The Most Used Methods of Resolving a Foreclosure
by: Dave Dinkel
The three most frequently used methods to resolve foreclosure are loan reinstatement, forbearance agreement, or loan modification. While there are numerous other specific ways to stop foreclosures, these three are used most frequently.
1.) Loan reinstatement is where a lender has started the foreclosure process and the homeowner finds a way to pay back or "reinstate" the entire deficiency owed. The deficiency amount includes back loan principal and interest payments, accelerated interest costs, attorney's fees, assorted processing and collection expenses, and late penalty charges. This technique requires the maximum amount of money all at once. Ironically, lenders recently indicated that pre-payment penalties may be included into final judgments in the near future.
When the homeowner's reason for the delinquency is resolved, he usually asks the lender to take partial payments because he can't get the entire deficiency amount together. However, the lender will not accept partial payments and the foreclosure will proceed if the full reinstatement amount isn't paid. The reason for this is simple, the lender knows that the homeowner's chance of getting out of, and staying out of foreclosure is less than 1 in 8. So the lender does not want to drag out the inevitable, the loss of the home to foreclosure.
2.) A forbearance agreement between the lender and the homeowner stipulates that the homeowner must make additional monthly payments for a specific period to make up the reinstatement amount that he couldn't pay in full. As simple as it sounds, it may be unaffordable for the homeowner who could barely afford the original loan payment. The lender will usually ask that the homeowner pay the reinstatement amount over a three or six month period. If the monthly loan payment was $2,000 per month and he was 3 months in arrears, the new monthly payment for a three month period would be at least $2,000 + $6,000/3 = $4,000 per month. For a six month repayment schedule the new monthly payment would be $2,000 + $6,000/6 = $3,000 per month. In some instances the lender may ask for an additional cash payment before they will start the increased monthly payments. After the 3 or 6 months, the loan payments revert to the original amount or $2,000 in the above example. The foreclosure does not stop with the signing of the forbearance agreement but simply is put on hold until the homeowner completes making all the increased payments.
When you speak to your lender try for 12 months and don't accept less than 9 months unless you can truly afford it! Ask them to review your financial statement, which they should readily send you and remember that the lender has already pulled your credit report and knows where you work, possibly how much you make, how many other monthly payments you have, and other information in the public records. They have also done a price analysis on your home and probably had a Broker's Price Opinion (BPO) completed. Essentially they know what answers you should be giving them, so be forewarned. This method of reinstatement takes as much money as the loan reinstatement except it is spread over 3 - 6 months or, hopefully, more.
3.) A loan modification program was the most common method of foreclosure resolution for decades. It involved the lender issuing a new loan agreement where the deficiency amount was added to the loan balance and paid in identical monthly payments but for many more months, at the end of the loan. The monthly payments remained the same and if the home was sold, the balance of the reinstatement amount was paid from the proceeds of the sale. This method of resolution requires no up-front cash and the same monthly payment as before the foreclosure.
Another type of loan modification was to very slightly increase the monthly payments over the remaining term of the loan. So the homeowner has a choice of either extended but identical payments (as above), or slightly higher payments for the original term of the loan. Either option repaid the lender his money back plus interest. It was an affordable win-win for the lender and the homeowner, but is seldom offered anymore unless the lender knows the property is not worth taking back by foreclosure and he hasn't sold the loan into a mortgage pool.
Loan modification programs are usually not available unless there is a hardship involved such as a job loss, death or illness. But it is worth asking your lender about it if you are in foreclosure because the market conditions and massive loan defaults puts pressure on the lenders to be more cooperative with homeowners. Your best option is to talk to your lender and as early as possible so you have time to resolve your problem.