Foreclosure Workouts

A workout agreement is a mutual agreement between a lender and borrower to renegotiate terms on a loan that is in default. Generally, the workout includes waiving any existing defaults and restructuring the loan’s terms and covenants. A workout agreement is only possible if it serves the interests of both the borrower and the lender.

How Workout Agreements Work

A workout agreement intends to help a borrower avoid foreclosure, the process by which the lender assumes control of a property from the homeowner due to a lack of payment as stipulated in the mortgage agreement. Workout agreements apply to liquidation scenarios as well. A business that becomes insolvent and cannot meet its debt obligations may seek an arrangement to appease creditors and shareholders. The renegotiated terms will generally provide some measure of relief to the borrower, in terms of reducing the debt-servicing burden through accommodative measures provided by the lender. Examples of relief can include such as offer as extending the term of the loan or rescheduling repayments. While the benefits to the borrower of a workout agreement are obvious, the advantage to the lender is that it avoids the expense and effort of payment recovery efforts, such as foreclosure.

Things To Consider When Negotiating Workout Agreements

For borrowers, general best practices to consider when negotiating, or thinking about negotiating, a workout agreement with a lender includes the following:
• Provide ample notification: Giving lender advance notice of an inability to meet any and all debt obligations is a courtesy to extend. Most lenders will likely be more accommodating when borrowers seek a workout agreement if they are aware that default could be an issue. Providing notice engenders confidence that the borrower is on top of their loan management and interested in being a reliable business partner that the lender can trust.

• Workout agreement terms will vary: A lender is not under any obligation to restructure the terms of a loan, so it is incumbent on the borrower to be honest and direct. However, the lender will likely want to limit their losses and maximize recovery of the loan they granted, so it is likely in their best interest to help the borrower, to the extent that they can extent. There are tax considerations as well. Any type of adjustment to the terms of a loan in a workout scenario could affect the borrower’s tax situation. Typically, the Internal Revenue Service (IRS) treats any loan reduction or cancellation as taxable income.

Repayment Plan: Keeping Current and Catching Up

With a repayment plan, you arrange to make up your missed payments over time and stay current on your ongoing payments. This approach is usually the most feasible and easiest to work out with your servicer. For it to work, your income will have to be able to cover both current and makeup payments. Repayment plans typically last three, six, or nine months. Servicers usually don’t offer longer plans because most borrowers find it difficult to make larger-than-normal payments for an extended period of time. Sometimes, the servicer can approve a repayment plan immediately without asking the lender for permission. The longer it will take you to catch up, the likelier it is that your servicer will have to get permission from the lender.

Reinstatement: Getting Caught Up on the Loan

Many states give you, by law, the right to reinstate your loan (make it current by paying off the delinquent amount in a lump sum). Or your mortgage contract might give you a period of time during which you can reinstate and stop a foreclosure.

Redemption: Paying Off the Loan

In all states, you can redeem the mortgage (pay off the entire loan) before the sale. Some states give you a period of time after the sales date to redeem the mortgage by paying it off in full (plus interest and costs) or by reimbursing whoever bought the home at the foreclosure sale.

Forbearance: Getting a Break from Payments

Under a forbearance agreement, the servicer or lender agrees to reduce or suspend your mortgage payments for a period of time. In exchange, you promise to start making your full payment at the end of the forbearance period, plus an extra amount to pay down the missed payments. Forbearance is most common when someone is laid off or called to active military duty for a relatively short period of time and can’t make any payments now but will likely be able to catch up soon. In forbearance, unlike a repayment plan, the lender agrees in advance for you to miss or reduce payments for a period of time. But both forbearance and repayment plans require extra payments down the line to bring the loan current. Forbearance for three to six months is typical; though a longer period might be possible, depending on the lender’s guidelines and your situation.

Modification: Lowering Your Payments

Unlike repayment plans and forbearance, mortgage modifications are designed to lower your monthly payments over the long term and, often, bring you current on the loan. If you can’t afford your mortgage payment now, or won’t be able to in the near future, a loan modification is most likely the best approach to remaining in your house.

