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.
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.
Retention Options seek a negotiated path to keeping the Property despite the fact that the mortgage is usually in default and often in a foreclosure litigation. Retention Options are often items that clients at first tried on their own on a rudimentary level. The main method of retention, a Mortgage Modification is the source of many mortgages being made current and many efforts toward an exit from the foreclosure litigation.
Clearly the advantages of Retention Options succeeding is the ability to keep property where the mortgage is in arrears, the mortgage in foreclosure and the client often worried over the potential loss of their home. Once foreclosure is threatened Retention Options become possible but become harder as the lender sees its arrears mount and and the owner sees an exit strategy as more difficult.
The disadvantages of Retention Options is potential liability for the mortgage if there is a deficiency and arrears that exceed the amount the Lender is able to obtain from selling the Property at a foreclosure sale. If there is a large deficiency, high arrears and high escrows needed to collect from mortgage, the lender is more apt to chase the borrower for funds despite the foreclosure. In those situation the borrower may separately pursue Non-Retention Options (or options where the goal is not to keep the property)>
Our multi-disciplined approach to foreclosure and to the challenge of distressed property gives us an advantage of time and leverage in the foreclosure proceeding which usually results in a successful negotiated Retention Agreement. Because there is no guaranty in one approach it is an advantage to have several potential approaches at our disposal in the quest of resolving the foreclosure and retaining the property.