It’s no secret that the past 16 months have been devastating to many lenders and borrowers. We’ve long maintained that when it comes to resolving issues surrounding breaches of obligations, foreclosure should always be the final option. That holds true now more than ever.
It’s easy to say that you shouldn’t foreclose unless you have to, but it’s a bit more difficult to determine the alternatives to foreclosing on a delinquent borrower. In the event of a monetary breach of obligation - failing to make a monthly payment or a balloon payment - the goal should be to get the borrower current and on track, saving time, money, and heartache for everyone involved. Here are five alternatives for lenders to consider before initiating a foreclosure.
Sale (or Short-Sale) of the Property
When a borrower goes into default, even the simplest things like listing the property for sale can sometimes be hard to do. Knowing the values of the properties in the area where your borrower’s property is located can help you determine whether you will be able to be repaid from an arm’s length sale or whether you may need to cut your losses and accept a short-sale of the property. Keep in mind that in some states, when a short-sale occurs the lender cannot collect on any remaining balance.
Forbearance
If you can determine that the borrower is experiencing a temporary setback, negotiating a forbearance agreement is a good solution. Here, you may offer the borrower a temporary stay on collection, or possibly an agreement that the borrower will make reduced payments for a set period of time with either a catch-up provision or capitalizing the missed payments and reamortizing the loan. It’s important to note that the borrower still has to repay the missed amounts. The benefit to the lender is you can have the borrower reaffirm the loan and confirm that the borrower has no claims against the lender. Of course, you need to engage competent legal counsel to draft the document on your behalf.
Loan Modification
For borrowers whose financial challenges may not be resolved in the short-term, modifying the terms of the loan is worth considering. A common pain point for struggling borrowers is the amount of the monthly payment. You may consider reducing either the monthly payment amount or the interest rate, and extending the term of the loan.
Refinance the Mortgage
Another option for Borrowers is that those with sufficient equity in their property can try to refinance the loan with another lender. Of course, they need to be able to make the installment payments and otherwise qualify. The rub here, of course, is that their history of delinquent payments may have negatively affected their credit score which may prevent them from getting an affordable loan.
Deed in Lieu of Foreclosing on Borrowers
The final option may be the borrower offering the lender a deed in lieu of foreclosure. Simply put, this is when the borrower deeds the collateral property to the lender in exchange for the release of all obligations. For homeowners, this requires them to vacate the property - but they are relieved of the burden of the loan and may be able to avoid the pain of foreclosure. Offering a DIL is a good option for lenders, but it’s important to make sure the transaction is properly documented and understand the pros and cons of deeds in lieu of foreclosure.
At Total Lender Solutions, we advocate for lenders looking to maximize recoveries on defaulted loans. For over 15 years, our team of highly experienced real estate professionals and legal experts has transformed complicated processes into clear resolutions for institutional and private lenders. We work as a vigorous extension of your team to provide comprehensive solutions and seamless communication, from pre-foreclosure and notice of default to the final sale phase. Our dedication and persistence when it comes to the foreclosure process ensures that our clients feel confident in reaching a successful outcome. Contact us today.