There are many reasons why borrowers might need a modification, including:
• Their income stream was disrupted by a layoff or injury and a new job at the same pay is just not available.
• Their interest-only loans caused the principal to reach a preset cap, which in turn dramatically pushed their monthly payment upwards to an unaffordable level.
• Their interest rates reset higher.
• Something happened in their life that required them to reprioritize their budget—for instance, a medical emergency or a child in trouble.
Here are some of the ways your servicer might modify a mortgage to reduce your payments:
• Reduce your mortgage’s interest rate to the current market rate, if it’s lower than what you’re supposed to be paying now.
• Convert from a variable-rate to a fixed-rate mortgage, which could bring the payment down.
• Extend the loan’s repayment period—for instance, from 30 years to 40. This will bring down the monthly payment, but delay for many years the time when you can begin to build equity.
• Forbear some of the principal balance. (“Forbearing” the principal means setting aside a portion of the total debt before calculating the borrower’s monthly payment. The borrower typically has to pay the set-aside portion in a balloon payment when refinancing or selling the home, or when the loan matures.)
• Reamortize the loan, which involves adding the amount of the missed payments to the principal balance and usually issuing a new interest rate for a new period of time. Reamortization can result in an increased payment (for example, if the interest rate stays the same or increases) or a reduced one (for example, if the interest rate is reduced and the loan period is increased).

Short Sales and Deeds in Lieu of Foreclosure: Ways to Give Up Your Home
In a short sale, the lender agrees to let the homeowner sell the home to a new owner for less than is owed on the mortgage loan. In a deed in lieu of foreclosure transaction, a homeowner voluntarily hands over the home’s title to the bank in order to satisfy the mortgage loan.

Common Foreclosure Prevention Workout Options

Lenders usually offer workout options based your household budget. Your servicer will make a final decision about which foreclosure prevention options are available to you, based on the rules and guidelines of the loan investor. Here are some various options that may be available to you, based on different scenarios.
If you have a positive cash flow in your budget, then you can explore the following options:
• Reinstatement
• Loan Modification
• Repayment Plan
• Partial Claim (FHA)

If you have a negative cash flow in your budget, then you should consider the following options:
• Forbearance
• Loan Modification
• Special Forbearance (FHA)
• Short Sale
• Deed in Lieu
• Sale of the property
If you have a balanced budget, consider learning more about:
• Loan Modification
• Partial Claim (FHA)
• Special Forbearance (FHA)
Other options to consider are:
• PMI – (Private Mortgage Insurance)
• Sale of Property
• Refinance
• Reverse Mortgage

Mortgage Reinstatement

To make your mortgage current, all delinquent mortgage payments and past due amounts must be paid. You may reinstate the loan at any point, even during a workout plan or foreclosure. To use this option, you will need a lump sum of cash.

Mortgage Forbearance

To resolve a temporary problem, this option allows you to send in no or reduced payments for a specified period. When forbearance ends, all payments uncollected during the plan must be repaid. This can be done by reinstatement, a repayment plan or a loan modification from the new financial situation. Forbearance may provide time to increase your income in order to qualify for another long-term loss mitigation option.

Mortgage Loan Modification

This is a written agreement between you and the servicer to change one or more of the original loan terms—for example, the rate, term or type of mortgage (ARM to a Fixed). The overdue amount, plus any additional fees, will be financed into the current loan balance, creating the new balance amount. Generally, a loan modification will reduce your monthly payment, but that is not always possible.

Mortgage Repayment Plan

This option allows you to send their regular payment, plus an agreed-upon amount each month. Plans can range from three to 24 months, depending on the lender. The Loss Mitigation department can extend plans beyond the collections department when pursuing this option. To qualify, your budget will need to show a surplus.

Deed in Lieu of Foreclosure

Here, you may voluntarily give the lender a clear title in exchange for a discharge of the debt. But your property must have listed for sale for a specified period. In most cases, it is a last resort. Plus, you must first try to sell the home using the servicer’s guidelines.

Partial Claim (FHA)

Your loan can be made current by securing up to 12 months of past due principal, interest, taxes and insurance in a separate, interest-free note payable when the original mortgage is satisfied. To qualify, you must be at least four months delinquent, but no more than 12.

Special Forbearance (FHA)

This is a written repayment agreement between a mortgagee and mortgagor. It contains a plan to reinstate an asset at least three mortgage payments due and unpaid. The forbearance agreement allows eligible borrowers to delay monthly mortgage payments for at least four months.

