One of the areas of practice for BoltNagi PC is commercial and residential mortgage foreclosure law. Although the substantive law governing commercial and residential mortgage foreclosures is virtually identical, commercial borrowers have an important advantage over residential borrowers: If a commercial borrower is facing foreclosure, it can seek out new investors or a “white knight” to get it out of trouble. Residential borrowers don’t generally have that option.
However, residential borrowers actually do have a network of potential “white knights” who can help them get back on track: Family members. Family members are usually deeply vested in one another’s relative success, and the burdens that are occasioned by the loss of a home for one family member can have ripples throughout the rest of the family. Foreclosed home owners often have to turn to other family members for financial support after the fact, and there is no mechanism for supportive family members to recoup the money that they spend. And, arguably, that money could have been better spent reinstating the defaulting home owner’s loan. If a borrower’s family members could be encouraged to help the borrower become current on his or her payments and stay current, then everybody wins.
Usually, a white knight in a commercial context gets an interest in the company in exchange for its investment. Lenders could experiment with similar (and creative) incentives to encourage “investment” in a troubled mortgage loan by family members. Incentives for family members might include a lienable interest in the property (with the approval of the mortgage lender) up to the amount that the family members contribute to reinstating the loan. If a lender agrees to guarantee repayment of those amounts—either through some sort of guaranty or subordination of the lender’s mortgage interest to these (relatively) miniscule amounts—then family members would be even more enticed to help “bail out” a family member who has fallen on hard times.
An alternative to the subordination idea might be for lenders to offer some sort of guaranteed rate of return—an eighth (or even a tenth) of a percent shaved off the interest rate—so that family members see this as way to assist their family members without throwing good money after bad. The key is not to make these arrangements some kind of alternative to regular investments. The key is simply to allow family members to contribute to the well-being of the borrower with some kind of guarantee that they will see their money again. This plan could even be spread across several family members, with each member contributing a small amount, without any single family member taking on the enormous burden of bailing out the borrower.
Even if these suggestions are ultimately unworkable, borrowers, family members, and lenders should be encouraged to experiment along these lines. The incentives for family members to invest in one another’s success are based on informal age-old family bonds. If these naturally-existing loyalties can be retooled and incentivized in the context of
residential mortgage loans, then the same incentives that exist for commercial investment can be brought to bear on the problem of residential mortgage foreclosures. Given the right circumstances, it is generally beyond dispute that family members will rally to help one of their own, so long as the downside risk for any one of them is not too great.
A. Jennings Stone is an attorney in the litigation practice group and concentrates his practice in the area of foreclosures at the law firm of BoltNagi PC. BoltNagi PC is a full service business law firm in St. Thomas, Virgin Islands.