Say your home gets foreclosed on. What then? Your options are to file for bankruptcy or pay off the deficiency balance, which is the amount you are liable for on the note after the foreclosure sale. But what many people don’t know — in fact, I learned this just at dinner last night — that figure can usually be reduced to pennies on the dollar outside of filing bankruptcy IF you hire an attorney to negotiate with the mortgage company. And the mortgage companies are getting so bankruptcy weary, they are in a more negotiating mood, says Jacob A. Decker, an attorney with Allmand & Lee.

“The large five mortgage companies are really talking turkey now, ” says Decker. “Last week, I settled one deficiency balance of $65,000 for less than $5,000.”

The trick, he says,  is to work with a bankruptcy law firm that deals with the creditors on a daily basis in a bankruptcy context. That way, the lenders know that if they do not settle for a  pennies on the dollar, the next step will be a bankruptcy filing where they will likely get zilch. A couple thousand versus zero? Decker says the lenders will almost always take the money.

Toss in cash-strapped tenants who are filing to wriggle free of long-term leases, bankruptcy attorneys are busier than they have ever been, says Decker. He’s also seen a significant increase in creditors’ willingness to settle other debt — renegotiate auto, student loan and even credit card debt. Bankruptcy attorneys are raking it in. Full disclosure: I have first-hand knowledge of how hard they’re working and am not complaining one bit: Decker is my new son-in-law!

One, I cannot believe how archaic the process is. A bunch of hot people standing outside the George Allen Courthouse, lawyers in suits  (low wool content, I hope). We could have used chair massages and Slurpee’s, and where’s the potty? At first we went to Lew Sterrett Frank Crowley, I pulled out the Handi-Wipes, but was re-directed to 600 Commerce after passing my handbag through the metal detector. Veterans tell me that folks didn’t like being at Lew Crowley for obvious reasons. So we get to 600 Commerce and like a sidewalk fair, everyone is  standing outside under the overhang, where I stayed remarkably comfortable for a July day in Texas. (Note to Dallas County: exterior ceiling fans.)  A few people did stop and ask if this was a fair or something. It was hot, but could have been worse.  Pity the poor trustee  who was off next to Tarrant County’s auction — it is held on the west-facing courthouse steps, outside, no overhang.

Foreclosure attendees consist of four basic food groups: newbies, like me;  investors (serious), also known as vultures; bank reps — I learned many of the banks buy back their own properties so they can re-sell them; people desperately trying to save their homes. The atmosphere is almost camp-like, since the savvy bring coolers and those fold-able camp chairs — one trustee even had a camp battery pack and fan. Paperwork is kept in rolling file cartons a la the Container Store. The American Dream is in full force — one person’s loss is another’s bargain.  Most folks are dressed casually save for the few dedicated attorneys in suits who stand out like hot, sore thumbs, but at least you can see them as they read off their prepped legal docs — same verbiage, different debtor: “Whereas on August 12, 1999, Michael Jackson, a single man, executed a deed for the sum of $500,000 in Dallas County…”  You cannot hear  very well as the buses, planes and sirens are out-screeching  words, so everyone leans in close, creating a huddle around each trustee. I saw one bid start at $80,000, the home sold for $214,000. (Interesting, the guy waiting to about $150K to jump in.) The bidding on some properties  started at a dollar. One Lakeridge property owned by Bank of America started at $24,650, and I wrote about a four million dollar property out there. Someone cleaned house on a $5 million dollar downtown commercial property they snagged for $3 million. The blood thirst for bargains was thick: I was back at the silent auction table at a charity fund raiser where an aggressive broad planted herself in front of the sign-up for lunch with Nolan Ryan at The Ballpark, or at Filene’s Basement with La Perla fifty cents a pair.

To do this right, you need a mentor, and mine was Virginia Cook’s Kyle Rovinsky, a D Best Realtor, and foreclosure auction vet. We wanted to be “in the pit” by ten a.m. and almost were save for the Lew Sterrett detour. The good folks at KERA were there filming a special on mortgages and foreclosure that runs July 21 –I chatted with the delightful BJ Austin and helped them find “who was in charge.” That was an excellent question, actually, because at the forclosure auction it seems that no one is in charge. You must buy the foreclosure list from Roddy’s Foreclosure Listing Service, Inc. to even know what is for sale,  who the trustee is, although a new company, Lone Star Foreclosures, is coming to cover Hunt and Smith Counties: one person’s poison is another’s paradise. Veterans buy the list days ahead,  (this month’s was about 136 pages long) scrutinize and organize it into the properties of interest. The trustee doesn’t just shout out the street address. They call the legal property description,  lot and block number, so you really have to know what you are looking for.  The Roddy’s people put name tags on the trustees — lawyers who work for the banks or mortgagors — and would occasionally shout out the name of the trustee for all to hear. No megaphones, no microphones, and a few lenders will send out a cameraman to document the process.

