Creditors often need to deal with situations where debtors fail to pay debts that are owed. This can be a significant concern for mortgage lenders who need to protect their interests in property used to secure loans. Debtors who are unable to make mortgage payments may take steps to sell a home. However, there are many situations where a home may be underwater, and the value of the property may be less than the amount the debtor owes to the creditor. In these cases, homeowners may seek to complete a short sale. They will usually need to receive approval from their lender to do so. Creditors will need to determine how to respond to short sale requests as they take steps to protect their financial interests and minimize their losses.

Response and Approval of Short Sales

When a debtor requests a short sale, they will typically seek to sell the home at the current market value, and they will ask their mortgage lender to forgive any deficiency. That is, if the home sells for less than what is owed on the loan, the seller will not attempt to collect the remaining balance from the debtor. While it may seem more financially beneficial for a lender to pursue a foreclosure, the expenses and complications involved in this process may prevent the lender from recovering a significant amount of what is owed. A short sale may be a simpler and easier way to recoup as much of the balance of the loan as possible.

A seller who requests a short sale will typically need to demonstrate that they have experienced financial hardship that has affected their ability to meet their financial obligations. Hardship may include the loss of a job that has affected a person’s income, injuries or illnesses that have led to large medical bills, disabilities that have affected a person’s ability to work, or other extraordinary expenses or financial issues. After a short sale is requested, a lender may evaluate the debtor’s situation to determine whether they qualify, and they may also receive a broker price opinion (BPO) of the market value of the property to ensure that the sale price will be appropriate. Other creditors may also need to approve the short sale, including second mortgagees, home equity line of credit lenders, or homeowner’s associations that have a lien against a home due to unpaid fees.

There are many situations where creditors will need to take action to address the nonpayment of debts. For mortgage lenders, these situations often lead to foreclosure, which can be a complicated and expensive process. However, there may be other options that will allow a lender to take possession of a property, including negotiating an arrangement in which a homeowner will turn over the deed to the home as a way to avoid foreclosure. By understanding when a deed in lieu of foreclosure may be advantageous, a lender can make sure they are taking the correct steps to protect their financial interests.

Benefits and Drawbacks of a Deed in Lieu of Foreclosure

Debtors may have multiple options for addressing delinquent mortgage payments. A mortgage lender may be able to negotiate loan modifications with a homeowner that will allow them to maintain ownership of the home and continue making affordable payments. If continued ownership of the home will not be possible, a debtor may seek a short sale in which the home will be sold for less than the amount owed on the mortgage. However, the best solution may be an agreement in which the debtor will voluntarily turn over the deed to the home to the lender. This may consist of a “cash for keys” arrangement in which the lender will pay a certain amount, and the debtor will vacate the home by a certain date. In some cases, the lender may even agree to lease the property to the debtor on a temporary or long-term basis.

A deed in lieu of foreclosure can often be a beneficial arrangement that will allow a lender to protect its financial interests while avoiding the legal complications of a foreclosure. The lender can quickly take possession of the property without the need to have the debtor removed from the home. Since a deed in lieu agreement will usually stipulate that a property must be in good condition, this may prevent the debtor from damaging the home or taking any actions that would reduce the value of the property.

Mortgage lenders have options for ensuring they receive the amount owed from homeowners, and when a person defaults on their mortgage payments, a lender can initiate foreclosure proceedings. However, second mortgagees may be unsure about their options in these cases, including whether they can collect payment following a short sale or another situation where the sale of a home will not fully cover the amount owed. By working with an attorney who understands laws that affect debt collection, second mortgagees can determine their best options for receiving payments following a foreclosure.

Foreclosure and Subordinate Loans

In a second or subsequent mortgage or home equity line of credit (HELOC), a borrower will be taking out a loan against the equity they own in their home. Most of the time, these loans are considered to be subordinate loans, and the first mortgage will have the priority claim to the property. If a homeowner defaults on their first mortgage, the lender may foreclose on the home. Second mortgagees may also initiate foreclosure proceedings if the homeowner has remained current on their first mortgage but has defaulted on subordinate loans.

During the foreclosure process, a home will be sold, and the proceeds of the sale will be used to pay off the amount owed by the homeowner. A first mortgage will have priority, and second mortgagees will only receive payments if there is enough money left over after paying off the first mortgage. In short sales or other situations where a home is sold for less than what is owed on a first mortgage or any subsequent mortgages, a second mortgagee may not receive enough to fully cover the amount that is owed.

Joseph R. Biden, Jr. was inaugurated as the 46th President of the United States of America on January 20, 2021. With barely enough time to celebrate this major achievement, he rushed to work and signed off on several executive orders and actions on his first day in office. One such executive order included extensions on the moratorium for mortgage foreclosures and rental evictions. Here are the details on this latest executive order, particularly helpful if you are a mortgage lender or servicer attempting to collect on the homeowners’ debts.

Extensions on Mortgage Foreclosure Moratoriums and Forbearance

President Biden issued several executive orders dealing with a wide variety of topics, including climate change, student loan debt, COVID-19 relief and regulations, and immigration. Of particular interest to mortgage lenders is the moratorium extension; request for even further extensions in the future; and updates to the newest forbearance guidelines. With regards to the moratorium, the new order mandates that:

While the mortgage, rent, and income protections provided for in last spring’s original Coronavirus Aid, Relief, and Economic Security (CARES) Act have long since been exhausted, many states, including Illinois, have continued to offer their own executive orders and legislation to assist residents during this unprecedented time. In addition, many mortgage companies have developed their own programs for homeowners to help them avoid foreclosure, at least for the time being. However, that is not to say if you are looking to eventually collect on the debts owed from these properties that might be in preforeclosure, you should not be prepared to take action. Foreclosure debt collection will be inevitable post-pandemic, despite the latest COVID relief package being signed into law. In that sense, you, as a mortgage lender or servicer who deals with foreclosures, must remain focused on your job, collecting and documenting everything necessary to make the preforeclosure and foreclosure processes go smoothly whenever the time comes.

Advice to Mortgage Lenders When Prepping for Foreclosure During the Pandemic 

With the vaccines only starting to be administered and with the latest COVID-19 economic relief bill signed into law nine months after the CARES Act, you cannot expect things to get back to normal immediately. Therefore, the negative impact of COVID-19 on the economy, including housing, will persist far into 2021. Due to this, you need to be prepared for continual increases in foreclosures, including from residents of normally good standing with your mortgage lending or servicing company. To better prepare for an influx of foreclosures in the new year, consider the following tips: