Lenders Often Willing to Aid Borrowers in a Bind

Times have been tough lately for Kristi and Stanley Barefoot.

The couple’s financial problems came to a head this spring when they fell behind on their second mortgage payments. Their lender filed a notice of default, forcing the Barefoots to close their sagging pool supply store in order to save their Northridge home.

“We borrowed heavily against our personal finances,” Kristi Barefoot said. “We had to make a choice.”

By closing the retail operation and moving the pool service operation into their home, the Barefoots have bought themselves some time. They managed to cut a deal with the lender that will allow them to catch up on their mortgage obligations over time.

There’s no guarantee that their game plan will work, Kristi Barefoot said. “It’s still iffy. We may yet have to file for bankruptcy.”

The Barefoots aren’t alone. Dozens of homeowners in the San Fernando Valley face similar circumstances every week as they find themselves in default or facing a trustee’s sale. The recession has made it increasingly tough for many people to keep up with their mortgage payments.

Missing a payment, however, doesn’t need to spell complete disaster. As the Barefoots learned, there are ways to deal with such a crisis--and lenders are often willing to help.

“We look at ourselves as counselors, not collectors,” said Jay Memmott, vice president of default administration at Coast Federal Bank in Granada Hills. As soon as a borrower begins experiencing money trouble, it’s advisable to contact the mortgage holder instead of just missing a payment, Memmott said.

“We find that a lot of people wait to the last minute and they haven’t won the lottery,” he said. Instead, they should “keep the lines of communication open.”

After two missed payments (about 30 days), Coast generally reports the default to credit bureaus. If nothing is done to correct the situation within 75 days, the thrift files a notice of default--to begin the foreclosure process.

There are, in fact, two types of foreclosure, said Martin E. Steere, a real estate and banking attorney who lives in Woodland Hills. Lenders can foreclose judicially--that is, through the courts. This method, however, is rarely employed by lenders because it can take more than a year. Most frequent is a non-judicial foreclosure, where the lender forecloses according to its rights under the note and the deed of trust.

“Lenders appreciate honesty and a legitimate desire by the borrower to resolve his or her problems,” Steere said. “Though they are big institutions, they’re human and they respond to human approaches.

“The No. 1 thing borrowers should do is go in and talk to their lenders. Lenders generally don’t want to be landowners,” added Steere, a partner at the law firm Manatt, Phelps, Phillips & Kantor.

Negotiating with lenders isn’t easy, however, said Don Arsenault, an account manager at Jasen Writter Management Service, a Tarzana-based debt counseling and budget planning firm. When it comes to getting significant concessions out of the lender, he said, “my experience is that you’re going to have a tough time doing it.”

Arsenault said it’s ironic that when some of his clients come to a lender before missing a payment, “they’ll think you’re bluffing.” It’s not until borrowers develop a checkered payment history that their problems get taken seriously, he added. To help overcome this problem, he said, “you have to get to the top person.”

“There are a variety of options to consider. Each deal has to be reviewed individually,” said Sam Lyons, senior vice president of mortgage banking at Great Western Bank in Northridge. Great Western is often willing to lower a borrower’s future interest rate or arrange for an extended payment schedule, Lyons said. However, “we are not in a position of forgoing principal balances or even interest”--at least for residential loans.

“The earlier borrowers can contact us and discuss the situation with the lender, the better off they are,” Lyons said. “Lenders would rather work the loan out with a borrower who has a reasonable chance of making it.”

If it appears that foreclosure is almost unavoidable, the lender will consider taking what’s known as a deed-in-lieu of foreclosure, Lyons said. This basically means that the borrower hands the lender keys to the house, and the lender steps into the shoes of the borrower. Lenders are less likely to take a deed-in-lieu if the property is encumbered with secondary loans.

Strategies for avoiding foreclosure include putting the property up for sale, finding an investor willing to assume the loan obligations, persuading the lender to take a deed-in-lieu or negotiating for more favorable loan terms.

Once a notice of default has been filed, any of the above strategies can still be employed, but the borrowers must act quickly. There’s a 90-day period between the notice of default and the recording of a notice of trustee’s sale. The borrower--also known as the trustor--has up to five business days before the date of sale to reinstate the loan.

The trustee generally schedules the sale 21 days after recording a notice of sale. This sale can be delayed, however. If the sale brings in more than the amount owed on the note, this money is transferred from the trustee to the trustor. If there’s a shortfall, California law basically prohibits the lender in a non-judicial foreclosure from going after the borrower for the balance.

A personal bankruptcy filing can stay the notice of default or trustee’s sale. This topic, however, could easily fill another column.

The Barefoots were advised by their attorney to file for bankruptcy protection “but we didn’t want to take that alternative,” Kristi Barefoot recalled. Selling the house was also not a preferred course of action for the couple. They bought their home in April, 1990, for about $310,000. Today, the house is worth at best $290,000. The Barefoots wanted to avoid selling it at a loss.

Overall, the Barefoots are hopeful about recovering from their present financial distress.

Their lender has been cooperative so far, Kristi Barefoot said, and “my husband and I are both optimists.”