Q: We have owned our house for many years and now owe several months of mortgage payments because I recently lost my job. The equity in our house is $80,000 to $90,000, but I can neither make the mortgage payments nor do I want to move somewhere else. I have heard about a deed in lieu of foreclosure, but do not understand how it works.
Can you explain? We never thought this would happen to us.
A: None of us can appreciate nor anticipate the future. Although we always believe it will never happen to us, once in a while calamity strikes. Then we have to address these very hard and difficult questions.
Before addressing the deed in lieu issue, let me outline for you a number of steps on how to deal with your mortgage lender, if you start to get behind on your mortgage payments.
If you want the lender to cooperate with you, there has to be an equal level of cooperation on your side. According to the Federal Home Loan Mortgage Corp. (Freddie Mac) guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief "to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations. . . ."
The first possible relief is referred to as "temporary indulgence," in which the lender, on request, may grant the borrower a short period of time -- usually not more than three months -- to cure any delinquency. However, this is merely temporary relief and by the end of that short period of time, the borrower must be completely current.
Another approach is a repayment plan. Here, the borrower is given a fixed period of time, usually not more than a year, in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly mortgage payment. It is important to get this repayment plan reduced to a written document, signed by both the lender and the borrower.
Lenders also can enter into what is known as a special forbearance relief agreement, in which the regular monthly mortgage payments are suspended or reduced for a period of up to 18 months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed. A comprehensive plan must be agreed upon for the repayment of the amount that has been suspended.
In this case, the lender will make a determination that the default is curable, and based on the current financial and appraisal data, the lender must be satisfied there is a likelihood that the borrower will be able to comply with the repayment plan. Clearly, the burden is on the borrower to document and justify the plan, so as to satisfy the lender's requirements.
If you are in the military, the Soldier's and Sailor's Relief Act provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that law.
Another avenue that may be available to you is known as a "short sale." Here, the lender will authorize you to sell the property for what it is really worth, and the lender will get all the proceeds.
Let us look at this example. The house can probably be sold at $95,000, but the mortgage is $125,000. The lender may allow you to sell the property for $95,000, giving a real estate broker a 3 percent commission. The lender gets all the remaining sales proceeds while you get nothing from the sale. However, under this "short sale" approach, you will be relieved of your mortgage.
In some cases, depending on your financial situation, the lender may want you to pay a portion of the mortgage shortfall, although this depends on the lender and is clearly negotiable.
The deed in lieu of foreclosure is another remedy that may be available to you. Under this arrangement, you deed your property to the lender, or to whomever the lender designates. This is in lieu of foreclosure proceedings. The arrangement is an acceptable and customary procedure when, for example, the borrower has died and the estate is willing and able to transfer the property; or the borrower has filed Chapter 7 bankruptcy and the trustee has abandoned interest in the property.
There are a number of requirements to accomplish a deed in lieu and each lender will have its own set of guidelines. Generally speaking, however, the following requirements are usually imposed by a lender that is willing to accept the deed in lieu:
* The borrower has a valid and documented reason for default that is beyond the borrower's control.
* The borrower has demonstrated that he or she has and can make prudent financial decisions since the default.
* The borrower has been cooperative and has provided all necessary documentation to the lender. The borrower also must permit the lender to have reasonable access to inspect the inside of the property.
* The borrower must be willing to make a financial contribution, if this is at all possible.
* If the lender has escrowed monies for the payment of future taxes and insurance, the borrower must be willing to forgo reimbursement of these escrowed funds.
The lender also will not even consider taking the property as a deed in lieu unless the property has been listed for sale at market value, and all attempts to sell the property have failed.
Finally, there can be no outstanding liens or other encumbrances on the property, since the lender wants to be able to take the property free and clear of any other claims against it.
When a lender takes property as a deed in lieu, presumably the borrower's credit history has already been tarnished. After all, the borrower has probably not been making mortgage payments for several months.
However, it is my understanding that a deed in lieu will not get reported as a foreclosure on your credit history, and thus if the lender is willing to accept the deed in lieu of foreclosure, at least you may be able to avoid even further negative credit history.
It is strongly suggested that you contact your lender immediately to initiate a face-to-face discussion. If your lender is no longer in your home town, send them a letter and then pick up the telephone and make arrangements to talk to the most senior official at that mortgage lending company.
The final option, of course, which should be used only as a last resort, is for you to file for bankruptcy.
When someone files for bankruptcy, there are many protections that automatically apply from the day the bankruptcy petition is filed with the federal Bankruptcy Court. The most important protection under the bankruptcy law is known as "the automatic stay." If you are in bankruptcy, no legal action can be taken against your house unless the lender requests the court for permission to "lift the stay." This means that the lender goes before the bankruptcy judge, in open court and petitions the Court to permit the foreclosure to take place. Depending on the circumstances, including the amount of equity you have in your house and the possibility of getting back on your feet financially, the Bankruptcy Court may or may not lift that stay.
Finally, I want to address your specific situation. You have indicated that there is equity in the house. I cannot recommend a "short sale" or a "deed in lieu" in your case.
However, I do suggest that you will probably have to sell your house -- and do so as soon as possible. Clearly, you do not want the lender to foreclose on you, since you will probably lose most -- if not all -- of that equity to a real estate investor or speculator. Even if you sell the house at a "bargain sale," at least you will keep some of that equity.
You cannot ignore the problem, hoping you will win the lottery or find some other immediate source of funds. The level of your cooperation is the most significant aspect that will determine how willing the lender is to similarly cooperate.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.