On Real Estate: Need still great for mortgage workout programs
By Jim Hagerty
Although the real estate market is improving, hundreds of thousands of homeowners are unable to pull themselves out of the red.
Sparked by several pools of federal funds, lenders are able to help their troubled clients instead of initiating foreclosure. Most offer an array of payment arrangements and mortgage workout options.
A reinstatement option involves bringing a home loan account current by paying all past-due payments, fees and penalties in one lump sum or a series of payments. This is commonly the first option lenders will offer. Some lenders will waive penalties and fees in exchange for a sensible reinstatement plan.
A repayment plan is simply an agreement in which a borrower agrees to begin making regular monthly payments in addition to a portion of what is past due. When past-due amounts are paid, borrowers revert to their regular payment plans and begin paying back the loan as agreed to in their original loan paperwork.
Forbearance agreements are common with borrowers who have the ability to bring their mortgages current, but need time to gather funds. Some lenders will not charge additional interest and fees when a loan is in forbearance. However, the interest is sometimes rolled into the loan, which causes the loan amount to increase. A forbearance is often combined with a reinstatement or other workout option.
Loan modification or restructure
A loan modification allows borrowers to have original interest rates and terms of their mortgage restructured to better fit their needs. Borrowers are commonly required to list their monthly income and debts and propose a payment they can comfortably afford to pay. Loan modification is common for borrowers who have little or no equity in their homes and bruised credit caused by housing slumps, most notably the national foreclosure epidemic that began in 2007.
Deed-in-lieu of foreclosure
A deed-in-lieu of foreclosure is a workout option in which a homeowner surrenders his property to the lender with the agreement that the bank will not initiate foreclosure proceedings and evict the borrower from the home. Under certain circumstances, some lenders, such as FHA (HUD), will allow borrowers to remain in their homes as renters after a deed-in-lieu.
A short sale is an agreement between a borrower and lender that allows the homeowner to sell the property for less than is owed on the mortgage. The difference between the sales price and remaining balance on the loan is either paid by private mortgage insurance (PMI), eaten by the lender or paid by the borrower at a later date. Borrowers are often allowed to remain in the home as renters or lease-option tenants after a short sale.
A foreclosure bailout is often a suitable way to work out a troubled mortgage. Under such an arrangement, a borrower seeks out another lender to refinance her loan. Meantime, the existing lender agrees to allow the borrower time to refinance, suspending foreclosure proceedings temporarily. Some borrowers also seek private buyers to purchase their homes, paying off the troubled mortgage in full. The new owner can either rent the home back to the borrower or resell it to them on land contract or through a lease-option.
From the July 21-27, 2010 issue
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