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Information for real estate agents regarding loss mitigation and how to handle foreclosures.

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  2. 2. INTERESTING FACTS ABOUT LOSS MITIGATION <ul><li>FACT: Fifty percent (50%) of the Homeowners who are foreclosed upon never initiate any &quot;contact&quot; with their mortgage servicer from the date they miss their first payment. </li></ul><ul><li>FACT: Investors / Mortgage Insurers / Mortgage Guarantors absorb losses of more than $50,000 for every foreclosed conforming loan and $40,000 for every foreclosed non-conforming loan. </li></ul><ul><li>FACT: Lenders do not want to foreclose. FACT: FHA, VA, FNMA and FHLMC require that all options to avoid foreclosure must be explored. </li></ul>
  3. 3. CURRENT LOSS MITIGATION OPTIONS <ul><li>Reinstatement </li></ul><ul><li>Repayment Agreement </li></ul><ul><li>Forbearance Agreement </li></ul><ul><li>Loan Modifications </li></ul><ul><li>Short Sale / Assumption Agreement </li></ul><ul><li>Deed-in-lieu of Foreclosure </li></ul>
  4. 4. REINSTATEMENT <ul><li>Reinstatement is the acknowledgment by a mortgage company that a loan in default has been brought current by the homeowner. There are several different workout options that would generate a reinstatement. </li></ul><ul><li>NOTE: Anything in writing can be modified, i.e. interest rates, term of loan, due date, etc., but it the modification must be in writing. </li></ul>
  5. 5. REPAYMENT AGREEMENT <ul><li>A repayment agreement is an agreement that gives a borrower a specified amount of time to bring a delinquent mortgage account current by paying the normal monthly payment plus an additional amount each month to cure the delinquency. A repayment agreement is considered when the delinquency resulted from a temporary hardship that has been resolved. </li></ul>
  6. 6. FORBEARANCE AGREEMENT <ul><li>A Forbearance Agreement is an agreement to temporarily allow a borrower to pay less than the full amount due on their mortgage or to suspend payments entirely during the forbearance period. </li></ul><ul><li>The lender agrees not to foreclose and the borrower agrees to get their loan current within a certain period of time. A forbearance agreement may have an acceleration clause that will shorten the time it takes for the lender to retake the property. </li></ul>
  7. 7. <ul><ul><ul><li>The delinquency must be greater than 1 month and less than, or equal to 12 months </li></ul></ul></ul><ul><ul><ul><li>FNMA </li></ul></ul></ul><ul><ul><ul><ul><li>Hardship must be temporary </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Borrower must have / meet debt / income ratios </li></ul></ul></ul></ul><ul><ul><ul><li>FHA </li></ul></ul></ul><ul><ul><ul><ul><li>Must be more than 3 months but not more than 12 months delinquent </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Property must be owner occupied </li></ul></ul></ul></ul>FORBEARANCE AGREEMENTS
  8. 8. MOSTLY SHORT TERM <ul><ul><ul><ul><li>Agreement in writing, signed by borrower and lender </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Suspends payments for a period not to exceed 3 months. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reduces payments for a period not to exceed 6 months. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>At the end of forbearance plan, borrower must cure delinquency through full reinstatement or repayment plan. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Lender must not accrue or collect late charges during the short term forbearance period, and subsequent repayment plan. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Workout not required. </li></ul></ul></ul></ul>SHORT TERM AGREEMENT:
  9. 9. <ul><li>A borrower who has substantial equity in the property may list it for sale. During the listing period the lender may grant special forbearance and must base its determination on the following: </li></ul><ul><ul><li>The value of the property. </li></ul></ul><ul><ul><li>The amount of the borrower’s equity. </li></ul></ul><ul><ul><li>The length of the forbearance period. </li></ul></ul><ul><ul><li>The time that will be needed to complete the sale of the property considering market conditions. </li></ul></ul><ul><ul><li>The amount of any payments the borrower can make during the forbearance period. </li></ul></ul><ul><ul><li>The effect that granting the special forbearance may have if the property does not sell and foreclosure proceedings have to be reinstated. </li></ul></ul>SPECIAL FORBEARANCE / LONG TERM
