Foreclosure Workout Plans
Despite your best efforts to bring your mortgage current, sometimes temporary financial setbacks occur.
Rather than foreclose, most lenders would rather work out a solution that protects their profit interests. Foreclosure workout plans depend on several factors so becoming familiar with all your options places you in a stronger position when dealing with your lender's workout agent. Most lenders administer the following five specific plans:
1. Repayment Plan A formal repayment plan that may include special forbearance and is structured to allow you to repay delinquent installments and/or payment advances to bring the mortgage current.
2. Loan Modification One or more of the terms of the loan are changed to bring the delinquent mortgage current
3. Assumption An enforceable "due-on-sale" clause is waived to allow a qualified buyer to assume the mortgage of a delinquent borrower.
4. Preforeclosure Sale The proceeds of a sale are accepted as full satisfaction for the mortgage obligation even if it is less than the mortgage balance.
5. Deed-In-Lieu of Foreclosure The borrower voluntarily deeds the property to the lender to avoid foreclosure.
Special Circumstances These are special situations involving natural disasters and bankruptcy.
Up Forbearance (repayment plan)
The formal Repayment Plan is the preferred workout option because it is the least costly workout alternative. It is usually considered when delinquency is the result of;
- The death of a contributor to the monthly mortgage payment and this does not necessarily have to be a person on the mortgage; or
- Illness, catastrophe, or natural disaster for which the borrower is not insured; or
- Any similar or contributing factors. Repayment plans may be customized to fit most any need or solution, however they cannot exceed 24 months. (see Special Forbearance)
Up Modification (replacement mortgage)
This is a change to the terms of the mortgage in order to remove a delinquency and avoid foreclosure. Modification includes reducing the interest rate, extending the term of the mortgage, negative amortization, replacing an adjustable rate with a fixed rate and capitalizing the delinquent payments.
Modification is appropriate when the potential for a Repayment Plan is needed due to a permanent or long term reduction in income. Other lienholders having a recorded interest in your property must agree to subordinate their interest to the new loan.
A particularly attractive workout solution if you have sufficient equity in the property to pay-off junior liens using the new loan.
You may qualify for loan modification if you are experiencing a permanent or severe financial hardship.
Normally your obligation-to-income ratio should not exceed 36-38%. Divide your total debt by the remaining term of the loan (more than six months) by your total income. This will give you a close estimate however, if the ratio is greater than 50% your plan is not likely to be approved.
The transfer of ownership to a buyer willing to assume full responsibility for the mortgage obligation.
While some loans, including most adjustable rate mortgages (ARM) are assumable without prior approval or buyer qualification, many others contain a "due-on-sale" clause allowing the lender to require the full amount to be paid in full.
Note: Fannie Mae will waive existing, enforceable "due-on-sale" clauses on conventional mortgages (fixed rate or fully amortized) in order to complete a sale and avoid foreclosure.
Up Preforeclosure Sale
In order to avoid foreclosure, the lender and borrower agree to accept the proceeds of the sale to satisfy a defaulted mortgage even if the sale results in less than the mortgage balance.
In order to be eligible for this option you must be experiencing financial hardship as a result of involuntary reduction in income and an unavoidable increase in expenses that exceed income. Unavoidable causes include:
- Lay-off or loss of job
- Disability, or prolonged illness
- Death of a mortgage contributor
- If self employed, a business set-back
You will have to accept the following conditions:
- Listing the property for sale will not delay initiating or continuing foreclosure action, but the terms of the agreement will be honored pursuant to a sale before the foreclosure date
- You agree maintain the property
- You agree to off-set any of the lenders losses (usually negotiable)
- You may have a tax liability if any of the debt is forgiven.
- The property is free of liens. If other liens exist, the lender must agree to the workout pursuant to the eligibility requirement for an assumption
- The lender retains the right to negotiate and approve the transaction.
Up Deed-in-Lieu of Foreclosure
You avoid foreclosure by voluntarily surrendering the property by deeding it to the lender as satisfaction for the debt. It is appropriate when . . .
- The property has been on the market as a Preforeclosure Sale for three or more months .
- There are legal obstructions to foreclosure action
- Deed-in-lieu allows the lender to take possession of the property sooner than would be possible through foreclosure.
You may be eligible for this option if you meet certain hardship requirements outlined in this document and all junior liens are removed.
Up Special Circumstances
Natural Disaster: Most lenders follow the Fannie Mae policy of making every effort to avoid foreclosing on properties effected by catastrophe or natural disaster. These properties are almost always protected by insurance or government policy.
Bankruptcy Foreclosure can stop a pending foreclosure but not completely avoid it. The delaying tactic will gain you time to put together a workout plan. Ultimately, if you do not work out a solution with the lender, the mortgage will foreclose and you'll lose the house. The upside is that under bankruptcy you may be relieved of any deficiency after the sale of the home.
See these pages for more information:
Up Contact Directory
Use the following information to contact a regional Fannie Mae office to ask for help in designing a foreclosure workout.
Fannie Mae Washington Office
Midwestern Regional Office
Serving: Illinois, Indiana, Iowa, Michigan,
Northeastern Regional Office
Serving: Connecticut, Delaware, Maine, Massachusetts,
Southeastern Regional Office
Serving: Alabama, District of Columbia, Florida, Georgia,
Southwestern Regional Office
Serving: Arizona, Arkansas, Colorado, Kansas, Louisiana,
Western Regional Office
Serving: AK, AZ, CA, Guam, HI, ID, MT, NV, OR, WA, WY
Remember . . . just about any reasonable plan will be accepted because the lender would rather work out a plan than to foreclose and lose a profit.