Guidelines to Proactively Address Foreclosure-Related Issues
The economic downturn and the significant drop in prices in our local real estate market has forced many property owners to face the possibility of a mortgage foreclosure, whether such foreclosure would affect their primary residence, their second home, or an investment property.
A borrower facing mortgage foreclosure as a result of the inability to continue to make the monthly payments on these properties has several options to resolve this problem:
1) Continue to make monthly payments
Whether this payment relates to an investment property, a second home, or unfortunately, in many instances, a primary residence, this may or may not be a viable alternative. If at all possible, efforts should be made to continue to make payments or immediately initiate contact with the Loss Retention Department of the lender(s) who holds the mortgage(s) on the subject property to determine if there is a way to resolve the issue prior to the mortgage going into default and the commencement of a foreclosure action.
2) Alter the mortgage by refinance, forbearance or modification
The borrower should consider a number of opportunities to rectify its mortgage problems, which could include:
b) A forbearance which is an agreed upon period of time for abatement of monthly payments or a reduction in monthly payments for an identified period of time until the borrower has the ability to recover from whatever economic factors are preventing the borrower from making payments.
c) A Loan Modification to alter the interest rate or payment amount to enable the borrower to maintain payments on its mortgage.
Although many lenders are willing to address these particular options prior to a mortgage default, the frustrating aspect of this process is that many lenders nonetheless fail to adequately do so or to respond in a reasonable period of time. Part of this delay is based upon the volume of foreclosures in process and staffing issues with lenders. As such, many lenders don’t have the ability to promptly respond to a borrower’s request. This results in forcing the borrower to cease payments and enter into default before any meaningful contact with the lender is made.
3) Discontinue making payments
Unfortunately, this is an option that sometimes is forced upon the borrower based upon the simple economic inability to continue monthly payments.
If a borrower is unable to continue mortgage payments, the same proactive format should be utilized as above set-forth, which would include efforts to refinance, modify or seek forbearance with the lender. Those borrowers with primary residences may consider seeking assistance through the new government “Making Home Affordable” mortgage modification program, which would require:
b) That the first mortgage amount not exceed 105% of the current market value of the property;
c) That the total mortgage expenses after the modification are no more than 31% of the homeowner’s gross monthly income.
There may be some opportunity for the borrower to obtain assistance through governmental programs, such as the FHA Secured Mortgage Program or the Obama Administration’s Make Home Affordable program. (www.makinghomeaffordable.gov) Unfortunately, in many troubled economic areas that have been hit hardest by the foreclosure crisis, such as Lee County, Florida, the mortgage balance-to-home-value ratio far exceeds the 105% requirements. Further, in many instances, the borrowers need some additional relief given their financial status and, as such, their total mortgage expenses may, in fact, exceed 31% of their gross monthly income. Lastly, in many hard hit communities there are many borrowers who need assistance as to their second home or investment property.
4.) Short Sale
One foreclosure alternative is for the borrower to list the property for short sale. A Short Sale by definition is a situation in which the net closing proceeds of the sale is not sufficient to payoff the full mortgage balance. In such case, the contract must be presented to the lender for approval and the lender has the choice under such short sale scenario to:
b) Release its mortgage on the property and demand payment from the borrower the difference between the net proceeds from the sale and the mortgage balance; or
c) Release its mortgage on the property and obtain a negotiated amount from the borrower for the deficiency amount which results from the short sale (either cash or promissory note or some combination of both).
In order to utilize an effective short sale, the borrower should seek the assistance of a real estate professional, preferably a real estate attorney, along with a qualified licensed real estate agent who is familiar with the short sale process (see www.kfjlaw.com website “Anatomy of a successful Short Sale” program).
5) Inability to obtain refinance, forbearance or modification
In the event a proactive approach proves to be unsuccessful relating to efforts to obtain lender approval for a refinance, forbearance or modification and a short sale is not able to be timely completed, a borrower’s next step might be to address the forthcoming issue of a mortgage foreclosure action initiated by the lender.
Barring circumstances giving the borrower a claim or defense to the foreclosure of the mortgage, the borrower still, nonetheless, has the opportunity to address the mortgage foreclosure issue, even if suit is initiated.
Attached is a Motion to Compel Mediation, which the borrower should consider utilizing at the initial step in the mortgage foreclosure process. A simple filing of the Motion to Compel Mediation and scheduling it for hearing will allow the borrower to present to the Court, whether the borrower is represented by counsel or representing themselves (Pro Se) that the borrower is making a good faith effort to speak with a decision maker of the lender. Going to the mediation, either through stipulation or court order, would be the one opportunity for the borrower to actually speak with a decision maker of its lender to determine if there is any way possible to resolve the mortgage foreclosure issue, which could include, but is not limited to, the following ways to resolve a mortgage foreclosure problem:
b) Modification of the mortgage and potential reduction of the mortgage.
c) Reduction of the principal balance up to 90% of the current fair market value of the property (guidelines as set forth in FHA Secure Program, FHA Hope Program and Section 109 of the “Bailout Bill”).
d) Reduction in principal rate up to 90% of the current fair market value of the property (guidelines as set forth in FHA Secure Program, FHA Hope Program and Section 109 of the “Bailout Bill”).
h) Stipulation of entry of judgment of foreclosure with a waiver of liability against borrower.
i) Stipulation for obtainment of deed to the property and release of the mortgagor (deed in lieu of foreclosure format).
j) Stipulation in regard to acceptance of deed to the property and an agreed upon and adjusted payment for any deficiency in a lump sum payment (deed in reduction format).
k) Promissory Note in lieu of cash payment for settlement of the deficiency amount.
In the event that there is no possible way to refinance the home, obtain a forbearance, modify the mortgage, or work out any other structured plan with the lender, it should be understood that the borrower should then focus on minimizing and mitigating damages both for itself as well as the lender. Minimizing and mitigating damages unfortunately may result in the borrower agreeing to allow the lender to proceed expeditiously to obtain a foreclosure judgment and eventual foreclosure sale, as well as making arrangements to vacate the premises.
If the borrower absolutely has no other alternative and a foreclosure ensues, it’s clearly in the borrower’s best interest to mitigate damages early on in the process. The borrower can do so by agreeing to provide marketable title to the lender, which allows the lender to cease the foreclosure process and eliminates the accrual of interest, attorney fees, court costs, taxes and maintenance on the subject property.
A program developed by the Law Office of Kevin F. Jursinski & Associates, titled “Deed In Reduction©/Modification In Lieu©” can be obtained by going to www.kfjlaw.com and requesting information on the program. This program provides the borrower with the opportunity to take a proactive position and provides the lender with marketable title to the subject property prior to facing a long foreclosure delay with the attendant increase in expenses, all of which exposes the borrower to a larger potential deficiency judgment or, alternatively, a larger tax forgiveness amount (1099 – Forgiveness of Debt).
In summary, there is a variety of positive and proactive procedures that can be undertaken by a borrower, either by themselves or, alternatively, by a borrower utilizing this information and discussing this with a Florida attorney who can assist them in the process of minimizing and mitigating damages. If structured properly, the program can minimize and mitigate damages for the borrower, as well as be a positive result for the lender.
Kevin F. Jursinski, Esquire
Florida Bar Board Certified Real Estate Attorney
©Law Office of Kevin F. Jursinski & Associates