  10. 10. LOAN MODIFICATIONS <ul><li>A Loan Modification is a written agreement between a mortgage company and a borrower that permanently changes one or more of the original terms of the mortgage note in order to bring a defaulted loan current and/or make the payment terms more affordable to the borrower. Modification process could include such things as reducing the interest rate on a mortgage, changing the loan type (i.e. from an ARM to a fixed rate) extending the term of the mortgage, and/or capitalizing the delinquent payments are considered. </li></ul><ul><li> Requirements: </li></ul><ul><ul><ul><li>Borrower must contribute funds, if possible, to reduce delinquency </li></ul></ul></ul>
  11. 11. WORK OUT REQUIREMENTS <ul><ul><ul><li>REQUIREMENTS CONTINUED : </li></ul></ul></ul><ul><ul><ul><li>Borrower must complete a workout / hardship package consisting of: </li></ul></ul></ul><ul><ul><ul><ul><li>Borrower Financial form / filled out </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hardship Letter / make it sad </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Copy of pay stubs or vouchers indicating YTD earnings </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Copy of borrower’s signed federal income tax return, with all schedules (for self employed only) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Copies of the last 3 months bank statements </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Copies of YTD and previous years P&L statement if self-employed </li></ul></ul></ul></ul>
  12. 12. <ul><li>Workout package includes : </li></ul><ul><ul><li>Financial Borrower Information form </li></ul></ul><ul><ul><li>Letter of hardship with documentation supporting the hardship. </li></ul></ul><ul><ul><li>At the end of forbearance plan the borrower must “cure” the deficiency through full reinstatement or a repayment plan. </li></ul></ul>WORKOUTS
  13. 13. Loan Modifications <ul><li>TYPES: </li></ul><ul><li>rate reduction; </li></ul><ul><li>capitalization; </li></ul><ul><li>term extension; and / or </li></ul><ul><li>one-time assumption. </li></ul><ul><li> conversion </li></ul><ul><li>refinance </li></ul>
  14. 14. RATE REDUCTION <ul><li>Option 1: Rate Reduction Modification This type of loan modification will permanently reduce the interest rate associated with the loan, thus lowering the monthly payment from the Homeowner. </li></ul><ul><li>EXAMPLE: Homeowner Joe Blow’s interest rate is 15%. His monthly income was reduced when his company reduced his overtime. He is current on his mortgage, but a financial profile indicates he will not be able to maintain the current payment. His credit is not good and he cannot find a lender to refinance his loan at a lower interest rate. A rate reduction modification will lower his monthly payment and keep Mr. Blow in his home. </li></ul>
  15. 15. CAPITALIZATION <ul><ul><li>Option 2: Capitalization When a loan is capitalized it means adding the delinquent payments to the remaining balance and changing the payment due dates or extending the loan. If the amount owed is too much for the homeowner to pay back during the original loan period the due dates for payment can be extended. When a loan is already at or below the current interest market rate capitalization could be used. </li></ul></ul><ul><ul><li>EXAMPLE: Joe loses his job and is 3 months behind on his mortgage payments. He finds a new job, but is unable to bring the loan current. Because his new job pays more he is able to make a higher mortgage payment. The loan is &quot;recast&quot; and the three delinquent payments are added to the loan balance and a new payment is calculated. Joe is able to keep his home. </li></ul></ul>
  16. 16. TERM EXTENSION <ul><li>Option 3: Term Extension Term extension is extending the amount of time the borrower has to repay their loan to achieve a reduced monthly payment (i.e. 10 year mortgage extended to 20 years). Extensions can be combined with an interest rate reduction or capitalization modification. </li></ul><ul><li>EXAMPLE: Joe had the right intentions. He was trying to pay off his mortgage early, so he took out a 15 year loan. Joe lost his job and fell 4 months behind on his mortgage. When he found a new job it paid significantly less than his old job. The loan can be &quot;recast,&quot; adding the delinquent payments to the loan balance and extending the term of the loan to 30 years. Joe’s payment is reduced and he can keep his home. </li></ul>
