Resolving non-performing mortgage notes is as much an art as it is a science. It’s a delicate balance between being aggressive and compassionate with the goal of reaching a win-win that resolves a difficult situation with the most practical solution.
There are really only three questions necessary to open a dialogue with the borrower. Whether that be through your servicer, attorney or handled yourself is on you to decide (and be aware of the risks). These questions are:
- What happened?
- Where are you now?
- What do you want to do?
Once you have an answer and further details from the borrower into each of these lines of inquiry, you’re ready to move on to pursuing one or more of the exit strategies referenced in the six modules below. For now, let’s unpack these three questions.
Referred to as the borrower hardship, what you’re trying to get to here is the reason the borrower stopped making their payments. Before this question is asked, make sure you have studied the loan data and are familiar with the general information (such as the last payment date). If you have access to a skip trace, you may have a head start on some follow up questions.
WHERE ARE YOU NOW?
You’ve established what caused the default, now you’re determining whether this hardship has been overcome, if the borrower’s situation has improved. Make sure detailed notes of this conversation are recorded because you may require evidence or followup from the borrower on some of the information provided.
Find out where the borrower is currently residing. If they’re working, find out where and how much they’re earning. Ask some specific followup questions based on their hardship. Get as much, detailed information as you can. The more they share, the better you will be able to help them come to a mutually agreeable resolution.
WHAT DO YOU WANT TO DO?
There are two paths that the answer to this question may take: does the borrower want to keep the house or move on. If they want to stay in the house you will need to discuss their monthly budget for a re-payment plan or the possibility of a lump-sum payoff.
If they are ready to cut their losses and move from the property, the conversation will take a different course. Ask if they’ve tried to sell the home before. If they know how much it’s worth and whether there are any substantial repairs necessary. Don’t make any promises at this time, just get as much detail as you can.
Once you are satisfied with the amount of information you have gathered it’s incredibly important to set a follow up meeting. Depending on how the conversation went, the borrower might have some homework to do. It’s very helpful to have them put together their financial information including bank statements and pay stubs.
HARDEST HIT FUND (HHF)
Until December 31st, 2020, applications were being accepted by several state-specific HHF administrators. The HHF allocated over $7.6 billion to provide assistance to homeowners in states severely affected by the economic crisis. These funds were utilized by agencies in 18 states to implement programs aimed at stabilizing local housing markets and aiding families in avoiding foreclosure.
While the deadline has passed, it’s still worth exploring other government programs that may currently be available. Please refer to the chart below for a quick overview, and for more detailed information, visit the state-specific information website by clicking on the respective state name.
|State||MPA||Reinstatement||2nd Lien Reduction||Transition Assistance||Principal Reduction||Blight Elimination|
The following exit strategies will be reviewed in detail in the modules below. For now here is a summary of what we’ll cover
Discounted Payoff: Unless there is substantial equity for the borrower to afford a full payoff, distressed note investors typically seek a lump sum discounted payoff.
Payment Plan: If the borrower doesn’t have the funds available for a lump sum payoff, a payment plan is the next best option. Often, you will negotiate for a downpayment to cover past due interest or late fees in addition to a monthly commitment.
Sell the Note: A note sale is a great strategy after a payment plan has been put in place and “seasoned” for six months or longer. It’s also a way to cut your losses if you need to liquidate a non-performing loan.
Short Sale: If the borrower is not interested in keeping the property the note investor can help them put the home on the market for sale. If there is not enough equity to payoff the lien(s), the sale is referred to as a short sale.
Deed-in-Lieu: This gives the borrower the ability to walk away from their debt in exchange for signing over the property to the lender. Depending on the investor’s intention and the value of the property, they may be able to offer “cash for keys” to help the borrower afford a downpayment or security deposit on their new residence.
Foreclosure: A very small percentage of investors that file foreclosure actually end up taking back the property. Foreclosure is often times the “wake up call” the borrower needs to realize that they need to make a decision or one will be made for them.