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Resolving Foreclosures

December 4, 2008 By:
Dave Dinkel, JE Feature
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 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.

Loan Reinstatement:This 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 in 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 one in eight. So the lender does not want to drag out the inevitable -- the loss of the home to foreclosure.

Forbearance Agreement: This 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.

In some instances, the lender may ask for an additional cash payment before he starts the increased monthly payments. After the time period, the loan payments revert to the original amount.

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 lenders, try for 12 months and don't accept less than nine months, unless you can truly afford it. Ask the lenders to review your financial statement, which should readily be sent to you. Remember that the lenders have already pulled your credit report and know 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 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 three to six months or more.

Loan-Modification: This 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 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 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. u

Dave Dinkel is the author of 32 Ways to Quickly Stop Foreclosure. 

 

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