Representation of Homeowners and Real Estate Investors in “short sale” and other “foreclosure alternative” negotiations.
Short Sale Negotiations
A “short sale” or “short payoff” occurs when a lender agrees to accept less than the outstanding amount of a loan to satisfy the seller’s obligations under the note and allow the seller to convey their property. A short sale allows both the lender and the distressed property owner to avoid foreclosure by selling the property at a loss. The following are common situations facing distressed sellers:
- Declining real estate values;
- Unexpected health issues resulting in difficulty making mortgage payments;
- Lending rate increases on adjustable rate loans;
- Divorce;
- Over-extended borrower with multiple mortgages;
- Job loss or transfer;
Short sales are much more complicated and time consuming than an average real estate sale, making it important to obtain an experienced real estate attorney to oversee and negotiate the transaction. A distressed seller initiates the short sale by contacting a Licensed Realtor to find a buyer at the current market price, typically a price much less than the seller may have paid for the property. The seller’s Realtor must find a bona fide purchaser for the property at the current market value before the short sale offer can be submitted to the seller’s lender.
Short sales are more beneficial to a lender than a foreclosure. Lenders are not in the business of managing and owning property, and often a short sale presents a less expensive option than completing the foreclosure process. Lenders accepting short sales receive a substantial percentage of the outstanding loan amount due without waiting for a time consuming foreclosure, and they are able to avoid foreclosure, maintenance fees, and the risk of a declining market.
Loan Modifications
A loan modification is a tool used to avoid a foreclosure case. When a borrower can no longer afford the payments due under the original loan, the borrower and lender may negotiate to modify the terms of the original loan. If the lender would incur a substantial loss should they proceed with a foreclosure, the lender may be willing to negotiate to modify the loan and sustain a smaller loss than the loss they would incur in the event of a foreclosure. Modification is especially common when the property that secures the loan has decreased in value below the amount that is owed on the mortgage and even after a foreclosure the lender would not recover the full amount owed. A modification is a permanent change in the terms of the loan and usually takes one of four forms:
- Reduction of the Interest Rate – The most common modification negotiated between lenders and borrowers is a reduction in the loans interest rate and/or a conversion of a variable rate loan into a fixed rate loan.
- Extension of the Loan Payment Period – Lenders may allow for a modification, which will extend the period over which the principle is repaid in order to lower the monthly payments. Extending the loan payment period results in a total higher interest being paid over the life of the loan, as well as a slower accumulation of equity in the home.
- Re-amortization with Capitalization of Arrears – A lender may allow for missed payments to be added back to the principal amount of the loan. The loan will then be recalculated using the same interest rate and time period as before. This will cause a slight increase in payments, but it will cancel the arrears. If re-amortization can be combined with any other forms of loan modification, payments can be reduced considerably.
- Reduction of the Principal Balance – If the loan amount is higher than the value of the property, due to reasons out of the borrower’s control, a lender may consider reducing the principal. They may also reduce the principal amount if they realize that the only other option is foreclosure in which they will obtain the current value of the property minus costs. If the principal is reduced, this will of course lower the payment. Some lenders will choose to lower the principal in the event that they are allowed to keep deferred junior mortgages in the amount of the reduction. This secures the lender in the event that the property goes up in value. These junior mortgages generally only require payment in the event that the property is sold.
Forbearance Plans
A forbearance plan allows the borrower to temporarily reduce or suspend monthly payments until the end of the plan period. At the end of the period, the borrower resumes their regular monthly mortgage payment, as well as making payments to reduce the accumulated debt owed to the lender.
Short Refinances
A short refinance is similar to a short sale except that the homeowner keeps the home. In a short refinance, the homeowner’s lender agrees to take a lesser amount to satisfy the mortgage when a home has decreased in value, however unlike a short sale where the lesser amount is paid by a new buyer, in a short refinance the homeowner finds a new lender that will refinance the loan for the lesser amount, and we will negotiate with the current lender to accept the refinance offer in order to avoid a foreclosure.
Loan Assumptions
A lender may allow for the mortgage to be assumed by a third party. In the event of an assumption, the person receiving the assumed mortgage will take over payments on the property. They will also be responsible to pay back any missed payments prior to the assumption unless a payback plan had already been agreed upon. A mortgage is presumed to be assumable unless stated otherwise in the contract. If the contract has a “due on sale” clause then the loan will be accelerated upon the transfer of the mortgage.