Deanne R. Stodden. Member, Rogers & Stodden, LLC Of Counsel, Carpenter & Klatskin, PC

Transcription

1 Deanne R. Stodden Member, Rogers & Stodden, LLC Of Counsel, Carpenter & Klatskin, PC

2 Loss Mitigation is generally defined as the process a lender goes through to work with a borrower (home owner or business owner) who is behind on mortgage payments, to create a workable solution, typically resulting in either a loan modification or the sale of the property or some other alternative to foreclosure.

3 Sometimes loss mitigation or workouts occur when a loan is not in default, but is at risk for going into default. The options are similar for commercial and consumer loans, but commercial workouts are generally more complex.

4 Forbearance Repayment Plan Loan Modification ( Mod ) Refinance Deed in Lieu of Foreclosure ( DIL ) Short Sale

5 Forbearance is an offer by the lender to temporarily suspend or reduce the monthly mortgage payments for a specified period of time. For a lender to offer a Forbearance, the borrower generally must have some kind of extreme and short-term hardship.

6 A Repayment Plan is arranged when a borrower and lender agree to spread out the past due amount, added on to the current mortgage payment, over several months, in order to bring the mortgage current.

7 A Repayment Plan is a good option IF: 1. the borrower is ineligible or does not want to refinance; and 2. the borrower wants to remain in the property; and 3. the borrower is/was facing a short-term hardship; and 4. the borrower can now afford their payments.

8 A Repayment Plan is not a good option when the borrower is more than a few payments behind or does not have the requisite income to afford their regular monthly payment PLUS their monthly payment towards the arrearage.

9 The most common alternative to foreclosure is a Loan Modification. Loan Modifications allow the lender to retain a performing loan, allow the borrower to retain the property and often lessen the cash flow burden on the borrower. Things that can be modified: term, interest rate, arrearage can be added on loan.

10 A Loan Modification can be a good option if the borrower wants to retain the property and the borrower has income, even if the income has been reduced from the origination of the loan.

11 A Refinance is when a borrower takes out a new loan with new terms, interest rate and monthly payments, that completely replaces the current mortgage. For home owners, a borrower may be able to refinance even if the property is worth less than what the borrower owes. In commercial loan situations, this is less likely.

12 Oftentimes, borrowers in default cannot qualify for a refinance because their credit reflects delinquent payments. See discussion on HARP later in these materials.

13 Deeds in Lieu ( DILS ) are designed to transfer the collateral to the lender without the need for a foreclosure. Historically, DILS involved the borrower conveying the collateral to the lender and the lender releasing the deed of trust and releasing the borrower from personal liability under the promissory note and guaranty (if applicable).

14 Nowadays, and particularly in commercial loans, the Deed in Lieu does not result in a total release of the obligated parties and the deed of trust. Oftentimes, the collateral is transferred immediately, but neither the debt is forgiven nor the deed of trust released. The debt and the deed of trust remain intact in case a title defect is discovered after the transaction closes or a bankruptcy is filed which challenges the lender s ownership of the property.

15 Borrower would agree to this because the lender agrees to convert the debt to a nonrecourse obligation with bad boy style carve outs to keep the borrower exposed to deficiency obligations if fraud, theft or other inappropriate behavior occurs. In other words, the loan and its security are not extinguished by the lender when it accepts title to the property.

16 This enables the lender to foreclose the deed of trust if an intervening lien is discovered or a bankruptcy is filed by the borrower which results in the deed in lieu being set aside. Obvious advantage for lender: immediate title to collateral and avoidance of the delay it takes to foreclose. Can eliminate the need for a receiver and enable lender to begin marketing the property.

17 DILS will not extinguish junior liens, mortgages and leases as a foreclosure will. Thus, some lenders will not do a DIL if there are junior liens. However, there is nothing that prevents a lender from accepting a DIL with the junior interests in place, as long as it does not release its deed of trust, because it can simultaneously foreclose its deed of trust to extinguish junior interests, while having the advantage of immediate possession of the collateral.

18 A Short Sale is when a lender agrees to release its deed of trust to allow a borrower to sell collateral without the entire loan being paid. A lender would consider this when the value of the property is at or near the proposed short sale price, as the lender will get the same amount of cash towards the debt but can avoid the time and expense of foreclosure and marketing the property.

19 Much like a DIL, a Short Sale can be done with or without a full release of the remainder of the obligation. A lender can accept a Short Sale and still pursue the deficiency against the borrower or can secure the deficiency with other collateral owned by the borrower.

