Alternatives to Foreclosure
Foreclosures are usually a last resort for both the lender and for the debtor. There are many alternatives to foreclosure, some still require the debtor to give up the property but most allow the debtor to keep possession of their property and make alternate payment arrangements.
Mortgage Modifications: This is normally a type of refinance under better terms then the current mortgage. It will lower the interest rate and extend the life of the loan. This results in a smaller monthly payment. The debtor keeps the home.
Forbearance: This is the lender allowing the debtor to miss one or a series of payments due to special circumstances. Interest continues to accrue and is capitalized into the loan unless the debtor is paying the interest only. In situations where there is a temporary situation this can give the debtor time to get his affairs in order without causing a default. The debtor keeps the home.
Reamortization: The lender takes the missed payments and “adds” them to the back end of the loan and re-figures the payments for the remainder of the loan. This is usually the direct result of a forbearance. This will also usually cause the monthly note to go up. The debtor keeps the home.
Short Sale: This is frequently confused with a foreclosure because it has the same end results: the debtor loses the home. The difference in a short sale and a foreclosure is who runs the sales transaction. In a foreclosure the court runs the sale (usually at an open auction), sets the price, and determines the advertisement and fees. Needless to say, they don’t do this with the debtor’s best interest at heart.
In a short sale the debtor is allowed to run the sale and can usually keep the fees lower and get a better sales price then the home going at a foreclosure auction. The other advantage to the debtor over a straight foreclosure is the lender agrees (an identifiable event) to accept the sales price and then forgive the remaining debt without further efforts at recovery. This makes the whole process faster and cheaper for everyone involved.
In a straight judicial foreclosure the lender may, and often does, continue seeking the remainder of the loan for extended periods of time after the sale. Form 1099C’s can be issued years after the actual foreclosure is completed.
Deed in Lieu of Foreclosure: This is a voluntary transfer of real property secured by the debt from the debtor to the lender in consideration for the debt. It allows the lender to take possession of the property and sell it without the costly and time consuming process of going through a judicial foreclosure. The debtor loses the home.
This normally occurs when the FMV of the property is determined to be greater then the outstanding loan value because the lender gets to keep the excess. Sometimes the lender will also do this in the case where the FMV is less then the outstanding loan to save the costs of the judicial foreclosure.
Gain or loss on the deemed sale and CODI are figured as if a judicial foreclosure was completed.
Home Loan Modification: This only available for acquisition debts (debt used to buy, build or substantially improve the property) secured by the debtor’s primary residence and is often referred to as a “workout agreement”. This may be done under one of the current government homeowner’s projects. Under this type of program, the balance of the loan is actually reduced by the agreed amount and then the debtor receives a 1099C for the reduction amount. The debtor keeps the home.