state in which the property is located requires judicial foreclosure procedures to be used. The statute is called "Single Family Mortgage Foreclosure" and it replaces applicable state law. Even if no power of sale clause is included in the mortgage contract, HUD may use the nonjudicial foreclosure process.

This clause clearly seems to go against the right to contract, as it negates certain aspects of mortgage contracts used by borrowers and lenders. There may also be unlawful taking issues when the federal government affects foreclosure laws and redemption rights. In addition, there is no required pre-foreclosure meeting or hearing for the borrowers.

In order to sue homeowners for foreclosure and obtain a judgment against them, the lender must prove three aspects of its case:

1. There is a valid mortgage between the lender and borrowers
2. The homeowners are in default of the mortgage contract
3. Foreclosure procedures have been followed according to the law

If the bank does not follow the foreclosure procedures for notice or court requirements, even a sheriff sale may later be voided.

One positive aspect of the judicial foreclosure process is that homeowners can raise claims against the lender that would otherwise have been barred by statute of limitations regulations. For instance, even if the statute of limitations for Truth in Lending Act violations has passed, borrowers may still raise these issues in a defense of a foreclosure case. But if the foreclosure is through nonjudicial procedures, these claims may not be allowed by the court.

All states allow homeowners the right to redeem their property by paying off the loan in full (plus interest, costs, and other applicable fees) prior to the sale of the house. Nineteen states give borrowers the right to reinstate their mortgage by curing the default and paying the amount past due plus applicable costs and fees. This must be done before the sheriff sale of the property in order to be accepted by the lender.

When homeowners file bankruptcy to stop foreclosure or delay a sale, they do not give up substantive or procedural defenses to the bank's attempts to take their home.

In many cases, the mortgage company does not strictly follow the pre-foreclosure procedures dictated by state and local laws. In these cases, courts have found that strict compliance is necessary for a foreclosure to go forward. Foreclosure is such a harsh remedy to the problem that these strict requirements are necessary for lenders to follow.

If a lender accepts late payments from a homeowner, it may be waiving its right to accelerate the mortgage later on in the case of default. Courts have found that allow late payments and not insisting on future on-time payments may be a waiver of the right to accelerate. The state of Maine goes even further than this and states that accepting a payment after foreclosure procedures have been started but before the right of redemption ends is considered a waiver of the right to foreclose on the home at all.

In the wake of Hurricanes Katrina, Rita, and Wilma in 2005, many agencies of the federal government imposed foreclosure moratoriums, including HUD, the VA, the Rural Housing Service, Fannie Mae, and Freddie Mac. New foreclosures were held off on, while foreclosures already going through the court system were postponed in an attempt to encourage servicers and lenders to work more closely with homeowners to help them save their homes. After all, a foreclosed home is good business for servicers, but an abandoned, destroyed, flood-damaged home is an opportunity to negotiate loan modifications and other solutions.

In the event of a disaster, Fannie Mae requires foreclosing servicing companies to reconsider evicting homeowners, especially if there is a lack of available housing. If the mortgage servicer and its attorneys decide not to proceed with an eviction, they may charge the former owners rent on a month-to-month basis, depending on what the borrowers can afford.

Having a full foreclosure or a bankruptcy on one's credit report is typically fatal to new mortgage applications for the first two years after the incident. A deed in lieu of foreclosure is viewed as just one small step below having a full foreclosure. Thus, the main benefit of the deed in lieu is to transfer the property sooner and get through the two-year period where it will be almost impossible to obtain a new mortgage.

If a mortgage is held by the federal government or insured or guaranteed by it, certain regulations determine how servicing companies should proceed with foreclosure. If these procedures are not followed, homeowners may have more defenses to foreclosure, including a full legal defense based on the servicer's failure to offer assistance or service a loan properly.

Although many attorneys and homeowners feel that the power of sale clause used in deeds of trust in nonjudicial foreclosure states deprive homeowners of due process, courts feel differently. They have ruled that, because the agreement is between two private parties (the bank and the borrowers), there is no due process protection. Only if there was a state actor would due process protections be granted to homeowners. Of course, banks are given a protected monopoly by the government to create money (legal tender) based on nothing (fractional reserve banking), which would usually be a state action -- but this is conveniently ignored.

