Foreclosure is a painful process. Unfortunately, foreclosure has become a way of life since the onset of the real estate collapse and job-loss recession. There have been more than 300,000 new foreclosure filings in Florida so far this year. The enormous number of foreclosure actions filed in the Florida courts has resulted in huge backlogs in a court system already plagued by budgetary cut backs.
In order to deal with this onslaught, the judges of the circuit courts turned to mediation. Some judicial circuits have opted for mandatory managed mediation programs which are administered by an outside agency. Other circuits assign the cases to mediation and allow counsel to select the mediators and schedule the mediations in the same manner as other court ordered mediations. Regardless of which method is used, the result is the same. Most foreclosure actions settle through mediation.
Foreclosure mediations come in all sizes and shapes. In some cases, lender and borrower have had little, if any, communication prior to the filing of the foreclosure action. In other cases, the borrower has received competent credit counseling and has already had meaningful discussions with the lender. Obviously, mediation usually proceeds much more smoothly in the latter case.
Initially, lenders were reluctant to consider workout arrangements with delinquent borrowers. Encouraged by generous government programs, lenders are now much more willing to work with their borrowers. Also, lenders do not want to own houses, especially in the current environment. Thus, lenders are more willing to talk with their borrowers about reasonable and practical solutions to bring about delinquency resolutions. There are a number of solutions which the mediator can explore with the parties. The solution will depend upon what the borrower can afford based upon income and expenses, the type of loan, the amount of arrearage, and other factors which will be discussed during the mediation. Although lenders utilize different loss mitigation programs, every lender will require that the borrower be able to exhibit a reasonable ability to pay the modified monthly loan payment.
Most foreclosures involve property which is “under water,” i.e., property which now has less value than the principal amount of the mortgage. Refinancing is therefore usually not an option. Since lenders are not likely to agree to a reduction of principal, most workouts now involve mortgage modifications, sometimes preceded by a period of forbearance.
While there are a number of options to be explored during mediation, many mortgage modifications are based upon or patterned after the federal “Making Home Affordable” loan modification program, commonly called the “Obama Plan.” Under this plan, the lender will reduce the interest rate, and the Treasury will match a portion of the cost of reducing the interest rate to a point where the monthly payments may be as low as 31% of the borrower’s gross income. This may also entail extending the term of the mortgage because all of the delinquent payments and costs are usually added to the back end of the mortgage. In addition, both the borrower and the lender receive financial incentives from the Government in order to encourage participation in this plan.
Other possible solutions include:
Reinstatement: The lender agrees to allow the borrower to bring the loan current, including all arrearages and charges in return for the withdrawal of the foreclosure action and resumption of the regular payment plan.
Repayment Plan: An agreement to resume regular monthly payments in addition to a portion of the delinquencies each month until the borrower has caught up, at which time regular monthly payments will resume.
Forbearance Agreement: The lender delays action for a certain period. Usually, the lender will agree to suspend or reduce payments for a period sufficient to allow the borrower to recover from the cause of default.
Extension Agreement: The term of the mortgage is extended and the delinquency charges are added on to the original debt.
Blended Equity Mortgage: The lender agrees to take a percentage equity interest in the home and reduce the amount of principal accordingly.
In some cases, the borrower cannot afford to remain in the home under any type of workout arrangement. In such cases, the mediator can help the parties explore transition strategies which can ease the foreclosure process and help the borrower relocate into an affordable situation. Some alternatives which may be considered are:
Mortgage Loan Assumption: The lender agrees to allow a credit worthy purchaser to assume the existing mortgage. If the mortgage contains a “due on transfer” clause the lender may be willing to waive that provision. The lender may or may not agree to release the original borrower from liability in the event that the new borrower defaults.
Deed In Lieu of Foreclosure: The borrower voluntarily executes a deed conveying the property to the lender. The lender will then terminate any foreclosure action and will often agree to forgive any deficiency that may remain after the sale of the property. This will only work if the title is clear of subsequent liens. Otherwise, the lender would have no choice but to foreclose in order to knock out the subsequent liens.
Short Sale: The lender agrees to permit the borrower to sell the property for less than the outstanding balance of the loan. The lender agrees to release the mortgage and will often waive any deficiency against the borrower because the short sale is preferable to proceeding through foreclosure. Lenders are more likely to accept a short sale as an option in mediation if the borrower comes to the table with an “arms length” contract for sale.
As with all mediations, any foreclosure settlement plan must have two essential elements: First, it must be a plan which both parties can live with, and second, and most importantly, it has to be a plan which will work. A good mediator will ascertain enough information to be certain that he or she is able to help the parties explore those opportunities which can result in a workable and mutually satisfactory result.
ARC’s foreclosure mediators are specially trained and experienced in conducting foreclosure and pre-foreclosure mediations.