Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

Most Common Question: "What do I do? - I can't pay my mortgage"

As an attorney, I receive plenty of telephone calls and visits from people that are no longer able to pay their mortgage on their home or investment property.  They all have endless questions and usually tell me they are getting all sorts of advice that they don't like.  They come to me to find their BEST solution, and I suppose they hope I am some sort of magician that can create an answer that they like.

The analysis of the problem is the first order of business.  These questions revolve around the "why" are they behind on the mortgage.  What situations (health, job, death, divorce, and catastrophe) triggered the problem? When did the problems arise? Are they current or delinquent with the mortgage? Are they in foreclosure? What are the repayment terms of the mortgage?  Do they have assets that are in savings, other properties, stocks, bonds?  Is this a matter of being "real estate rich and cash poor"?  What is their income past, present and future?

We like to get a financial statement filled out by the client, which sometimes is like pulling teeth - people just hate filling out financial forms - so we made one that is very simple and tracks the 1003 without the fluff.  The idea is to get a handle on the financial numbers and thus the situation from raw information.  We do this because people in general and delinquent borrowers in particular have a hard time verbalizing and quantifying the monetary problem and why it is a problem.

Simply put, there are 4 solutions to the problem:

            1.  Let the house go into foreclosure.  This is the most drastic response and is not a solution but a result.  It ruins credit badly and the property and all equity is usually lost.

            2.  Modify the mortgage(s).  If the borrower has the financial resources to permit a modification of the mortgage terms then this is the best of the bad solutions.  Modification can come in many shapes, sizes and flavors.  Think about reducing the loan balance (up to the amount allowed without prepayment fees) in exchange for an interest rate adjustment downward (great for those 12% loans).  Sometimes these solutions require financial help from family and it may not make sense to owe more on the property than it is presently worth.  But being "upside down" in value is something that is always going to happen in real estate.  If the property is the primary home and the borrower expected to live in it for the long term, then being upside down for a few years is going to be long forgotten 10 years down the road.  Like kidney stones, they will pass and the pain will be forgotten.    Often the title must be clear since from a technical standpoint, there can be a new start point created for the lien of the mortgage and that mortgage must retain its priority over other liens and potential liens.  Credit hit can be nominal to average, depending on the deal and modification.

            3.  Deed in Lieu of Foreclosure.  Everyone talks about it but this is more difficult than one may think.  In 30 years I can only think of a half dozen that we have worked successfully.  The key here is the lender has to agree to take the deed and deal with the property itself (it would much prefer a short sale) and the title to the property must be clear.  This usually means there should be only the one mortgage and there can be no liens and no judgments against the owners / borrowers.  This is basically a foreclosure without the judgment of foreclosure.  Credit hit can be substantial but not as bad as a full foreclosure.

            4.  Negotiate a Short Sale.  It is surprising how many people call me - including owners, Realtors and sales associates - and don't know what a "short sale" means, much less how it works.  Think back just 5 or more years and remember "loss mitigation".  The term "short sale" is relatively new lingo for an old option lenders have used for decades.  The concept is too simple:

                        a.  house bought for $300,000

                        b.  loans on house are $280,000

                        c.  value of house is now $200,000

                        d.  shortage of loan equity value is $80,000

In the above scenario if the owner needs to sell (because he or she can no longer make the house payments (taxes, insurance, utilities, interest, principal, and whatever) then typically the house needs to be sold.  However, the mortgage is greater than the selling value of the house by $80,000.  If the bank foreclosed, it could not expect to receive more than the house is now worth at a foreclosure sale.  And the bank would also have the costs of attorneys, sales agents, real estate taxes, unpaid interest on the principal, insurance and maintenance on the home until it got sold and the costs of selling the home.  For a house worth $200,000 in South Florida that could easily be another $30,000 after 6 months of the bank holding the property.  Thus, the bank often recognizes that it is better off with a sooner sale outside of foreclosure - the "short sale".  Shore sales have downsides for the borrower, primarily in potential income tax recognition and the potential for continuing liability on the "short" promissory note(s).  However, the credit hit is substantially less than a foreclosure.

Which of the four scenarios is best for any particular borrower requires application of a firm understanding of the mechanics of the various processes.  Be sure you use an attorney experienced in working with mortgage lenders, and a Realtor that understands and has the patience for short sales.

Be sure you understand what you (or your client) need and why you (or your client) need it before you make any decision about how to handle the matter - a bad situation does not need to become worse because you just "give up".  There is always a solution - finding the best solution to a bad situation is something you (or your clients) need to carefully examine.



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Brian Sharkey
SharkeyRE LLC - Port St Lucie, FL
SharkeyRE - #SouthFloridaBroker

great job, very informative, we have got to get together soon.  Can you be available on Monday the 21st for a TV interview?  I beleive I'm filming in West Palm Beach- you would be a great source for knowledge.

Call me.. Sharkey

Jan 12, 2008 01:19 PM #1
Endea Thibodeaux
Tarver Realty Group - Washington, DC
Have you ever heard of a bare bones petition?  I have a guy calling my client about doing one on his proerty to keep it from going into foreclosure.
Jan 21, 2008 07:23 AM #2
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney
A bare bones petition is a generally used term in bankruptcy or other court pleading type filings - it means the absolute minimum information is filed to initiate a bankruptcy filing or other court filing.  In your statement it sounds like he filed a bare bones bankruptcy petition.
Jan 24, 2008 05:45 AM #3
Mike Davis
Keller Williams Realty, Augusta Partners - Evans, GA
Realtor, Selling Buying Homes Fort Gordon, Hephzibah, Augusta, Evans

I have to say that you may have wrote the best blog on short sales that I have read. I know understand why the bank would do a short sale as opposed to going to foreclosure. The excess costs that the bank picks up after the foreclosure should give the short sale leverage during this period of time



Sep 18, 2008 09:50 AM #4
Mike Lee

The first TD 625,000

        The second TD 82,000

The current value is 425,000

The IRS income tax lien is 252,000

The State tax lien is 45,000

The NOD received on August 22, 2010

    What's the best way to handle this without filing BK?






Aug 27, 2010 08:55 PM #5
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Mike -

You did not tell me what state you are in, as that could have an important effect on possible. In reality though it is the IRS lien that troubles me the most. It is not dischargable through bkcy except under certain circumstances (such as how old it is and if the return was properly filed and accurate).

So, although the mortgages might be able to be resolved through modification or short sale, the big unknown is the government liability.

More info would help in a general discuscussion on this matter.

Aug 30, 2010 08:21 AM #6
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Richard Zaretsky

Florida Real Estate Attorney
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