  17. 17. ONE-TIME ASSUMPTION <ul><li>Option 4: One-Time Assumption </li></ul><ul><li>Most mortgages are non-assumable, which means the borrower can not sell the property using a contract for deed. The mortgage company can allow for a one-time assumption, in order to facilitate the sale of the property if a hardship can be demonstrated. Fannie Mae and Freddie Mac will allow a one-time assumption under special circumstances to prevent foreclosure. The transaction must be an &quot;arm's length&quot; transaction. In other words, there cannot be any pre-existing relationship between the homeowner and the individual assuming the mortgage. The original borrower is still liable for the loan if the buyer defaults on the loan. The new borrower will also have to be qualified by the lender. </li></ul><ul><li>EXAMPLE: Joe has an interest rate of 5.75 % on his mortgage. Joe lost his job and is not able to keep his home. He wants to preserve his credit rating and avoid a foreclosure. Since the current market interest rate is 9%, a buyer would be willing to pay more for Joe’s house if he/she can assume the 5.75 % loan. The mortgage company allows a qualified buyer to assume the loan and Joe moves in with his mother until he gets a new job. </li></ul>
  18. 18. CONVERSION <ul><li>Option 5: Loan Type Conversion </li></ul><ul><li>(ARM) may not be able to keep up with increased payments during times of increasing interest rates. In this case, the loan Servicer may opt to modify the loan type to avoid increasing the interest rate. The loan could be converted to a fixed rate mortgage. </li></ul><ul><li>EXAMPLE: Joe purchased his home several years ago when interest rates were high. He opted for an adjustable rate mortgage (ARM). The rate has steadily increased so that Joe can no longer make the payments. The lender converts Joe’s loan to a fixed rate mortgage. Joe keeps his home. </li></ul>
  19. 19. REFINANCE <ul><li>Refinance </li></ul><ul><li>Obtaining a new loan to replace the existing loan. Rarely will this be the current lender. </li></ul><ul><li>If the borrower is only 2-3 months behind and he can explain to a lender why he was delinquent he may still be able to obtain a non-conforming loan at a reasonable interest rate. The reason for the delinquency must have ended. Refinancing would pay off the current mortgage loan using the proceeds from a new mortgage loan while using the same property as security. </li></ul>
  20. 20. SHORT SALES <ul><li>Option : Short-Sale – Tricky </li></ul><ul><li>A short-sale requires that prior to the closing the mortgage company agrees that the sales proceeds from the sale of the borrower’s home will completely satisfy the debt even if that amount is less than what the borrower owes on the loan. Get this in writing. Make sure that you as agent advise the borrower to discuss this with his accountant. Document that you did this in writing and have the borrower acknowledge that you informed him about the possible tax consequences. Although the lender considers the loan satisfied, the IRS looks upon any forgiven debt as income and requires an IRS Form 1099 to be issued. The Homeowner is responsible for taxes on the forgiven debt. </li></ul><ul><li>Find the right person – TALK – LOSS MITIGATION DEPARTMENT </li></ul><ul><li>Develop a relationship with a title company so that you can get HUD form long before the closing. You will need this to convince the mortgage company to take the offer on the table. </li></ul><ul><li>EXAMPLE: Joe decided to take a new job in California. He puts his house in Rockford, on the market for $210,000. He still owes $200,000. After 2 months the only offer was for $180,000 . Joe is two months behind on his mortgage. The mortgage company agrees to the $180,000 and considers Joe’s debt satisfied. Joe moves to California but may have tax consequences from the forgiven debt. </li></ul>
