Mortgage Workouts (Modifications) as a Defense to Foreclosure
	General Rule. For almost all homeowners whose mortgage is in default, a workout can be made if it is supported by the homeowner’s revised budget. Even after a foreclosure has been started. Also, for example a face-face meeting is required for a homeowner who lives within 200 miles of a lender or branch office, before an FHA foreclosure can begin. If your budget will not permit a workout, usually on account of other bills, then either a Chapter 7 or 13 bankruptcy filing may allow you to keep your home and reduce or eliminate the amount owed on other bills. f

Types of Mortgage Workouts

Today mortgage lenders now are more anxious than ever to negotiate an agreement to prevent foreclosure. The lender would prefer to avoid a foreclosure sale. The lender wants you to keep your home.

In fact, FHA requires that a face-face interview with the homeowner be held before 3 payments are unpaid. As long as you live in the property or you live more than 200 miles away from the lender, servicer, or a branch office of either. This must be done before foreclosure proceedings are initiated.

A mortgage workout is a modification of the loan terms so that you can catch up and keep the loan in place. In many cases it provides a short term way to avoid the foreclosure sale as well as a long term strategy to pay the mortgage and other debts.

To begin, prepare a budget which is reasonable for usage to propose a workout. The income and expense information must be detailed and fairly accurate. Gather the last couple of years of tax returns. Create a strategy to propose a payment plan to the lender which will work for your family and also for the lender.

1. In addition to your first mortgage, your plan must address other secured debt such as other mortgages, homeowners association dues, and car payments, and family necessities, such as utilities.

2. Prepare a “hardship” letter, stating why you have defaulted. What is the reason that you have fallen behind in your payments? Be prepared to provide proof if you have been laid off or suffered some other setback.

3. Obtain information about the property value, including the condition of the property.

4. Study your options and know what you want before you contact the lender. For example:

a. Don’t propose an unrealistic budget. It must be a workable plan for you.

b. If you were temporarily laid off, you may only need temporary help with a payment plan to pay the missed payments.

c. If you have a permanent loan reduction, you may need a restructuring of you loan. Such as a reduced interest rate

d. If you cannot keep your home, then you may be able to get more time to sell it. Selling your home is the best option to keep more of your equity.

e. Don’t ask for more than you need, since lenders are not happy to see you asking for more than you need

5. You must understand the details of your loan and the details of your default. How much are you in default and what does the default mean to you?

6. Your mortgage holder (real lender) is almost always not the company to which you are paying your mortgage payments (the “servicer”). Most loans are owned by Fannie Mae, Freddie Mac, HUD, or are pooled together and sold to large investors.

7. Contact the mortgage servicer first. The servicer is the company to whom you are sending your mortgage payments. Such as Countrywide, Wells Fargo, or GMAC. Often the servicer is not the original lender on your loan documents. Often the real lender on a prime mortgage is Freddie Mac or Fannie Mae.

8. Request workout application package from your servicer. The servicer will deal with you directly, rather than you work with the mortgage owner.

9. If a foreclosure attorney already has your case, you may have little alternative but to work with that law firm. Particularly if the servicer tells you to work with that attorney. If it is early in the foreclosure process, the attorney may have to be pushed to work with you. Understand that the attorney makes money by doing the foreclosure.

10. Contact any mortgage insurer. Such as private mortgage insurance, FHA, and VA. They all have an interest in preventing the foreclosure. Sometimes they will insist that a workout be processed. Send copies of your workout application to any mortgage insurer to keep them informed.

Sometime you can make a partial claim as shown in the following example.

	Example - Explanation of Partial FHA/HUD Claim. For homeowners who live within 200 miles of the lender, the servicer, or a branch office, a face-face meeting is required prior to the foreclosure of an FHA loan. In some cases, a claim can be made where FHA or HUD will reimburse your lender or the guarantor will advance money (make a one-time payment) to you so that the mortgage arrears is cured. You may have to meet certain requirements, such as not able to do a different workout, be between 3 and 12 months behind on your mortgage, agree to a lien on your property for the cure amount, and agree to make 3 mortgage payments before getting the help. Generally this help must be repaid, but it is interest-free and does not have to be paid until you sell or refinance your home. As with other workout options, you have to address your other bills, such as credit card bills and car loans in order to make a workout agreement.

