Mortgage Workout Basics
In the past several years it has become easier to negotiate pre-foreclosure "workout" agreements. A workout is any agreement between you and the lender that changes how you pay your mortgage delinquency or otherwise prevents foreclosure.
Many lenders now realize it's better for them to accept what you can afford to pay than to foreclose on your home. In the past, consumers were often frustrated in attempting to work out a deal with a mortgage lender when they fell behind in their payments. In many cases, it was impossible to determine whom to contact to discuss a workout. When a consumer did find the appropriate person, that person generally had little flexibility to consider postponing a foreclosure or arranging reasonable workout terms. While borrowers with huge debts, such as Donald Trump, were getting significant concessions, individual homeowners with small mortgages were generally told that immediate full payment with fees and costs was necessary.
More recently, however, the potential for reasonable agreements with reputable lenders, while still imperfect, has begun to improve. To a large extent, this improvement is because lenders are realizing that large numbers of foreclosures on small properties is not in their self-interest.
After a glut of foreclosures in the late 1980's and early 1990's, lenders were left with the problem of managing large numbers of deteriorating properties. Although some foreclosures were very profitable because of the potential for the lender to resell property bought cheaply at foreclosure for full market value, large portfolios of foreclosed properties generally lost money. For these reasons, most lenders will now talk to anyone, including owners of small properties, about agreements to avoid foreclosure.
The importance of getting help
In most cases, it can't hurt to try to arrange a workout on your own. If you have a good idea of what you want and are able to work with numbers, good results are possible.
However, arranging workouts is a tricky business. Too often, the lender will have far more information than you about available options. The lender may push you to choose an option that isn't what you want or that is really too expensive for your family to afford. It's a good idea to try to find a nonprofit counselor or a lawyer who has experience with mortgage workouts to help you through the process. You may be able to find a nearby HUD-approved counseling agency with experience doing mortgage workouts by calling HUD at 1-800-569-4287 (TDD 1-800-877-8339). Having an advocate will help you get a fair deal by balancing the bargaining power between you and the lender.
If you do try to arrange a workout on your own, you should read the rest of this section to get some tips on how to prepare, what to ask for, and how to negotiate with a lender. Even if you decide to get help, you should review this section carefully to help you understand the workout process.
Should you consider a workout, and, if so, when should you seek it?
For many homeowners facing foreclosure, negotiating a workout is the best strategy for saving their home. But it is not always the best approach for all homeowners and, even when it is, care must be taken to start negotiations with the lender at the best time. This section provides guidelines to help you decide whether and when to initiate discussions with the lender about a workout agreement.
You should determine whether you have defenses
There are some situations in which you have defenses to repayment of a mortgage. You should never agree to repay money that you do not owe unless you can work out a compromise of the amount in dispute or you obtain an agreement to eliminate the inappropriate charges.
In some cases, you may have potential defenses to collection, such as "Truth-in-Lending" violations, usury, fraud or unfair and deceptive practices. When appropriate, legal claims can be used as bargaining chips for workouts either before or after legal action begins. You should remember, however, that a lender who took advantage of you in making the original loan also may look for ways to take advantage of you in arranging a workout. Try to find a lawyer for help in this process. (See "Saving Your Home From Foreclosure " In the Learn More box for more information.)
Don't initiate a workout when there are other financial problems that are equally pressing.
A workout doesn't make sense if you will lose the home anyway because of another mortgage problem that can't be worked out. You don't want to throw away money on a mortgage workout if you are going to lose your home anyway. Sometimes, if you have a large number of pressing financial problems, bankruptcy will be a better option than a workout because the bankruptcy process will allow you to deal with all of your financial problems at the same time.
Don't initiate a workout when it is too late to finish the process before the foreclosure sale.
If your foreclosure sale is very soon, a workout process can be risky. Workout negotiations almost always take at least 30 days to complete. If you are within 30 days of a scheduled sale date, always obtain a written agreement to postpone the sale as one of the first steps in the workout process. Without such an agreement, you will be better of f exercising your bankruptcy rights since you will get the benefit of an automatic stay of the foreclosure sale by filing bankruptcy.
Start workout discussions as early as possible.In situations other than those described above, a workout is usually a good approach after you default on a home mortgage. Always begin a workout discussion as early as possible after the default. There are five reasons to do so:
- It's easier to negotiate a workout before you get too far behind in payments.
If you are thinking about bankruptcy, workouts should generally be considered prior to filing. Once bankruptcy is filed, most lenders will not negotiate an agreement that goes beyond the best potential result under the bankruptcy law.
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