As for the people, they ranged from the pros working for real estate investment companies to individuals, like the woman and her family who have been buying foreclosed properties for 30 years. She was the one out-bid by a man on an east Dallas property she told me was owned by an older Vet who had fallen behind on his payments — she wasn’t sure what she would have done with the home had she bought it, but she was out-bid so the issue was moot. Though the banks will start bidding at a dollar, they will not let the property out the door at that price. Once the bidding starts, a bank rep will bid it up. You can pick up some real dogs if you don’t know what you are doing — these properties, one veteran told me, sell “as is” and unless you’ve gotten title work you could turn around and have to pay out thousands in unpaid liens, property taxes, not to mention repairs. That’s why you really need the list early  and need to research the properties.  Also, many homes on the list never make it to the auction, like 3616 Beverly. People make midnight deals — even 9:00 a.m. deals — with the lenders to save their home. I was told of a local home builder who has been “saving” his properties the night before every auction now for six months. Still, one expert told me that a smart buyer can pick up a home for 30% less — he strongly suggests that if you have your eye on a property, go ahead and pay for the title work prior to the auction.

I met one young eager investor who started buying buying foreclosures one year ago — 50 units. He put in about $15,000 in repairs and sold for a profit. But this is such a depressing market, I said. Not so, he said, this is when you make money, when the market is down. Quit listening to the media. But what, I asked, what if it NEVER comes back, at least not for a very long time? Doesn’t matter, he said, as long as you buy it right. There is this thing called seller financing.

Real estate, he said, is very much like poker: matters not the cards you are dealt, it matters how you play the game.

I’m almost bullish.

Another client paid a local “law firm” that advertises on a local Dallas radio station $3,000 to get his mortgage modified; the firms first piece of advice was to intentionally get behind on his mortgage. The mortgage company posted him for foreclosure, the modification people told him that they couldn’t help him. Now he now faces the prospect of losing his home if he does not pay three months of payments all at once, plus all of the bank’s legal fees related to the foreclosure, and he’s out the $3,000. What a scam.

Then there’s the “foreclosure rescue specialist” called North American Foreclosure, LLP.  Folks need to be careful, says Polk, a bankruptcy attorney and home foreclosure expert for 15 years.

“Sadly, a person will try whatever they have to in order to keep their home and a roof over their kid’s head.  And who can blame them?,” says Polk. “But a con artist can sense that kind of desperation.   The number of so-called “loan modification counselors” has quadrupled in the last 18 months as the hucksters have opened up shop.  These fly-by-night operators target desperate homeowners– the easiest mark, but also the least able to afford such a scam.”

Here are the dirty details on qualifying:

• Must have originated mortgage before Jan. 1, 2009.
• Be an owner-occupant.
• Have an unpaid balance that is equal to or less than $729,750 (for a single-family home).
• Have trouble paying your mortgage due to financial hardship.
• Your monthly mortgage payment must also be more than 31% of your gross (pre-tax) monthly income. Duh.There’s a three-month trial period before you lock in the lower rate for five years and if your home is in danger of foreclosure the process will be halted while you apply for the program.

Here’s a closer look at the data from Addison-based Foreclosing Listing Service:

A -$8000 tax credit for first-time buyers, l like very much. Assuming this will work like a section 179 deduction and come right off the taxes, not add 5 more pages or 6 hours of CPA billable hours to the tax return, essentially using tax dollars to help fund the home purchase. 

F- Revamping U.S. bankruptcy rules, giving judges the power to reduce mortgage payments and set lower interest rates. Excuse me, but I think part of our problem was that banks got too big, unregulated and complex. So now we are going to let judges play banker? This will slow down lending and banks will have to recoup their losses from somewhere —charge more to the customers who pay their bills, or higher PMI or PMI for everyone or higher interest rates.

Not fair, folks.

C – The government will match reductions lenders make to keep borrowers home payments at 31% of their income. What income — stated income? Does that include alimony?