11. During the workout process, make whatever payments you can to the lender. If your payments are returned to you, keep the returned payments in a special account, or at least set them aside. If you can save a lump sum to offer in a workout agreement, you appear to be more responsible and the lender will be more receptive to a workout.

12. If you cannot do a workout, then you should be saving money to move and address your other monthly bills.

13. The workout application process is different for different lenders. In addition to a formal application which details your income and expenses, you should be prepared to submit a recent credit report, a hardship letter explaining why you are behind, income verification such as pay stubs, a property appraisal or market analysis, and filed income tax returns.

14. Be prepared to follow up and negotiate. Your case will be unique. The specifics of each case are different from most every other case.

15. In a workout proposal, you should ask for terms which will solve your problem for both the short term and the long term. Sometimes you may need a combination of workout options.

A. Request a delay in a scheduled foreclosure sale. This can often be done if the foreclosure sale is more than 30 days away. Some lenders will grant a delay only when the foreclosure sale date is near. But, don’t delay until the last minute, because you begin to lose your options the closer you get to the foreclosure sale date. Get a written response from the lender so that you have some verification of the agreement to delay the sale.

B. Propose a payment agreement to cure your default. Such as:

1. Forbearance agreement
2. Reinstatement agreement
- such as an additional 1/4 of each payment to made with a regularly scheduled
payment until you are caught up.
3. Deferral Agreement

Now an agreement to cure a default may last for more than one year.

A common agreement is one similar to what you would get a chapter 13 bankruptcy payment plan. This can be an easy agreement to negotiate.

C. Temporary Interest Rate Reduction. If your income reduction will last for a limited amount of time, but you cannot presently make your monthly payment. You usually will need a reasonable plan to increase your income so that you can resume making the full payments.

A good reason for the lender to reduce the interest rate to the market rate (or even below) is that the present market rate is what the lender will get for a new loan. An interest rate reduction prevents the lender from adding the missed interest amounts onto the principal amount owed.

D. Recasting or Deferral of the Missed Payments. Although less popular today because of the accounting problems for the servicer, lenders have agreed to delay the payment of the missed payments until the end of the loan.

E. Modifying the Loan Terms. Lenders do modify the terms of the loan if you have had a permanent change in your income, such as retirement or the death of spouse, and it is not in the lender’s best interest for foreclose. Particularly when the foreclosure sale is likely to bring much less than what is owed. The terms that may be modified include: interest rate reduction, reamortization, or capitalization of arrears. You may also get a modification if you have legal counterclaims against the lender.

- an interest rate reduction may include a temporary reduction (called a step-up plan) Or a change from a variable rate to a market rate fixed rate.

- an extension of the repayment period out to 30 days on the remaining balance.

- Reamortization means a recalculation of the monthly payment over the remaining term of the loan. Sometimes the arrears can be capitalized and added to the principal amount owed before the recalculation is made. This lets the overdue payments to be paid over the life of the loan.

F. Deferred Junior Mortgage. Sometimes the lender will reduce the principal amount of the first mortgage is you give a second mortgage in the same amount of the principal reduction. For example, if the principal is reduced by $30,000, then the second mortgage will be in the amount of $30,000. Then you may get a deferral of the obligation to pay on the $30,000 second mortgage.

G. Legal Claims against the lender. May give you better negotiating power to lower the interest, convert to a fixed rate, capitalize the arrears, or even reduce the principal amount owed down to the fair market value of the home.

H. Pre-Sales for More than You Owe. If you can show that you have made substantial progress in reaching an agreement with a specific buyer for a sale price which will result in full payment to the lender, you can almost always get an extension of the foreclosure sale to allow the sale.

I. Short-Sales. Pre-Sales for Less than you Owe. If you want to sell the property for less than what is owed, you have to get lender approval so that the deed of trust lien is released and a pending foreclosure sale is delayed to allow the sale. A short-sale may allow the lender to get more money than if the lender went through with a foreclosure. Generally the lender also will have to approve the sale price. What you want is a written agreement from the lender that the lender will not seek a deficiency judgment after the sale. In a short-sale, you are losing your home similar to a deed in lieu of foreclosure. However, you are trying to avoid a deficiency judgment and perhaps improve your credit report somewhat.