  21. 21. GETTING IT DONE <ul><li>LET YOUR FINGERS DO THE WALKING: </li></ul><ul><li>Be persistent. Find the decision maker. Keep calling! If you can’t get in touch with anyone keep trying. This is the hard part. The negotiating can begin only when you get in touch with the right person. </li></ul><ul><li>Once you have reached a representative for the lender, inform him or her that you represent the homeowner. Provide your authorization letter. Get it early in the process because they will not be able to talk to you without first verifying that you represent the homeowner. </li></ul><ul><li>Remember – Privacy Laws Exist. The representative will usually want basic information about the property, the homeowner and the proposed deal. He or she will also want to know the value of the property and the financial situation of the homeowner. They will order an appraisal if the numbers look good. </li></ul><ul><li>The goal of this conversation should be to request a short sales or workout packet. This packet will provide you with everything you need — instructions, forms and procedures — to close a successful short sales deal. </li></ul>
  22. 22. HUD-1 <ul><li>HUD-1 settlement statement </li></ul><ul><li>A lender will generally require a written contract between you and the homeowner. A preliminary HUD-1 settlement statement will reassure the lender that the homeowner isn’t receiving any cash from the deal. You may need to forecast these into the future to get it right. </li></ul><ul><li>Homeowner cannot get any money back at closing. You must itemize all charges that need to be on HUD-1. </li></ul><ul><li>The contract should be written so that all costs associated with the deal are paid including your commission. Don’t close without an agreement in writing to pay you. And, that the “net cash” to the homeowner is the precise amount of the short pay to the lender. </li></ul><ul><li>Your contact at the title or escrow company can help you prepare it in advance of the closing. </li></ul>
  23. 23. DEED-IN-LIEU <ul><li>When a mortgage is in default and it is concluded that there is no alternative for resolving the delinquency (even through a sale of the property) the lender may agree to voluntary conveyance of the property (free and clear of other liens) from the borrower in exchange for full satisfaction of the debt. </li></ul><ul><li>You can’t find the buyer fast enough </li></ul><ul><li>Homeowner voluntarily gives the property deed to the mortgage company in exchange for forgiveness of the debt. </li></ul>
  24. 24. SHORT SALE / DEED IN LIEU <ul><li>THINGS TO THINK ABOUT: </li></ul><ul><ul><ul><li>Consider a Deed-In-Lieu when no other relief or workout option is appropriate </li></ul></ul></ul><ul><ul><ul><li>Borrower must have an involuntary inability to pay that is permanent or long term </li></ul></ul></ul><ul><ul><ul><li>Workout Package includes </li></ul></ul></ul><ul><ul><ul><ul><li>Borrower Financial Information form </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Income verification / copies of bank statements </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hardship letter / make it sad </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Copy of listing agreement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Title report / </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Most recent closing statement analysis </li></ul></ul></ul></ul><ul><ul><ul><li>Appraisal </li></ul></ul></ul>
  25. 25. WHAT HAPPENS <ul><li>Lender takes less than what is owed </li></ul><ul><li>2 nd Mortgage loans take less than what is owed. Keep calling everyone. Convince them that they may get nothing if they don’t compromise </li></ul><ul><li>Seller must demonstrate or explain delinquency. </li></ul><ul><li>Get “ hardship letter ” and authorization from seller to speak for them. It must be in writing. </li></ul><ul><li>Contingency in Contract for lender approval. You don’t want to owe commission if this does not close. </li></ul><ul><li>Patience! </li></ul>
  26. 26. PATIENCE AND WAITING <ul><li>Waiting for an answer: </li></ul><ul><ul><li>It usually takes anywhere from 1 to 6 weeks to receive an answer from the lender once you have submitted the HUD-1 settlement statement and all of the other supporting documentation. </li></ul></ul><ul><ul><li>Call the lender to ensure that he or she has received all the information. Make it clear that you are always available to answer questions and provide additional information, especially if something is missing. </li></ul></ul><ul><ul><li>If the sale date for the property is approaching, ask the lender to extend it until he or she has had time to consider your offer. If the numbers make sense, the lender will almost always grant your request. </li></ul></ul>
  27. 27. HOW TO LIST <ul><li>DO BPO’S </li></ul><ul><li>REGISTER on Websites </li></ul><ul><li>Check out </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>REO.COM </li></ul><ul><li>REALTRANS.COM </li></ul><ul><li>TITANIUMINC.COM – TRAINING </li></ul><ul><li>AGENTSONLINE.NET </li></ul>