A significant part of my neutral practice involves New Mexico foreclosure mediation, and I have written several posts recently regarding foreclosure. See Foreclosure Mediation - Limitations and Concerns and How a Mediator Can Help in Foreclosure - More Thoughts. Today, I'd like to look at a couple of particularly thorny issues that often arise in foreclosure mediation.
First, it may be that the homeowner will need to consider whether he or she is even able to afford the home. If the homeowner is not offered a loan modification that will
substantially lower payments (and substantial reductions in payment are becoming more rare), he or she may need to consider other alternatives. The more common loan modification today, repayment plan, is most viable for those folks who have run into a temporary setback in income, due to medical emergency or temporary loss or drop in wages. It may not be sufficient or viable, however, for those folks who are suffering long term unemployment, or who have had a permanent and significant decrease in income.
substantially lower payments (and substantial reductions in payment are becoming more rare), he or she may need to consider other alternatives. The more common loan modification today, repayment plan, is most viable for those folks who have run into a temporary setback in income, due to medical emergency or temporary loss or drop in wages. It may not be sufficient or viable, however, for those folks who are suffering long term unemployment, or who have had a permanent and significant decrease in income.
Second, there may be some relief possible through bankruptcy. However, a Chapter 7 liquidation or Chapter 13 or 11 reorganization would still likely require an ability to meet the existing payment (liquidation) or even a regular payment plus an additional payment for arrears spread out over five years (reorganization). Thus, like repayment loan modifications, they are generally most likely to offer relief where the homeowner suffered a temporary setbacks in income. Nonetheless, in situations like this the homeowner should be strongly encouraged to consult with a bankruptcy attorney. In my own foreclosure mediation practice, I have seen a possibility of relief through bankruptcy where the homeowner can make a payment on arrears in addition to the regular payment, but not the size of repayment required under the 3-12 month repayment plans often offered by the lender through loan modification processes.
Third, if the homeowner cannot afford the house under any modification plan offered (or not offered) and bankruptcy is not desirable or appropriate, the homeowner will likely need to consider short sale or deed in lieu. Usually, they are required by the lender to try them in that order--first short sale, then if that is unsuccessful deed in lieu, but that is not always the case.
In a short sale, the homeowner gets the lenders approval of a sale price lower than what is owed on the mortgage. In a deed in lieu, the homeowner signs the property directly over to the bank to sell as REO ("Real Estate Owned"). Both processes require an application to the lender and special supporting documentation, including a hardship statement. The deed in lieu requires approval and release of any junior lien holders. In the past, some lenders offered a "cash for keys" program, in which the bank would offer a homeowner several thousand dollars in exchange for signing over the property, and this money could be used for relocation costs, etc. My understanding, though, is that the use of this has declined and it is rarely offered any more.
Either short sale or deed in lieu may result in a deficiency judgment. Some lenders purport to actively pursue such deficiencies, some waive them, and others reserve the right to pursue any deficiency but may not in fact ever act on it. Either short sale or deed in lieu could also result in a "taxable income" transaction and the issuance of a 1099, to the extent that any debt is forgiven.
If you are interested in mediation services for a foreclosure matter (residential or commercial), please contact Pilar Vaile, P.C. at (505) 247-0802 or info@pilarvailepc.com.
