What to Do If You Can’t Pay Mortgage

QUESTION: We never believed this would happen to us. We have owned our house for many years and currently owe several months of mortgage payments. The equity in our house is somewhere in the neighborhood of $60,000-$70,000, but since I lost my job recently, I can neither make the mortgage payments nor do I want to move somewhere else. I have heard about a deed in lieu of foreclosure, but do not understand how it works. Can you explain?

ANSWER: None of us can anticipate what the future will bring. Once in a while, calamity strikes, and then we have to face these very hard questions.

Before addressing the deed in lieu of foreclosure issue, let me outline for you a number of steps when dealing with your mortgage lender.

At the outset it must be pointed out that if you want the lender to cooperate with you, there has to be an equal level of cooperation on your side. Indeed, according to the Freddie Mac guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief “to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations. . . .”

The first possible relief is referred to as “temporary indulgence.” Here, the lender, on request, may grant the borrower a short period of time--usually not more than three months--to cure any delinquency. However, this is merely temporary relief, and by the end of the short period of time, the borrower must be completely current.

Another approach is a repayment plan. Here, the borrower is given a fixed period of time--usually not to exceed one year--in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly mortgage payment. It is advisable to set down this repayment plan in a written document, signed by both the lender and the borrower.

Lenders also can enter into what is known as a “special forbearance relief agreement,” in which the regular monthly mortgage payments are suspended or reduced for a period of up to 18 months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed, and more important, a comprehensive plan must be agreed upon so as to repay the amount that has been suspended.

In this case, the lender must satisfy itself that the default is curable, and based on the current financial and appraisal data, the lender must be satisfied that there is a likelihood that the borrower will be able to comply with the repayment plan. Clearly, the burden is on the borrower to document and justify the plan, so as to satisfy the lender’s requirements.

If you are in the military, the Soldier’s and Sailor’s Relief Act provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that Act.

The deed in lieu of foreclosure is another remedy that may be available to you. Under this arrangement, you deed your property to the lender (or to whomever the lender designates) and this is in lieu of (instead of) foreclosure proceedings. This arrangement is an acceptable and customary procedure when, for example, the borrower is deceased and the estate is willing and able to transfer the property, or the borrower has filed Chapter 7 bankruptcy, and the trustee has abandoned interest in the property.

There are a number of requirements to accomplish a deed in lieu, and each lender will have their own set of guidelines. Generally speaking, however, the following requirements are usually imposed by a lender that is willing to accept the deed in lieu:

1--The borrower has a valid and documented reason for default that is beyond the borrower’s control.

2--The borrower has demonstrated that he or she has made and can make prudent financial decisions since the default.

3--The borrower has been cooperative and has provided any and all necessary documentation to the lender. Additionally, the borrower must permit the lender to have reasonable access to inspect the inside of the property.

4--The borrower must be willing to make a financial contribution, if this is at all possible.

5--If the lender has escrowed money for the payment of future taxes and insurance, the borrower must be willing to forgo reimbursement of these escrowed funds.

Additionally, the lender will not even consider taking the property as a deed in lieu unless the property has been listed for sale at market value, and all attempts to sell the property have failed.

Finally, there can be no outstanding liens or other encumbrances on the property, since the lender wants to be able to take the property free and clear of any other claims against it.

When a lender takes property as a deed in lieu, presumably the borrower’s credit history has already been tarnished; after all, the borrower has probably not been making mortgage payments for several months. However, it is my understanding that a deed in lieu does not get reported as a foreclosure proceeding on your credit history, and thus if the lender is willing to accept the deed in lieu of foreclosure, at least you may be able to avoid even further negative credit history.

I strongly suggest that you contact your lender immediately, and have a face-to-face discussion with them. If your lender is no longer in your hometown, send them a letter and then call and make arrangements to talk to the most senior official at that mortgage lending company.

The final option, of course--which should be used only as a last resort--is for you to file bankruptcy. When someone files for bankruptcy, there are many protections that automatically apply from the day the bankruptcy petition is filed with the Bankruptcy Court.

The most important protection under the bankruptcy law is what is known as “the automatic stay.” If you are in bankruptcy, no legal action can be taken against your house unless the lender requests the court for permission to “lift the stay.” This means that the lender goes before the bankruptcy judge, in open hearing, and petitions the court to permit the foreclosure to take place. Depending on the circumstances, including the amount of equity you have in your house and the possibility of getting back on your feet financially, the Bankruptcy Court may or may not lift that stay.

Kass is a Washington, D.C., real estate attorney who writes for The Times and the Washington Post.