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Distressed Loans: Foreclosures, Loan Modifications, Short Sales

SOLUTIONS TO DISTRESSED LOANS

Options For Homeowners Facing Foreclosure

There are several options for homeowners who wish to stay in their property as well as options for those who do not, including the following:

To Stay in Your Property

1. Cure/Reinstate - If you are behind on your payment you are considered "in default" with your lender. Prior to a formal foreclosure, you have an opportunity to cure the default, which is called "reinstatement" of your loan. Making up any back payments can be done from the time the notice of default is recorded until the time set for the foreclosure auction/trustee sale. Payments to reinstate would include back payments, late charges and other costs that may have been incurred by the lender..

2. Conventional Refinance - A borrower also has the right to pay off the loan that is in default. In most cases, a pay off of the defaulted loan occurs through a sale of the property or refinancing of the property with a new lender. However, in today's housing market, it may be difficult to secure a conventional refinance of the loan because of poor credit rating caused by the foreclosure or because there is little or no equity in the property.

3. Equity Loan - Equity lenders are commonly referred to as "hard money" lenders. A hard money
loan is not based upon the credit worthiness of a borrower but is usually based solely on the
equity in the property. In the majority of cases, a borrower could not expect total loans on the property to exceed 65-75% of the fair market value of the property. Borrowers should be aware that equity loans are very expensive and often include "points" ranging from 4-8% in order to get the loan. In addition, inter rates may well exceed 12%.

4. Loss Mitigation Options - Since this recent wave of foreclosures began, lenders have become more open to using "loss mitigation" tools at every opportunity. The word "mitigation" means to "reduce or lessen." Thus, when lenders engage in loss mitigation with borrowers, they are trying to reduce the losses to their bottom line and return a non-performing loan back to performing status.

Loss mitigation options that allow you to retain your home at least temporarily are as follows:

a. Forbearance Agreement - When a lender agrees to this option, it is agreeing to temporarily "forebear" (postpone) from taking further foreclosure action on a defaulted loan. In essence, the lender places the foreclosure on hold. This is usually done when you can demonstrate that the reason causing the default was temporary and you will be able to cure the default within reasonable time. This is usually 3-6 months or less.

b. Repayment Plan - With this option, a lender agrees to allow you to catch up on the delinquent payments over time. This is usually accomplished by requiring payment of an extra amount in addition to the regular payment over a specific time period (normally from 1 year to 2 years).

5. Loan Modification - By establishing a "financial hardship" leading up to the default, and inability to pay the current payment or an extra amount each month under a repayment plan, the lender may agree to modify the terms of your loan. For example, the lender may add the missed payments to the back of the loan or add the total delinquent amount to the principal and re-amortize the loan. Sometimes lenders even extend the term of the loan or reduce the interest rate to reduce the normal monthly payment. It should be noted that a loan modification option may not be able available if there is a 2nd mortgage on the property. This is because a modification of a 1st mortgage would impair the rights of the 2nd mortgage by increasing the total amount of debt that is senior to the junior lien holder on the property.

Options to Sell the Property

In those cases where a borrower cannot qualify to stay in the property or is interested in selling the property prior to foreclosure, the best alternative may be to sell. In those cases, the following options are available.

7. Conventional Sale - This option is available if there is sufficient equity in the property. The conventional sale usually takes a minimum of 30-45
days to complete after a contract to purchase is signed, and is usually still contingent upon the new
buyer obtaining new financing. If the new buyer is unable to obtain financing, it may put the borrower under pressure if the foreclosure sale has been scheduled. In such cases, it is possible to delay the foreclosure sale if steps are taken at least several weeks prior.

8. Short Sale - When the proceeds from the sale of a property will not be sufficient to pay off the defaulted loan in full, the lender may agree to accept a "short sale/' This means the lender will agree to release the lien on the property even though the loan has not been fully paid. And due to the "Mortgage Debt Forgiveness Act of 2007" in most cases, a borrower will not be liable for any Federal taxes on the difference between what is owed on the home, and what it sold for. Under new legislation (SB 458 and 931) a lender agreeing to a short-sale cannot seek a deficiency judgment against the borrower for the difference between the sale proceeds and the balance on the note. However, there are exceptions.

9. Deed-in-Lieu - When a lender foreclosing on a property agrees to allow the borrower to deed the property back to the lender before the foreclosure is complete, it is called a "deed in lieu of foreclosure." This can be advantageous to lenders because they get the property

New Legislation: SB 931 and SB 458

On July 15, 2011 Governor Brown signed into law Senate Bill 458 which provides expanded protection to sellers in short sale transactions from personal liability.

The new law prohibits your lender (or for that matter, any lien holder, regardless of whether it is a senior or junior lien holder), who agrees to a short sale from pursuing the seller for a deficiency judgment. A deficiency judgment means suing the seller (borrower) for the difference between the sale proceeds and the balance on the note.

Senate Bill 458 extends the protection against deficiency judgments contained in the recently passed Senate Bill 931 which became effective on January 1, 2010. Senate Bill 931 merely prohibited the first lien holder from pursuing a deficiency judgment following a short sale.

According to C.A.R. President Beth L. Peerce:

"SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lien holders- those in first position and in junior positions - will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property."

SB 458 will amend California Civil Procedure section 580e. [C.C.P. section 580e].

APPLICATION:

Please note that the note-holder still has absolute authority to decide whether to accept a short sale or not, and is not required to consider the homeowner's interests. Therefore, the lender may try to impose additional requirements (i.e. the payment of additional money as a financial contribution to "share in the loss") as a condition to consenting to a short sale..

The legislation does, however, provide important protection against homeowners unknowingly exposing themselves to deficiency judgments by short selling their homes.

This deficiency judgment prohibition applies to a broad category of 1 to 4 residential units with exceptions noted below. It applies to: Cash-Out Refinanced loans, Non-Owner Occupied Homes, Second Homes, Vacation Homes

Exceptions: Section 580e does not apply in the following circumstances:

  • Where debtor is a corporation, limited liability company, limited partnership, or political subdivision of the state. C.C.P. 580e( d)(1).
  • Where debtor engages in fraud in the sale or waste of the property C.C.P. 580e( c).
  • A lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property. C.C.P. 580e(d)(2).

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