Incomplete – Flushing Fannie Mae and Freddie Mac with $900 billion.

To understand how we got into this trillion dollar financial mess, Shiller said we had a number of merging factors: rare events, complacency, over reliance on conventional wisdom, herd behavior, and more respect for sophisticated methods rather than substantial evidence. (”Quantitative technology?”) Finance and real estate have become much more sophisticated disciplines, but data we used didnt include historical episodes such as The Great Depression. Since the 1929 crash, we had 3 major stock dips — 1929, 1987 and 2008. Shiller thinks this latest episode is more like 1929 than 1987, and he doesn’t think recovery will be rapid. But for the first time in our economic history, we had a real estate bubble. Americans went gaga about real estate as an investment. In Miami, for example, housing prices were stable from 1987 to 2000. 2001 to 2007 prices tripled — the Miami condo market overbuilt by hundreds of thousands of units. We got carried away: irrational exhuberance, herd mentality. Long term solution? Market transparency, better information, but as Shiller pointed out, you can present buyers with all kinds of warnings — sometimes people just don’t pay attention or figure it out. Very interesting comment: what if, he asked, medical professionals did not exist and all we had were drug company sales reps telling us which drug to take? (Would the Wellbutrin folks would tout the benefits of Prozac or push their product?) Shiller believes every family needs a financial physician that the government should subsidize. (Reality check: the government does provide health benefits for some through Medicaid and Medicare, but both programs reimburse physicians at minimal rates and are teetering financially.) These advisors would vow to not take commissions or other distractions to affect the advice they give their clients.

In this country, we have failed to manage real estate risk, which is devastating to familes. Shiller proposes a futures market for single family homes. We need more hedging of real estate risk, something he is focusing on in his company, Macroshares. We need to think creatively about our mortgage institutions. Why are we so married to 30 year conventional mortgages? (And why was the wheeled suitcase only invented in 1972?) Why can’t a work-out be built into a mortgage — in case of default, safety measures would kick in to prevent foreclosure. Why not have home equity insurance? Livelihood insurance? Payroll deductions for mortgages that would adjust up or down with the market? Harvard’s Elizabeth Warren has proposed a Financial Product Safety Commission to protect consumers from financial products, much like the Consumer Product Safety Commission protects consumers from concrete products.

 We are living in very uncertain times, says Shiller. To people close to retirement or living off equities, be careful — the market could fall in half again this year. Job creation did not drive the housing boom — credit did. And it’s going to take much more than just a finger-snap to get us out of it.

“While conceding that economic fundamentals were favorable to rising home prices, they also noted that there were elements of bubble psychology in the housing market. Case and Shiller pointed to an increase in the buying of real estate for investment purposes and high expectations of housing price increases.

They also observed an increasing sense of urgency and opportunity among home buyers, who were plunging into real estate for fear of being left behind as they perceived their friends and neighbors growing richer–classic signs of a bubble.”

Meantime, Tamarack in Idaho is under, while Credit Suisse is fighting to hang onto first lien status with uber-exclusive Yellowstone Club, which is just a mess , bankrupt and smarting from bad press due to the nasty divorce of it’s great-looking founders, Tim Blixeth and his ex (?), Edra. Also pulled in: luxury second home big boys Discovery Land Co. Interim lender CrossHarbor Capital Partners is trumping and may end up owning the joint because Credit Suisse apparently could not cough up enough cash for a debtor-in-possession loan:

“While it is highly unusual for a major lender to be pushed out of the first lien position in a bankruptcy, Credit Suisse may turn out to be too late with its latest plan.”

About this time last year I tried phoning YC to write up  properties as Hot Props in D Home — they acted as if I needed a security clearance and was trying to find the president’s war-time bunker. We ended up in Big Sky.

But Dallas Addison, who develops second home properties in east and south central Texas, as well as Hawaii, tells me the second home market is still pretty strong. (Posting his story soon: Dallas tells me that Hawaii’s Big Island gets so crowded with residents’ private jets they have to haul them off to other islands for parking.) Glad to hear it: I haven’t been on a Lear in forever.

“We’re, as it is, struggling now from paycheck to paycheck just to make sure ends meet,” she said. “So, that would be great, a perfect idea.”

Doesn’t sound like a perfect idea to me. Sounds like how we got into this mess. Sounds like someone who probably ought to put home buying on hold, save some money, rent and buy when they are not struggling from paycheck to paycheck.

Or are we looking at the next family to have a home foreclosed in Arlington?