Work-Out Strategies to Combat a Threatened Foreclosure
February 11, 2009
You struggle and fail to make mortgage payments or your loan matures and the lender is ready to lay siege to your property by filing a foreclosure action. What are your options? Do you run for cover? Counterattack? Fortify the defenses and dig in? Following are some of the strategies you might consider.
Restructure the Existing Loan. Turn and renegotiate! Most lenders are overstocked with distressed work-out inventory (properties taken through foreclosure or deeds in lieu of foreclosure), which strain the lender’s ability to police the properties. Thus, a lender may be willing to listen to creative options. Consider a temporary payment reduction by extending the maturity date, reducing interest rates, making interest only payments or possibly reducing principal. Lenders may prefer reducing their income stream if the alternative is taking title to non-productive property that needs maintenance, management, insurance premiums, tax payments, etc.
Market the Property for Sale. Selling the property will probably require a discussion with the lender because in all likelihood the loan documents will require the lender's consent to any sale. In addition, if the property is worth less than the amount due on the mortgage, the lender will need to agree on a minimum purchase price. You might want to consider suggesting an auction sale of the property with an agreement that the borrower will be released if the property brings in a certain minimum price. The auction sale can be structured so that it can be called off if the property is unlikely to obtain this agreed minimum price. Experienced auction sale professionals can help guide you through this process.
Refinance the Property. While refinancing offers an escape from your existing loan, refinancing is difficult with today’s tougher underwriting requirements (e.g. conservative appraisals, reduced loan-to-value rations and higher debt coverage ratios, etc.). Also, beware of land mines in the existing loan such as prepayment penalties and "lockout" periods during which prepayment is prohibited.
Additional Capital/Joint Venture. An owner could rearm through a cash call from current investors. If investors are already shell shocked, consider the time honored tradition of enlisting allies through a joint venture or bringing in additional investors. However, the cost of fresh supply lines and strength through numbers, is the dilution of equity and authority.
The "deed-in-lieu". You can waive the white flag and surrender the property by giving the lender a deed in lieu of foreclosure. If you do, press for a complete and unconditional waiver of all claims lender has against the borrower and guarantors or a covenant not to sue.
Bankruptcy. Bankruptcy provides at least temporary protection through the automatic stay, which prohibits any legal action against the debtor during the pendency of the bankruptcy. However, beware that your loan documents may provide that the filing of a bankruptcy petition will trigger "springing recourse" against the borrower and the principals of the borrower, making both fully liable on the loan. Unless the principals of the borrower are in such dire straits that they are prepared to file bankruptcy, this is not an acceptable result.
Choosing the correct strategy will require the advice of counsel. Taft's real estate and bankruptcy counsel can help determine which alternatives are best for you.
Restructure the Existing Loan. Turn and renegotiate! Most lenders are overstocked with distressed work-out inventory (properties taken through foreclosure or deeds in lieu of foreclosure), which strain the lender’s ability to police the properties. Thus, a lender may be willing to listen to creative options. Consider a temporary payment reduction by extending the maturity date, reducing interest rates, making interest only payments or possibly reducing principal. Lenders may prefer reducing their income stream if the alternative is taking title to non-productive property that needs maintenance, management, insurance premiums, tax payments, etc.
Market the Property for Sale. Selling the property will probably require a discussion with the lender because in all likelihood the loan documents will require the lender's consent to any sale. In addition, if the property is worth less than the amount due on the mortgage, the lender will need to agree on a minimum purchase price. You might want to consider suggesting an auction sale of the property with an agreement that the borrower will be released if the property brings in a certain minimum price. The auction sale can be structured so that it can be called off if the property is unlikely to obtain this agreed minimum price. Experienced auction sale professionals can help guide you through this process.
Refinance the Property. While refinancing offers an escape from your existing loan, refinancing is difficult with today’s tougher underwriting requirements (e.g. conservative appraisals, reduced loan-to-value rations and higher debt coverage ratios, etc.). Also, beware of land mines in the existing loan such as prepayment penalties and "lockout" periods during which prepayment is prohibited.
Additional Capital/Joint Venture. An owner could rearm through a cash call from current investors. If investors are already shell shocked, consider the time honored tradition of enlisting allies through a joint venture or bringing in additional investors. However, the cost of fresh supply lines and strength through numbers, is the dilution of equity and authority.
The "deed-in-lieu". You can waive the white flag and surrender the property by giving the lender a deed in lieu of foreclosure. If you do, press for a complete and unconditional waiver of all claims lender has against the borrower and guarantors or a covenant not to sue.
Bankruptcy. Bankruptcy provides at least temporary protection through the automatic stay, which prohibits any legal action against the debtor during the pendency of the bankruptcy. However, beware that your loan documents may provide that the filing of a bankruptcy petition will trigger "springing recourse" against the borrower and the principals of the borrower, making both fully liable on the loan. Unless the principals of the borrower are in such dire straits that they are prepared to file bankruptcy, this is not an acceptable result.
Choosing the correct strategy will require the advice of counsel. Taft's real estate and bankruptcy counsel can help determine which alternatives are best for you.