20 Buying and Selling Loans: the lender can sell the loan to an investor, sometimes for less than the amount of the debt. Most lenders will not entertain such a request from a borrower, but may sell to an affiliate of friend of the borrower. This is not a common practice in the consumer loan market as many loans are pooled and sold in groups as opposed to individually.

21 Receivers: Although receivers are generally not used for workouts, they can be used to help a lender manage its risk when there is a default. For example, if a lender does not want to take title to or even manage the property because of associated risks, it may consider the appointment of a receiver, and once that litigation is underway, the parties can reach a settlement that will keep the receiver in place while risks are assessed.

22 Bankruptcy Settlements and Sales: Just because a borrower files a bankruptcy petition does not mean that a settlement or foreclosure cannot be pursued in an amicable manner. Resolutions are encouraged by the bankruptcy code and by the bankruptcy courts. Examples include settlements that are approved by the bankruptcy courts under BK Rule 9019 and sales of the debtor s assets are permitted under 11 U.S.C. 363.

23 Whenever a deed of trust/note is modified or amended, there is risk that an intervening lienor may claim that the modification/amendment reprioritizes the lender s lien position. In other words, if a lender extends more money, or increases the burden of its lien on collateral by raising the interest rate, a lien holder who is junior in priority to the lender s deed of trust may claim that the Mod reprioritizes the lien positions such that the lender s lien is no longer senior.

24 To reduce the risk of a lien priority dispute, a lender can obtain endorsements to its mortgagee s title insurance policy that will show, what, if any, liens have been recorded since the lender s original deed of trust.

25 Whenever lenders cancel debt, they are required to send the IRS a form 1099-C which notifies the IRS of the cancellation and subjects the borrower to ordinary income taxation equal to the amount of the debt forgiven. A 1099-C is usually issued when a foreclosure, DIL or short sale is approved by a lender.

26 If the Mortgage Forgiveness Debt Relief Act of 2007 applies, which is where a primary residence is involved, a borrower can exclude up to $2 Million in forgiven mortgage debt, if married and filing jointly, and up to $1 Million for other filing statuses. Debt reduced through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure qualifies for the relief.

27 This provision applies to debt forgiven in calendar years There is currently a proposal to extend the Act until 2016.

28 Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. Insolvency: If the borrower is insolvent when the debt is cancelled, some or all of the debt may not be taxable. Certain Farm Debts: If the borrower incurred the debt directly in operation of a farm, more than half of their income from the prior three years was from farming and the loan was owed to person or agency regularly engaged in lending, the cancelled debt is generally not taxable income.

29 Non-Recourse Loans: a non-recourse loan is a loan for which the lender s only remedy in case of default is to repossess the property being financed or used as collateral. (In other words, the lender cannot pursue the borrower personally.) Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

30 The CFPB Mortgage Servicing Rules (effective January 2014) set forth minimum requirements for loss mitigation for lenders and loans that are subject to CFPB regulation. The CFPB has supervisory and enforcement authority over very large depository institutions and credit unions with over $10 billion in assets, non-bank financial institutions, and has limited authority over smaller institutions and credit unions.

31 The CFPB Rules include requirements and timeframes for: Acknowledging and evaluating loss mitigation options; Responding to consumers on incomplete loss mitigation applications; An appeals process; Prohibitions and limitations on dual tracking; Limitations on beginning or completing the foreclosure process during loss mitigation.

32 MHA is the umbrella for the: Home Affordable Modification Program ( HAMP ) Home Affordable Refinance Program ( HARP ) 2MP Second Lien Modification Program ( 2MP ) Principal Reduction Alternative Program ( PRA ) Home Affordable Foreclosure Alternatives ( HAFA )

33 MHA programs were originally scheduled to sunset on December 31, 2013, but were extended until December 31, HARP has an extended deadline for applications until December 31, MHA is run jointly by the Departments of Treasury and Housing and Urban Development. Lenders participation in MHA is optional. There are incentives for lenders.

34 Since MHA s inception in March 2009, about 1.6 million actions have been taken through the Program Nearly 1.3 million homeowners have been helped. This number is less than the Administration estimated.

35 Through HAMP, borrowers can earn up to $10,000 in principal reduction by making their mortgage payments in full and on time. Borrowers can earn up to $1,000 per year for the first five years and a $5,000 one-time payment at the end of year six. After year six, borrowers become eligible to reamortize their reduced mortgage balance to lower payments.

36 In order to refinance through HARP, the mortgage must be owned by Freddie Mac or Fannie Mae. Application deadline is December 31, 2016.

37 If First Mortgage was modified under HAMP and the second lien was obtained before January 1, 2009, and the borrower owes $5,000 or more and pays $100 or more per month towards the second lien, the second lien may be modified under the 2MP program. Lender must be participating in MHA.