Retention Options in General for Distressed Real Estate

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Distressed Real Estate Negotiation Lawyers Help Home Retention

Attorneys Negotiate Retention Options for Homes Where the Mortgage is in Default and/or the Property is in Foreclosure

What are “Retention Options”?
Define the Several Different Types of Retention Options-
When are these Retention Options Used? And What is the Goal and/or Strategy?
What Else, Would Be an Alternative? What is the Back-Up Plan?
Advantages / Disadvantages of Retention Options
Obstacles / Challenges / Timing / What Can Help or Expedite
What are the Initial Questions and Searches and Documents To Review?
How Do We Get Started?
How We Can Help You

What are “Retention Options”?

Retention Option are alternatives that seek to allow a Homeowner to remain at their property. The goals of Retention Options are for the Homeowner to directly or indirectly retain control and possession of their real property, especially the home in which they and their families reside, despite mortgage arrears and usually a foreclosure litigation. The tools to retain possession or control of property by necessity need to be monetary. However monetary tools by themselves are insufficient without clever and aggressive negotiations which seek advantages in some of dislocations, inefficiencies and illogical premises of foreclosure procedure. The premises of a foreclosure action support a long, drawn out foreclosure action where arrears accumulate to the point that often the lender could never make up the loss of financial resources through the foreclosure. Most properties in foreclosure have little equity above what is owed on the mortgage yielding a monetary loss for the lender in any drawn out foreclosure litigation. It is for that reason that when the homeowner can find support in the form of their own strong income and/or financial help and/or friendly but discreet allies, that the homeowner may be able to turn matters around. The goal of Retention Options is to take advantage of such dislocations to convince the lender to stop its foreclosure, which has usually been inefficient economically and pursued because there was often little other alternatives. With the Retention Options in this section the lender will be aware of their other options, and hopefully realize the economic advantages of pursuing options that improve the lenders economic advantages.

Define the Several Different Types of Retention Options-

There are several different types of Retention Options. We shall define and/or describe them below, as follows:

a) Mortgage Loan Modification – Mortgage Loan Modifications are the most frequently pursued Retention Option, since it is an option that Lenders are often willing to consider and openly offer to Homeowners with distressed real property. A mortgage loan modification seeks to take the principal amount of the mortgage and have it absorb the arrears owed so that the client is deemed to be current with payments. The monthly payments are usually brought back to what the client was paying before their hardship; the payments are lowered, despite a large loan based on a lower interest rate and longer duration for the loan.

b) Friendly Sale / Friendly Short Sale – A real estate deal to sell the property would bring the loan current since the arrears on the loan would need to be paid off in full at the time of closing. Usually a sale of the property would be a non-retention option, in that the property would no longer be a welcoming long term abode to the client once he sold it. However where the Homeowner/Borrower has friendly allies, they could purchase the property in their name, and after its purchased allow the Homeowner to pay rent for a period of time until the Homeowner restores their credit sufficiently to be able to purchase the Property back. Where there is still equity in the property this retention option is a regular real estate deal. But where the property is upside down, with the mortgage balance exceeding the fair market value of the property, a short sale becomes possible. In such a situation the short sale buyer would usually make an offer below fair market value and often get a deal that was based on the price of distressed property (at least 10% below fair market value; but often a higher discount accounting for potential wear/tear, lack of updating and damage to the property requiring extensive renovations). Here, if the Homeowner eventually purchases the property back, the Homeowner essentially erased much of the arrears, interest and costs due to the default.

c) Payoff / Short Payoff – This option seeks to payoff the full amount owed on the loan. However as with the Short Sale description above, where the fair market value dictates a lower payoff, some lenders would realistically demand the lower payoff (or short payoff) in order to forgive the entire loan.

d) Reinstatement / Short Reinstatement – This option seeks to reinstate or cure the full amount of mortgage arrears, costs and escrow owed on the loan. However as with the Payoff description above, where the fair market value dictates a lower reinstatement, some lenders would realistically demand the lower reinstatement. A Short Reinstatement makes sense for a lender where there is a lack of equity in the property and salvaging part of the arrears is good enough under the circumstances.

e) Forbearance – Forbearances have been widely used by lenders during the Covid-19 pandemic to deal with arrears due to the economic fallout caused by business lockdowns and slowdowns that plagued the economy. The problem with this option is that it is inherently a short term option and eventually the lender either needs payment in full, OR the Homeowner / Borrower needs to pursue a modification or other retention option to absorb the arrears.

f) Refinancing – Obtaining a loan to take out the loan in arrears is usually not an option due to credit issues for the principal borrower who is in arrears with the loan. The assumption is that that the refinancing would have a co-borrower or that there would be collateralized security for a down payment at a high enough level to overcome any credit issues for the principal, original borrower.

When are these Retention Options Used? And What is the Goal and/or Strategy?