Mortgage PMI

If PMI is part of your mortgage payment, the PMI company may be able to help you pay outstanding amounts to avoid larger losses with a foreclosure.

Mortgage Sale of Property

You will be released from the mortgage debt if the home is sold at a price equal to or above the outstanding mortgage note.

Refinance

You can satisfy the current debt with a lender and bring their account up to date. Typically, you must have a strong credit history to pursue this option.

Reverse Mortgage

If you are age 62 or more and have a significant amount of equity in your home, a reverse mortgage may be an option to help you prevent foreclosure.

Mortgage Forbearance Agreement

A mortgage forbearance agreement is an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments.

Breaking Down Mortgage Forbearance Agreement

A mortgage forbearance agreement is made when a borrower has a difficult time meeting his or her payments. With the agreement, the lender agrees to reduce or even suspend mortgage payments for a certain period of time and agrees not to initiate a foreclosure during the forbearance period. The borrower must resume the full payment at the end of the period, plus pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. The terms of the agreement will vary among lenders and situations. A mortgage forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems. Borrowers with more fundamental financial problems such as having chosen an adjustable rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable must usually seek remedies other than a forbearance agreement. A forbearance agreement may allow a borrower to avoid foreclosure until his or her financial situation gets better. In some cases, the lender may be able to extend the forbearance period if the borrower’s hardship is not resolved by the end of the forbearance period to accommodate the situation.

While a mortgage forbearance agreement provides short-term relief for borrowers, a loan modification agreement is a permanent solution to unaffordable monthly payments. With a loan modification, the lender can work with the borrower to do a few things (such as reduce the interest rate, convert from a variable interest rate to a fixed interest rate or extend the length of the loan term) to reduce the borrower’s monthly payments. In order to be eligible for a loan modification, the borrower must show that he or she cannot make the current mortgage payments because of financial hardship, demonstrate that he or she can afford the new payment amount by completing a trial period and provide all required documentation to the lender. The documentation the lender requires could include a financial statement, proof of income, tax returns, bank statements, and a hardship statement.

Loss Mitigation Period

Under federal law, in most cases, a servicer can’t start a foreclosure until a homeowner is more than 120 days overdue on payments. Applying for loss mitigation before foreclosure starts. The 120-day pre-foreclosure period gives the homeowner time to:
• get caught up on the loan or
• work out a foreclosure avoidance option, like a mortgage modification.

If you turn in a complete loss mitigation application during the 120-day period, the servicer must evaluate the submission, and inform you of the results, before it can start to foreclose. Though, once the 120-day period expires, if you haven’t brought the loan current or applied for (or received) a foreclosure alternative, the servicer will probably start a foreclosure. Applying for loss mitigation after foreclosure begins. If you don’t apply for loss mitigation during the 120-day pre-foreclosure period, you can still apply for a loss mitigation option after the foreclosure begins. Under federal law, so long as you submit a complete application more than 37 days before the foreclosure sale, the servicer can’t ask for a judgment or order of sale, or conduct a foreclosure sale unless:
• the servicer denies your request (and any appeal period expires)
• you decline the loss mitigation option offered, or
• you fail to abide by a loss mitigation agreement.
Still, it’s usually a good idea to get the process rolling during the 120-day pre-foreclosure period—before you get even further behind in payments.

Many mortgages and deeds of trust have a clause that requires the lender or servicer to send you a notice, commonly called a breach letter, informing you that the loan is in default before it can accelerate the loan and proceed with foreclosure. (The acceleration clause in the mortgage or deed of trust permits the lender to demand that the entire balance of the loan be repaid if you default on the loan.)

Typically, the breach letter will provide the following information:
• the nature of the default (for example, you didn’t make payments)
• the action required to cure the default (you have to get current on the loan)
• a date by which you must cure the default, usually not less than 30 days from the date the notice is given, and
• that if you fail to cure the default on or before the date specified in the notice, this may result in acceleration of the debt and sale of the property.

If the 30-day time period expires and you haven’t cured the default, foreclosure proceedings (which could be non-judicial or judicial depending on the state and the circumstances) will begin. Most times, you’ll get this letter during the 120-day pre-foreclosure period.

Foreclosure Attorney

When you need help from a foreclosure lawyer in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.