Real Estate

Property Loss Mitigation

Lenders are in the business of providing loans that are repaid according to the terms agreed to by the borrowers. This is accomplished by establishing and adhering to a loan approval process that rates the property and borrower against benchmarks and other variables that quantify probability of payment and applicable risk premium, loan terms, and repayment schedule. required to mitigate loan default. However, regardless of the best efforts of the lender and the best intentions of the borrowers, some loans on the books will become delinquent and will require steps to change their status. When a loan defaults depending on the underlying reasons, the options available to correct the problem are varied. The default status of a loan inadvertently provides an opportunity to improve, correct or change the financial structure supporting the property or to relinquish ownership of the property, which may be a viable option under certain conditions to rectify the delinquency. Some of the possible ways to address a delinquent loan and change your status are:

Loan Modification – Changes the agreements in a mortgage instrument and the accompanying promissory note or deed of trust, making the payment terms temporarily or permanently more affordable to the borrower. This may include lowering the interest rate, extending the duration, adding the delinquent amount to the outstanding principal, and repaying the loan balance, etc. This modification may be all that is required to correct the mortgage delinquency and allow the borrower to make future mortgage payments without further default. This allows the lender to keep the loan on the books, gives the borrower some financial relief, and makes the payment more affordable based on the cash flow of the property.

Discounted Payment: Represents the change implemented by a lender in which it accepts less than the outstanding amount owed on a loan to satisfy the debtor’s debt. This allows an owner whose property has a correctable diminished return to purchase third-party financing in the form of debt or equity to satisfy the discounted settlement amount and remove the asset from the lender’s balance sheet. This is a positive resolution to delinquency for all parties; the lender receives payment of a percentage of the outstanding debt and only has to pay off a small amount compared to the full balance, the property owner has set up a new loan, possibly a bridging or hard money instrument, which gives time until maturity to correct or improve the property’s fundamentals for future stabilization and refinancing, the hard money or bridge lender has added another loan to its books that meets its lending parameters, the outside capital provider injects funds into the capital structure to pay the debt to the lender while diluting the capital of the sponsors for an attractive Return on Investment (ROI), etc.

Bringing in outside capital – An equity partner can sometimes be called upon to recapitalize the equity stack by winding down the lender’s debt financing or strengthening the property’s fundamentals, making it a more attractive candidate for debt financing alternative while maintaining an appropriate equity/debt ratio for cash on cash yield. However, this reduces the principals’ equity interest in the property and dilutes their ownership interest. This financial maneuver represents a viable option to deal with a property in default and provide corrective measures to the problem while positively improving the position of the interested parties in the property.

Refinance – A property owner who still has enough equity in the asset backed by the property’s equity and loan-to-value (LTV) ratio may be able to obtain a loan from another lender to pay the original lender the full amount owed; whether other variables in the property profile and the borrower profile support the loan. This removes the asset from the original lender’s balance sheet and provides the property owner with a new loan instrument for future servicing. Executing this option is a complete break with the original lender, which can be beneficial, especially if the relationship has become tumultuous during the loss mitigation process.

Sale – Disposition of property through sale provides an option to satisfy delinquency associated with a delinquent loan if the property’s value and equity-to-debt ratio are sufficient to generate enough post-sale equity to pay the underlying debt on the property. This could be considered one of the least desirable options, as it eliminates the future ownership interest in the property with its related financial benefits. However, depending on the circumstances surrounding the loan default, it may offer a means for the lender to recover, possibly offsetting the principal from the cash sale on top of loan satisfaction and associated fees and providing capital to reinvest. on other properties.

Deed-in-Lieu of Foreclosure: Occurs when the mortgagor conveys ownership of the property to the mortgagee to alleviate the initiation of the foreclosure process by the lender. The property owner in this circumstance relinquishes all rights to the property which are transferred to the lender via deed to avoid the need for the lender to go through the foreclosure process to obtain ownership of the subject property . This action represents a more amicable resolution of the delinquent loan status without the lender having to resort to litigation to obtain title to the property to perfect the lender’s security interest. A deed-in-lieu of foreclosure is considered an amicable foreclosure and is less adversarial in nature than a foreclosure.

Foreclosure: Generally represents the last option available to the lender to protect their interest in the property and enforce their rights to repay the debt evidenced by the real estate loan instrument. This course of action is generally applied by lenders when other options were not executed by the property owner, were executed but also defaulted, or market conditions diminished their relevance as viable loss mitigation alternatives to address the state of the mortgage. In foreclosure, the lender declares the loan instrument delinquent, notifies the borrower of their responsibility to cure the delinquency, and, if not cured, initiates litigation to obtain ownership of the property for sale to a third party to obtain the repayment of the loan balance from the proceeds of the sale of the property. This depends on the net amount of the sale being enough to satisfy the outstanding amount of the loan. In the event that the net amount is inadequate to satisfy the outstanding balance, this leads to a deficiency judgment against the property owner for a recourse loan. However, the frequency with which lenders enforce deficiency judgments against homeowners is debatable in commercial real estate loan foreclosure.

Lenders use Loss Mitigation to work with borrowers who are experiencing mortgage payment problems that could result from a cash flow problem caused by a high vacancy factor, tenant delinquency, below-par rental rate, market etc Lenders are primarily concerned with the repayment of the loan incurred against the property and will try to work with homeowners through difficult times during ownership. The options available are often specific to the individual property and the underlying reasons for the delinquency and feasibility of changing your financial situation. The earlier action is taken in the delinquency stage, the more resolution options can be provided and offer the owner the ability to protect more equity from erosion.

Leave a Reply

Your email address will not be published. Required fields are marked *