Residential Loan Workout Options
By: Lance T. Denha, Esq.
If you’ve fallen behind on your mortgage payments, or if your loan has been referred to an attorney for collection, you should act quickly as you may still have time to save your home. The most important step you can take is to get help early from your mortgage lender, servicer, or housing counselor. The following are typical loss mitigation options for borrowers in distress:
REFINANCING
Your lender may give you a fixed amount of time to repay the amount you are behind, plus any late fees, by adding a portion to your regular monthly payment. This is a good option if you only missed a few payments. If the borrower has equity in the home and income sources and expenses haven’t significantly changed, the borrower may be able to refinance with a more affordable mortgage.
REPAYMENT PLAN
Your lender may agree to suspend your payments for a period of time. At the end of this time, you will resume your regular monthly payments, and you may be required to either make one lump sum payment or additional partial payments. This may be a good option if you have a temporary reduction in income.
LOAN MODIFICATION
Loan modifications are designed for a borrower that can’t afford a repayment plan. In a modification, the lender actually adjusts the terms of the loan to make it affordable on a temporary or permanent basis. These modifications may include: (i) Extending the term of the mortgage to cut the monthly payments, (ii) lowering the interest rate to cut the monthly payments, (iii) rolling all or part of the past due amounts into the loan and re-amortizing the new balance to allow payment of the past due debt over time, (iv) changing an adjustable rate to a fixed rate of interest, and/or (v) conditionally or unconditionally forgiving a portion of the debt. A lender is more likely to be receptive to this where the borrower has no equity or negative equity in the house, but wants to continue living there.
FORBEARANCE TO ALLOW SALE
If a borrower has equity in the house, and has experienced financial problems that appear long term in nature thereby preventing him or her from bringing the mortgage current even with a modification or repayment plan, the borrower may be able to get the lender to agree not to exercise its legal right to foreclose on a mortgage for a short period of time. This type of forbearance agreement would allow the borrower time to sell the house and recoup the equity. It would prevent the more serious damage to the borrower’s credit standing that a foreclosure would bring. The lender would benefit from avoiding the time and expense to go through the foreclosure process. If the borrower can’t convince the lender to give a forbearance period, and does not want to be forced into a fire sale, the borrower may also attempt to get a home equity line of credit to keep mortgage payments current until the sale.
PREFORECLOSURE OR SHORT SALE
If a borrower owes more than the home is worth, it is sometimes in the lender’s best interest to accept a short payoff on the mortgage balance. This saves having a non-performing property on the lender’s books that continues to lose value in today’s declining market. A short sale will have less damaging effect on the borrower’s credit report as he or she is doing something to meet their obligations to the lender.
In a short sale, the lender releases its mortgage and lets the borrower sell the house for less than the outstanding loan amount and takes the proceeds. Lenders may be willing to do so because they often lose less on these deals than they do in foreclosures. The lender will also avoid the additional expenditure of resources and ownership liability risk associated with a foreclosure. It is important to determine if the lender will completely release the borrower from any deficiency after the sale. The lender is not required to do so, and it is a common misconception that a short sale completely discharges the borrower’s obligations.
DEED IN LIEU OF FORECLOSURE
A borrower as a final resort short of foreclosure can offer to sign over title to the property to the lender without the expense of foreclosure in exchange for being released from the mortgage obligation. The lender will then sell the property and retain any proceeds. This keeps the borrower from having to pay off the mortgage and the lender avoids the time delay and further legal costs to complete a foreclosure. The deed in lieu eliminates the redemption rights of the borrower and his or her right to control the property (and the resulting risk of the property condition and/or market values deteriorating) during this time. This may also allow the lender to avoid a bankruptcy by the borrower. However keep in mind that the lender does not have to accept a deed in lieu of foreclosure; the lender may require that the borrower try to sell the home first through a short sale.
Always remember the lender has the right to foreclose on the property however there are procedural guidelines and notice requirements to the borrower which must be met in order to do so. In the event these aforementioned loss mitigation options fail, a borrower should consider foreclosure defense representation and possible bankruptcy options. It is advisable to consult with an attorney or housing counselor to discuss your options.
Lance T. Denha, of Denha & Associates, PLLC, works in the areas of business transactional law, foreclosure/pre-foreclosure workouts and bankruptcy law. In the business area, he specializes in general corporate law with a concentration in business and commercial transactions, property tax appeals, health care, and liquor licensing matters. In the foreclosure/pre-foreclosure workouts legal arena, Mr. Denha represents borrowers against lenders in seeking out residential loan workouts for purposes of avoiding foreclosure, or in the alternative, Mr. Denha will represent borrowers in foreclosure defense cases against lenders. Lastly, in the bankruptcy area, Mr. Denha’s focus is on bankruptcy law matters, specializing in debtor representation, creditor relations, and related litigation. Mr. Denha is a member of the State Bar of Michigan and State Bar of Florida where he is licensed to practice law in Michigan and Florida.
