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Alternatives to Foreclosure

For homeowners that are behind on their payments that have not had a foreclosure action filed against them, there are several alternatives to foreclosure that may resolve the homeowners obligations under the subject mortgage or mortgages.  Some of the alternatives are: Deed In Lieu of Foreclosure, Short Sale, and Short Refinance.

Deed In Lieu of Foreclosure

Deed In Lieu of Foreclosure is an agreement wherein the homeowner voluntarily transfers ownership of the home to the lender in exchange for the lender releasing the homeowner for all obligations under the mortgage and note.  Some lenders demand that the homeowner execute a promissory note for a portion of their expected losses in exchange for their acceptance of a deed in lieu.  Other lenders will only agree to a deed in lieu if it is with recourse.  A deed in lieu that is with recourse allows the bank to sue the homeowner for the difference between when the amount of the loan and the amount obtain when they sell the property.  In our opinion, it is useless and foolish for a homeowner to agree to a deed in lieu of foreclosure unless it is without recourse.  A deed in lieu is supposed to be mutually beneficial.  What the bank gets is possession of the property without the expense and delay of hiring a lawyer to bring a foreclosure action.  What the homeowner should get is a complete waiver of the outstanding balance.  If the deed in lieu is not without recourse, the homeowner is not getting anything.  If the bank does not offer a deed in lieu without recourse the homeowner may as well let the bank foreclose and negotiate for a waiver of deficiency with the lender’s foreclosure attorney.

Short Sale

A Short Sale is agreement by which the property is sold for less than the outstanding loan balance and the lender agrees to accept the short sale proceeds in full satisfaction of the loan.  If the real property is not the owners primary residence and the property does not generate sufficient rent to pay the mortgage, taxes, insurance, and maintenance, then a short sale is usually in the homeowner’s best interest.  If the homeowner has substantial assets or income, such that the bank might collect on a post-foreclosure deficiency judgment, then the bank might insist on a contribution from the homeowner before approving the short sale.  Under such an arrangement, the selling homeowner would have to bring “cash to the closing.”   Banks often file foreclosure actions while a home is on the market as a short sale property.  This tactic is used so that the short sale process does not last indefinitely.  As the foreclosure case develops, the bank will evaluate which option (short sale or foreclosure) will best mitigate its losses on the loan.  If the bank takes the home by foreclosure before a short sale is complete, the homeowner risks being sued for a deficiency judgment.  If a foreclosure is completed after the property is sold, the bank may apply to the Court for a deficiency judgment for the difference between the amount of the loan and the amount obtained for the property.  The bank can then seek to levy on the assets and wages of the borrower.  As such, even if the homeowner is attempting to short sell the property, if a foreclosure action is filed against the homeowner, the lawsuit cannot be ignored.  Fighting the foreclosure will increase the amount of time the homeowner has to sell the house and increase the likelihood that the bank will accept the a reasonable offer on the property.

Short Refinance

Short Refinance:  (Short ReFi):  A short refi is a process by which the lender agrees to accept a loan payout amount that less than the full amount of the loan and the borrower obtains the payoff amount from a different lender.  Example:  Jane has a $400,000 mortgage from Countrywide on a property that has fallen in value from $415,000 to $215,000.   Countrywide agrees to accept $210,000.00 in full satisfaction of its $400,000 loan because Countrywide knows that it would by expensive to complete a litigated foreclosure against Jane and that it would be difficult to net $210,000 by short sale or other means after commissions and carrying costs are considered.  Jane then obtains a loan for $200,000.00 from New Bank and $10,000 of cash and uses the loan proceeds and cash to settle the Countrywide mortgage.  After the short re-fi, Jane has cut her loan balance from $400,000 to $210,000 and has gone form being $185,000 upside down to having $5,000.00 in equity in the property.  Short Re-Fi can sometimes be accomplished with less than perfect credit and without a cash down payment.  A good candidate for a short re-fi will need steady employment, to be living in the property, and have sufficient income to pay the new mortgage.

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