The following is a list of protections homeowners have if their loan is insured by the Federal Housing Administration (FHA). Lenders must meet these requirements to begin foreclosure:

• Three monthly payments are due
• Foreclosure is not allowed if the default is based on a missed escrow payment that is due in a lump sum
• Notice of default must be sent to the borrowers before the second month of delinquent payments
• Before the third payment is missed, the lender must make an effort to arrange a face-to-face meeting with the borrowers
• In many situations, the lender must accept partial payments if the homeowners are able to make them

For mortgage insured by HUD, there are two types of special forbearance plan. The first type must include a repayment plan that lasts for at least four months after payments have been suspended for a period of time. During the period of suspended payments, homeowners may be required to make partial payments. The second type of forbearance allows for a short-term repayment plan to be combined with a partial claim or a loan modification.

A partial claim is not widely known and is rarely used by homeowners to stop foreclosure on their properties, and for good reason. Look at the list of requirements for this government assistance:

• Have a mortgage insured by HUD
• Be at least four months behind in payments
• Total arrears must add up to less than twelve months of payments
• Must be able to make full monthly payments
• Loan modification or special forbearance will not solve the problem

With HUD loans, a partial claim may be used by homeowners who have filed for bankruptcy to stop foreclosure (either Chapter 7 or Chapter 13). However, a mortgage modification may not be used with a partial claim.

One of the reasons that HUD distorts the housing market is through its payments to homeowners and lenders for performing certain tasks related to preventing foreclosure. For instance, pre-foreclosure sales can net homeowners up to $1,000; deed in lieu of foreclosure will net $2,000 for borrowers. Lenders can receive $100 for each special forbearance, $750 for loan modifications, $500 for partial claims, $1,000 for a pre-foreclosure sale, and $250 for a deed in lieu.

When preparing a workout application, families that have one parent at home taking care of children need to explain this to lenders who may look unfavorably on the fact that both parents are not working. Comparing costs of childcare to income from a potential job should be done to show the mortgage company that staying at home is more cost effective.

Recasting a loan refers to a type of modification of the original note where the missed payments are added to the back end of a mortgage. The life of the loan is extended and the borrowers will eventually have to pay back those missed payments.

Although recasting a loan sounds like a great idea that could help many borrowers get back on track with a regular monthly payment and worry about their arrears at the end of the loan or when they refinance or sell, leave it up to the mortgage industry to mess it up. Mortgage accounting rules have been changed, and many large lenders and Fannie and Freddie no longer recast loans.

Short term repayment plans can be verbally agreed to with a lender or mortgage servicer and usually last from three to six months. Longer term plans need approval from the mortgage holder. Twelve to twenty-four months are fairly common time frames for a repayment plan for seriously delinquent borrowers, although even longer plans can be proposed to avoid foreclosure.

Although there are numerous methods when it comes to loan modification, here are five common ones that banks and homeowners often agree to:

1. Reducing the interest rate
2. Reducing the principal balance of the mortgage
3. Extending the payment period of the loan
4. Reamortizing the loan and the arrears
5. Placing a deferred junior lien on the home

One reason borrowers request financial hardship information and income and asset documentation in the case of a short sale is to make sure that a deficiency judgment has little value. If homeowners claim to have a lot of assets, the bank may just foreclose and pursue a deficiency.

Clear title can not be conveyed through a deed in lieu of foreclosure. If there are tax liens, second mortgages, mechanic's liens, or similar issues, the bank will not accept the deed in lieu. In that case, the foreclosure will usually go forward if the borrowers can not sell or work out another arrangement.

Fannie Mae and Freddie Mac will occasionally accept a charge-off of a mortgage, rather than pursue a foreclosure. This is like banks charging off a defaulted credit card or personal loan. But this option will likely be used only in a small number of situations, such as when the default is on a small amount of money and the property is severely damaged and the insurance will not cover the losses.

Foreclosures for unpaid property taxes vary widely by state and county. Sometimes the house is auctioned off to satisfy the taxes. Other times, a lien or certificate is sold to the high bidder. And in some areas, no sale is conducted and the property is simply transferred from the homeowner to the county or other tax agency. In most jurisdictions, homeowners have the right to redeem their property after the auction for delinquent taxes.