J. Mortgage or Delinquent Assumptions Upon a Sale. Here, the lender may agree that a buyer may assume your present loan. If your loan is in default, the buyer will have to cure the default to avoid a foreclosure.

K. Modification fees, Foreclosure Fees, and Late Charges. Many lenders will charge a fee of $600 or more for taking a workout application. You may request a waiver or reduction of the fee. However, you will likely have to pay at least the lender’s out-of-pocket fees, such as an appraisal fee.

L. Finalizing and Documenting a Workout Agreement. You may be asked to waive any legal claims in order to final a workout agreement. In most cases, you should waive any such claims in order to save your home. The workout must be documented in writing.

M. How to Deal with a Poor Workout Negotiation. If you are not getting cooperation from the lender or servicer, you may get help from the actual mortgage holder or mortgage insurer.

N. Deed in Lieu of Foreclosure. If you cannot agree to a workout and you cannot find any way to keep your home, then you might transfer your home to the lender. This transfer is commonly called a “deed in lieu of foreclosure.” If you have much equity in the property, this is often a bad idea. If you do a deed in lieu, then get a written agreement. You should also try to get a waiver of any potential deficiency judgment.

O. Income Tax Effects of Short-Sales and Workout Agreements. Any workout plan or all short sales include an agreement to cancel part of your debt. Under our tax laws, cancellation of debt is taxable income. The lender must report the cancellation of debt to the IRS and you must pay income tax on this as though it is regular income (but not payroll taxes.) However, you do not have taxable income to the extent that you are insolvent at the time of debt forgiveness or you took bankruptcy to cancel the debt.

P. Credit consequences of Foreclosure, Default, Deed in Lieu, and Work-Out Plans. A foreclosure sale will be reported for 7 years. Since lenders interpret credit reports differently, there is no way to tell how the foreclosure sale will ultimately affect your credit. However, a completed foreclosure sale or bankruptcy will usually make you ineligible for another mortgage for the following 2 year period. A deed in lieu of foreclosure affects your credit report about the same as a foreclosure. However, after 2 years, if you are financially solvent and stable, you should be able to qualify for a new mortgage.

	An example of a mortgage loan workout: Current Mortgage situation: Original Loan: $250,000 Present Balance Owed: $200,000 Interest Rate: 8.0% Current Monthly Payment: $1834.00 Interest Arrears: $ 10,000 Foreclosure costs: $ 1,000 Total Amount Owed: $211,000 Re-amortize to 30 years, with Arrears Capitalized: New loan amount: $211000 Interest Rate: 8.0% New Monthly Payment: $1548.00 Here, the homeowner has a reduced monthly payment of about $286.00 per month and the arrears is added into the existing loan amount. More reduction may be had if the interest rate can be lowered. Your income and other bills will determine how attractive your proposal is to your mortgage lender. If you have too many other bills, then you can usually keep your home and pay your other bills based on your ability to pay, using a Chapter 13 bankruptcy filing. (A Chapter 7 filing should eliminate most of your other bills.) If you cannot do such a workout, then a Chapter 13 bankruptcy will allow you to keep the home if you can pay the $11,000 arrears over 60 months at $183 per month plus the Trustee’s 10% fee of about $19 per month. Then your payments are the original $1,834 + $183 + $19. Most of the rest of your monthly bills will be paid based on your ability to pay. Such as your credit card bills and other unsecured debt. In other words, a Chapter 13 will allow you to catch up on the arrears, keep your home, and pay other bills based on your ability to pay. At the end of the plan, whatever balance remaining on your unsecured bills, such as credit card bills, will be discharged (eliminated.)

Start the workout process as early as possible, as soon as some payments have been missed. This may avoid foreclosure fees and costs, avoids having to deal with a foreclosure attorney, and gives you more time to re-structure your income and expenses without the pressure of a foreclosure sale. If you have to file bankruptcy, then the lender may be less willing to do a workout.

ARM loans can be difficult to work with, unless you can convert them to a fixed interest rate loan.

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