Retention Options are used when we have a client who wants to keep real property where the mortgage is in default and/or in foreclosure. In order to retain the property, the client may need to implement one of the options above. The goal with Retention Options is to survive a relatively difficult financial period long enough for the economic adversity to potentially end and for secure home ownership to become possible again. The strategy is use what may be temporarily limited financial and legal resources in a wise manner while attempting to keep the property so that the client’s ability to deal with their finances improves sufficiently so that they may retain the property going forward. The Covid-19 pandemic has created many economic dislocations that may need short term solutions like the following Retention Options: modification, a friendly short sale and/or a forbearance agreement, with the thought that in the long run most persons experiencing temporary shortfalls of income will eventually be able to return to a more profitable status which would allow them to resolve their mortgage issues.

What Else, Would Be an Alternative? What is the Back-Up Plan?

Alternatives to Retention Options, that would allow a client to retain their property would be:

Bankruptcy Reorganization – Reorganization plans in Bankruptcy Court where debtors can reorganize debt under either chapter 13 or 11 plans. Bankruptcy allows debtors with mortgages in default to try to catch up on arrears for up to 5 years with monthly payments on the arrears to a trustee or to seek a mortgage modification through the bankruptcy case.
Litigation Defense -Litigation defense with a goal of slowing down the foreclosure action thorough time consuming motions is a viable option.
Negotiations Only to Buy Time – Negotiations ONLY as to non-Retention options which give the pretext for delay. Non-Retention Options, seek the opposite of Retention Options, they support the owner’s planned and negotiated surrender their Property, in the manner most advantageous to the owner. The premise is that any negotiated solution, like a sale to a 3rd party, may give the excuse for the owner to buy time.

Advantages / Disadvantages of Retention Options

The Advantages of Retention Options is that the client may keep their property and potentially stay there for a long time. They may get a price discount as they seek retain the property during societal and individual adversity. Retention Options encourage a client to remain in their home, knowing that their mortgage arrears are not necessarily fatal to their goal of continued home ownership.

On the other hand, the Disadvantages with Retention Options is potentially their encouragement to have a client struggle and invest to keep themselves at a property when the client may not be able to keep the property in the long run. In some cases the client’s struggle may be futile if the client has encountered long-term devastating financial set backs.

Obstacles / Challenges / Timing / What Can Help or Expedite?

Challenges and obstacles to Retention Options are as follows:

Secondary Secured Liens – Liens and secondary mortgages because could get in the way of the Retention Option. For example a second mortgage lien on the property can make a short sale difficult.
Insufficient Income – Inability to show sufficient income or assets in documentation requested by the lender. For example, lack of income or the inability to show sufficient income may harm the ability to pursue Retention Options.
Lack of a Downpayment – Often an agreement or settlement like a modification depends on a downpayment, especially if the the arrears are high. The downpayment may makes the lender more comfortable with the risk of a modification.
Excessive Mortgage Arrears – Where the mortgage arrears are very high, it becomes harder to get a modification or other settlements to keep the property. For example a modification may not be able to absorb the large arrears and still give a reasonable monthly installment payment.
Lack of Documents – Even if a Home Owner has the necessary economics to deal with situation, to access institutional loans, the effort and abilities of the borrower need to be well documented.

What are the Initial Questions and Searches and Documents To Review?

In order to pursue Retention Options we need to review the clients documents and information, since these are the documents that we will need to present in support of our applications. Such documents are as follows:

Proof of Income – tax returns, pay stubs, bank statements, affidavits of contributions, and profitability statements for a business need to be reviewed.
Proof of Deposits / Assets – account status for a down payment for a purchase/refinancing.
Budget Information – Needed to determine the viability of modification.
Total Amount of Debt – Also needed to determine the client’s debt to income ratio.
Liens and Mortgages on the Property – A lien and judgment search for liens and potential secondary mortgages needed for sales and short sales.

How Do We Get Started?

We meet in our office or by phone for an initial consultation. Assuming that we determine that we can help a client we strategize on a customized strategy and plan of action for the unique fact pattern of that particular client. We then have an intake appointment where the client and our office sign a retainer agreement and the client pays us part of the fee so we can work on their case. Often we would need to do searches and we would need documents from the client. We bring all that information together in our files in order to move our negotiations forward in what is often a successful manner.

How We Can Help You

We are uniquely situated to negotiate Retention Options because of our ability to leverage options that the lender would often prefer to avoid, like delays and costs due to ongoing foreclosure defense litigation and/or bankruptcy filings designed to give the defendant protection and time. We are divided into departments for every type of matter a client may pursue so that in the event our negotiated Retention Option efforts do not work, we will have other viable options. It is impossible to know in advance exactly how certain options that we pursue will fare, but the fact that we can drastically improve our client’s chances of success with Retention Options and that we can look at and purse many alternate plans, help us represent a client effectively.