Loss Mitigation Programs

1. Loan Workout- Many homeowners with the 2/28 and 80%/20% purchase loans are having a pay rate adjustment of 28% to 44%. Many of these homeowners can’t handle the new payments and will not qualify for a new loan. A loan workout is a broad term used in the loss mitigation arena. It is used when you negotiate with your lender any kind of plan that will benefit both you and the lender when you are delinquent or in default. Construct and analyze your financial plan that considers your current income and details a list of your monthly expenses thoroughly, this will improve your budget and cash flow so your income exceeds your total monthly expenses each month slightly (not too much). The key to a successful modification is constructing a financial plan that you and your lender can approve and, most importantly, that you are able to perform. Compose a hardship letter that describes why the problem occurred and, the good news, why it won’t happen again.

2. Loan Modification- This term has been getting a lot of attention lately and rightfully so. With millions of homeowners stuck in toxic adjustable rate mortgages and no way to refinance out of them, loan modifications may be the only way to assist struggling borrowers. This term is used when your lender modifies your current mortgage (same loan you have, only changes are made to the note) in order to work with you and make your mortgage more affordable. A modification to your rate, balance of loan, delinquent fees owed, term of loan etc. can be made at the “discretion” of your lender. In the past this was only used when a borrower was delinquent but now it is being reviewed before someone is delinquent. 

3. Forbearance- This is used most of the time, when a Notice of Default has been filed. You are allowed to delay or reduce payments for a short period, with the understanding that another option will be used at the close of that time to bring your account to a current status. Your lender, if in agreement, will then temporarily cease legal actions. Typically 30% of sub-prime lenders (with high interest rates) will only offer a workout program that requires borrower to immediately pay at least 20% or more of the total delinquencies including foreclosure fees, plus the balance of the delinquency will be added to their regular monthly payments over a period of six to forty-eight months. Forbearance plans do not remove a foreclosure action but simply stop it in place until the loan is current.

4. Short Sale- Here is another abused tactic that is being pushed on homeowners by over-zealous real estate agents (not all agents are like this) that profit from the sale of your home. Bottom line is that if you want to save your home, then this should be one of the last methods you utilize in the loan workout process. If you do not want to save your home and you have resigned to the fact that you are way in over your head, then by all means, find an experienced short sale agent (not just any real estate agent, but one with a proven successful track record) to assist you in dealing with your lender and getting your home sold.

5. Foreclosure Bail Out Loan- A new loan where the defaulted mortgage is paid off. This is usually a hard money mortgage and it is common for interest rates to approach 10-15%. Points can be as high as 5 and terms are usually short. In the 1 to 5 year range, then a balloon payment will be due for the remaining balance. In order to qualify you must have sufficient equity. Hard money lenders are looking for 65-75% max loan to value and a decent equity cushion. You also would need to have ability to repay as in a traditional mortgage.

6. Deed-in-lieu- is a deed instrument in which a mortgagor (i.e., the borrower) conveys all interest in a real property to the mortgagee (i.e., the lender) to satisfy a loan that is in default and avoid foreclosure proceedings. The deed in lieu of foreclosure offers several advantages to both the borrower and the lender.

Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.

Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Generally, the lender will not proceed with a deed in lieu of foreclosure if the current fair market value of the property exceeds the outstanding indebtedness of the borrower. Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parole evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.

Advantages to a lender include a reduction in the time and cost of repossession, and additional advantages if the borrower subsequently files for bankruptcy. In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred.

The principal advantage to the borrower is that it immediately releases him from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he would in a formal foreclosure.

Many lenders are severely back logged in their short sale departments. Many are simply not cooperating and making their clients lives very difficult. Remember they are now debt collectors and you owe them money on a contract and they plan to collect on that.

A short sale is primarily used when all negotiations for a loan workout have failed and you are upside down on your mortgage, meaning you owe more on the mortgage than it’s worth. The lender basically agrees to cooperate in the sale of your home and take a loss. You place the home for sale and any offers that are obtained will be presented your lender. Unlike a traditional real estate sale when the homeowner decides what offer to accept or not accept. Your lender will control the negotiations and you will not be involved in the contract negotiation of the sale of your home.

FORBEARANCE PROGRAMS OFTEN FAIL IF THE LENDER IS NOT FORCED TO CONSIDER THE ABILITY OF THE BORROWER TO PAY.

Loss mitigation programs were established by the federal government and the mortgage industry in order to stop home foreclosures. They help foreclosure victims in default on their mortgages to find alternatives to home foreclosure. Every homeowner's situation is unique and each lender has their own policies regarding the use of these programs to stop foreclosure.