By Roland P. Reynolds,
Esq. of The Wolf Firm (Network News, March/April 1998)
By Roland P. Reynolds,
Esq. of The Wolf Firm
(Network News, March/April 1998)
Written in collaboration with Larry Douglas, a long-time member of the mortgage
servicing industry.
Loss mitigation encompasses a number of alternatives that are used to
avoid foreclosure. Each one has its own special factors that determine whether it is the
best alternative for a particular situation. Some of the more common loss mitigation
alternatives are as follows:
1) Special forbearance agreement
2) Modification agreement
3) V.A. refund
4) V.A. comp/sale
5) FHA pre-foreclosure sale
6) Deed in lieu of foreclosure
ESTABLISH REASON FOR DEFAULT
To determine the most effective loss mitigation alternative, the
collector should start by interviewing the borrower to establish the reason for default.
1)typically, collectors follow a three-step mantra: 1) counsel the borrower, 2) identify
the hardship, and 3) execute the solution.) Generally, hardships are of two types: those
hardships created by choice, e.g. the purchase of a new, larger home, and those hardships,
which are beyond the borrrower's control, e.g. loss of income from unemployment or
illness.
The type of hardship drives many lenders' determination of which loss
mitigation alternative is appropriate. Often a deed in lieu of foreclosure will only be
offered to a borrower who has demonstrated severe hardship that is not of the borrower's
making. This alternative is particularly appropriate because it is usually a much more
economically attractive option compared to foreclosure.
Another important consideration for the collector is the duration of
the hardship. Does the borrower have a chronic problem such that the mitigation
alternative will only delay the foreclosure? Duration of hardships can be categorized as
temporary or permanent. Temporary durations are: job loss (temporary layoff), illness,
high utility bills, medical bills, and temporary disability. Permanent durations are:
death of a primary mortgagor, divorce, retirement, permanent loss of spouse's income.
Again, in cases of permanent hardship, the preferred alternative is for a solution that
separates the borrower from the property and the continued necessity for making any
payments. The temporarily challenged borrower may be able to get back on track through a
payment plan or other solution.
A TYPICAL SCENARIO:
A borrower calls in and explains that he has been off work for three
months. His spouse still has a full-time job, but he has used up his savings. He has no
realistic prospects for immediate reemployment. The borrower realized that he is unable to
keep the house. However, in the process of listing the house for sale, the borrower
discovers that the value of the property is less than the amount of the loan that encumber
it. As the financial pressure mounts, the borrower calls in asking what his options are.
Obviously, the first step is to verify the borrower's statement as to
his condition. A full statement as to present and past employment, all income, assets, and
liabilities should be obtained, preferably signed under penalty of perjury. If there is a
any doubt about the borrower's veracity, compare the information provided with the
information in the original loan application. In some cases, if the loss is going to be
substantial, a private investigator may be used to do a check of assets. Assuming the
borrower's information is confirmed, a loss mitigation alternative needs to be applied. In
this case, the borrower appears to have a hardship of a semi-permanent duration. A payment
plan or forbearance agreement will be a successful workout. The best alternative is
probably to allow the borrower to sell the property for less than the amount of the loan.
The property value should be independently verified and the short sale agreement should
provide, of course, that no cash is paid off to the borrower through escrow.
SUMMARY
In summary, loan mitigation alternatives are an essential part of
default loan servicing. When there is a problem, contact the borrower early and determine
the extent and severity of the hardship. Mitigation is almost always easier to accomplish
when instituted at the beginning of the problem.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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