The following are some defenses homeowners can still raise after a sheriff sale to delay or challenge the foreclosure process and auction:

• Irregularity in conducting the sale
• Sale price at auction was grossly inadequate
• Homeowners did not receive notice as required
• Sheriff sale was not advertised as required

Any physical problems with a property make proceeding with a foreclosure much less desirable for lenders. An appraisal, Broker's Price Opinion, or other type of valuation from a trustworthy source should be included with any workout proposal, loan modification, or short sale request homeowners make if there are deficiencies in the condition of the house.

If borrowers run into a brick wall dealing with the mortgage servicing company, they can go a step above and contact the holder of the loan. Large banks, institutional lenders, Fannie Mae, and Freddie Mac, among others, will often push a servicer to intervene and work out a solution with homeowners to stop foreclosure, modify a loan, or delay a sheriff sale.

Most people think that Wall Street was primarily responsible for securitizing junk loans and unleashing the subprime crisis. In reality, though, over 50% of mortgage securitizations are guaranteed or issued by Fannie Mae and Freddie Mac (two government-sponsored enterprises), or Ginnie Mae (Government National Mortgage Association).

In a mortgage modification or other workout agreement, it is always easier to negotiate down interest charges, late fees, and other unexpended costs to the lender. These are costs the lender has not paid out of pocket, but has instead just tacked onto the loan balance. They can and should be negotiated away.

According to the Truth in Lending Act, homeowners can request their mortgage servicer to identify for them the person or company or organization that holds the mortgage. The servicer must comply with this request.

Sometimes homeowners are able to delay a sheriff sale over and over again. While this seems a little counter-intuitive, if the lender does not accept the request for a postponement, it may face liability for acting in bad faith. Pursuing foreclosure and using the courts is usually considered the last option, and if the owners are working on a mortgage modification or short sale, for instance, the county auction can be called off relatively easily.

For subprime mortgages originated in 2005 and 2006, the years before subprime loans dropped through the floor, it is estimated that 19% will default and end up in foreclosure.

Although real estate transactions involving mortgages fall under the jurisdiction of state foreclosure laws, the securities created by real estate mortgage loans are considered personal property and treated by the law as such.

Some state deceptive practices statutes (also known as UDAP statutes) actually exclude real estate transactions and some credit transactions. Some lenders are also specifically excluded, as well as other transactions regulated by other agencies. After all, the creation of money and credit out of thin air is a deceptive practice in every case.

If a lender accepts a late payment from a homeowner, it may be viewed as the court as the bank having waived its right to require on-time payments.

This is interesting: if the foreclosing mortgage holder is the FDIC or RTC, the homeowners may not be able to bring some claims in court. There are doctrines called "super holder in due course" and D'Oench, Duhme that apply here.

In some cases of a first mortgage on a primary residence, cram downs in Chapter 13 bankruptcy are allowed. These involve instances where the mortgage covers more than the property and some other incidental property types, or if the last payment due on the mortgage is within the bankruptcy payment plan term. If either of these apply, the loan can be stripped down to the value of the property.

Private mortgage insurance is paid by homeowners, but it allows the bank to recover from 30-50% of the losses on a mortgage foreclosure.

There are three types of servicers in a typical mortgage -- the master servicer, the subservicer, and a special servicer.

One of the main reasons banks turned to securitization of home loans was to protect investors, lenders, servicers, and everyone else from the liability of the loan originator. But the idea has backfired in that hiding the loan in hundreds of different hands means no one owns the loan or has the legal standing to sue for foreclosure.

The players involved in a typical securitization: lender, seller or wholesale lender, issuer or depositor or Special Purpose Vehicle, servicing company, trustee, custodian, underwriter, ratings agency, insurer, warehouse lender or facility.

responsiblelending.org has reported that 60% of refinance mortgages during the boom were subprime.

Average estimated costs per foreclosure:

• $7,200 in costs to the borrower for administrative fees
• $20,000 to local government for taxes, utilities, water, sewer, maintenance and upkeep
• 1% drop in property values within 1/8 mile radius of foreclosed home