In a previous post, I offered tips on how to avoid foreclosure. Most of those suggestions centered on how a mortgage borrower should talk to the mortgage lender at the onset of financial difficulties. But what alternatives do borrowers have if they are already in active foreclosure litigation and they don’t qualify for loan modification programs such as the Home Affordable Modification Program (known as HAMP)? In that case, a borrower’s options narrow considerably, but a few options might remain open.
First, a few caveats: This is a blog post, not a legal memorandum, and nothing in it should be construed as legal advice. Reading this article will not form an attorney-client relationship with BoltNagi PC. This article is intended only to provide a general sense of what options might be available to settle mortgage foreclosure litigation. If you have specific questions about your own situation, consult an attorney. This article is not a substitute for individualized legal advice, and your specific circumstances will determine the best course of action for you.
Also, this post assumes that the mortgaged property is in the U.S. Virgin Islands, which is a jurisdiction that requires judicial foreclosure. Although elements of this article may apply broadly to other jurisdictions, it is not a substitute for appropriate legal counsel from those jurisdictions.
Finally, this post assumes that the borrower wants the easiest, least expensive, and most painless way to resolve an active foreclosure lawsuit. It is certainly possible to mount a legal defense to foreclosure. There are attorneys who will champion those causes, and it is not the intent of this article to dissuade borrowers from seeking them out. But unless there is clear evidence of lender wrongdoing, there are very few grounds to challenge a conforming promissory note, mortgage, and subsequent default.
Ever since the financial collapse of 2008, mortgage lenders and servicers have significantly tightened their internal practices and procedures. And for every headline-grabbing allegation of mortgage fraud, there are untold numbers of enforceable mortgages that proceed uneventfully from default to foreclosure. At most, foreclosure litigation will only buy time for the borrower, and even that will come with the expense of legal fees and costs that will very likely be added to the borrower’s total mortgage debt.
The first option for a borrower is to get current with any late mortgage payments. This is called “reinstating” the loan. It might sound like a ridiculously obvious solution, but reinstatement is a powerful weapon to stave off foreclosure and retain the mortgaged property. If a borrower faces a potentially short-term financial shortfall, the foreclosure litigation will stop dead in its tracks if the borrower catches up on any outstanding back payments. With quick action, the borrower can pull together cash from other sources while the amounts in arrears are still manageable. But this option has a very short shelf life. The longer that a borrower goes without reinstating the loan, the more that interest, costs, and legal fees will continue to accrue. After a few months of these mounting costs, coupled with the borrower’s usual monthly mortgage payments, reinstatement usually becomes out of reach for most borrowers.
A second option is to seek either a short sale or a deed in lieu of foreclosure from the mortgage lender. Both of these options assume that the borrower does not want to retain the mortgaged property. In a short sale, the lender agrees to let the borrower sell the property for less than is owed on the mortgage. The borrower must already have a potential buyer, and the offer must be a reasonable offer—i.e., at or near fair market value. The lender will likely require an appraisal or a broker price opinion (“BPO” for short) to establish a reasonable sale price.
A deed in lieu of foreclosure is where the lender agrees to accept a deed to the property in exchange for the satisfaction of the borrower’s mortgage debt. The property must not have any liens against it. Again, the lender will require an appraisal or BPO, as well as a title search.
For a borrower to qualify for either of these options, the borrower must provide personal financial information to prove that the borrower does not have the means to satisfy the mortgage debt. (Most residential mortgage lenders will consider you for a short sale or deed-in-lieu only when it is clear that a borrower’s financial situation makes a loan modification unworkable). In some instances, the lender may require some financial contribution from the borrower to help offset the lender’s anticipated loss. If the mortgage is backed or insured by an entity such as Fannie Mae, Freddie Mac, or the Federal Housing Administration, then that entity also will have to review and approve the application.
Again, keep in mind that I am speaking in generalities. Both a short sale and a deed-in-lieu are fairly complex transactions, and a lender has the final word on what it will accept for either of these remedies. Both remedies will have legal and financial consequences. Consult an attorney if you have questions about either of them.
If a borrower does not qualify for a short sale or a deed in lieu of foreclosure, then a third option might be either a consent judgment of foreclosure or a confession of judgment. Basically, a consent judgment or a confession of judgment will accomplish the same goal: The borrower and the lender agree that the borrower will freely and voluntarily accept the entry of a foreclosure judgment. This saves both the borrower and the lender time, money, and the uncertainty of litigation; and it gives the borrower some control over the resolution of the case.
Almost always, an agreed-upon entry of judgment requires the borrower to surrender any right to get the property back (known as “rights of redemption”). If a borrower agrees to cooperate with the lender early in the suit, the lender might agree to foreclose on more agreeable terms. (Just don’t ask for the moon—lenders are answerable to their regulators and their shareholders. They cannot and will not give away the store just to settle with an individual borrower.)
Finally, agreeing to a consent judgment or a confession of judgment is a serious matter, and it will have legal and financial consequences that go beyond the immediate foreclosure case. If you are entertaining this option, seek legal advice if you have any questions.
BoltNagi PC is a full-service business law firm located in St. Thomas, U.S. Virgin Islands, and represents both local and national mortgage lenders and servicers. A. Jennings Stone, III serves as Chair of the BoltNagi PC Creditors Rights Practice Group.