0.1 Loss Mitigation
Loss mitigation is used to negotiate mortgage terms for the homeowner that will prevent foreclosure and help make the terms more affordable. These new terms are typically obtained through any of the following: loan modification, repayment plan, forbearance, short sale, deed in lieu of foreclosure, cash-for-keys, or other loan work-out options. In general, any loan can be modified. A mortgage modification is the most commonly pursued option for homeowners that want to keep their home and get back on track. This process allows the terms of a mortgage to be modified outside the original terms of the contract. This is agreed to by both the lender and borrower. Generally speaking, any change to the mortgage terms is a modification, but as the term is used, it refers to a change in terms based upon either the specific inability of the borrower to remain current on payments as stated in the mortgage, or more generally a mandate to lenders. A loan modification will typically result in the change to the loan's monthly payment, interest rate, term or outstanding principal. The borrower can be late, in default or in foreclosure at the time the application for loss mitigation is made.
The lender is motivated to offer better terms to the borrower because of the expectation that the borrower might be able to afford a lower payment, and that a performing loan will be more valuable ultimately than the proceeds obtained from a foreclosure sale. The state and federal government may structure a mortgage modification program as voluntary on the part of the lender, but may provide incentives for the lender to participate. A mandatory mortgage modification requires the lender to modify mortgages meeting the criteria with respect to the borrower, the property, and the loan payment history. Programs will vary according to lender.
0.2 Lender Litigation
Lender litigation is strategically designed to seek restructured mortgages by initiating legal action in court. Lenders have engaged in widespread conduct in originating prime and subprime mortgages, ignored state foreclosure laws, engaged in illegal unfair business practices, and violated state Consumer Protection Laws. Seeking justice through the legal system can ensure that important borrower information and documents have originated properly. This will also address loans to borrowers which they were known to be unaffordable and which would ultimately be foreclosed upon. This conduct has lead directly to the collapse of the financial markets and the bankruptcy and closing of many banks.
Unfortunately, these business practices by lenders have left many homes “upside down” and “under water” to the extent that the mortgage debt on the property exceeds the appraised value of the home. Federal, state, and local agencies have initiated intervention programs to help resolve the foreclosure crisis around the country. The mediation program between lenders and borrowers is a mandatory process. Under this law, this legal mandate ensures that borrowers and lenders meet to negotiate a settlement and might even make foreclosure unnecessary. In a settlement conference, the two parties may make new arrangements such as modify an existing loan's interest rates, length, type, waive fees, or some other mutually agreed upon alternative.
This evaluation will include taking a look at your income, expenses and your current assets. A settlement will be based on your ability to make your current loans or be adjusted to a new loan payment arrangement. Other factors involved will include the type of mortgage you have, how overdue your payments are, and other relevant facts. Solutions mediated may include forbearance agreements involving temporary reductions or suspensions of required payments, repayment plans, short sales, or modifications of loan terms.
0.3 Short Sale
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens' full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.
However, in California, legislation was passed to preclude deficiencies after a short sale is approved. The same is true of lenders on first loans and lenders on second loans — once the short sale is approved, no deficiencies are permitted after the short sale. (SB 931, SB 458 - Calif. Code of Civil Procedure §580e).
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. Both often result in a negative credit report against the property owner. A similar procedure to a short sale is an Assisted Voluntary Sale (sometimes referred to as Assisted Voluntary Purchase). Real estate industry data indicate that there were 2.2 million short sales in the United States during the period of the subprime mortgage crisis.
0.4 Deed In Lieu
A deed in lieu of foreclosure 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.This offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her 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/she would in a formal foreclosure.
Another benefit to the borrower is that it hurts his/her credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy. If there are any junior liens a deed in lieu is a less attractive option for the lender. The lender will likely not want to assume the liability of the junior liens from the property owner, and accordingly, the lender will prefer to foreclose in order to clean the title.
In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. 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. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.
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 parol 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. Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.