Alternatives To Filing For Bankruptcy – Mortgage Foreclosure Mediation
Foreclosure

New Jersey has one of the highest costs of living in the nation, due in large part to the very high cost of purchasing a home in the state. It’s no wonder then that many people in New Jersey will occasionally fall behind on their mortgage payments. When enough payments are missed, the bank that issued the mortgage will begin a foreclosure proceeding. 

A foreclosure is when a home is sold by the lender to recover their losses after a borrower stops making payment. These secured loans are not eligible for discharge in a bankruptcy proceeding, leaving few options for a person going through foreclosure.

Fortunately, the State of New Jersey recognizes the difficulties in maintaining a mortgage within the state, and so they have mandated that all mortgage lenders participate in a foreclosure mediation if it is requested by the borrower and approved by the court. 

The foreclosure mediation is a meeting between the lender and the borrower where options that allow the borrower to either modify or get out of the mortgage are discussed. There are several requirements and options available to a borrower in this scenario.

Requirements

There are multiple requirements that must be met in order to qualify for foreclosure mediation. If any one of the following are not met, a borrower will not qualify.

  1. The property must be residential: commercial properties like shopping centers and other businesses do not qualify for this type of mediation.
  2. A foreclosure action must have already been filed by the lender.
  3. The foreclosure mediation request must be filed by the borrower in time:
    1.     Up to 60 days after the service of the summons and complaint of the foreclosure.
    2.     Or if after 60 days: Homeowners must file a motion in the county where the foreclosure is filed and obtain a court order permitting them to participate in the program.
  4. The property must be a primary residence: vacation homes or investment properties do not qualify.
  5. The property must be a one to four-family dwelling, not a large apartment building.
  6. The borrower must actually make the mediation request and participate in the mediation along with any cosigners to the loan.

Anyone considering requesting a foreclosure mediation should consult with an attorney before making the request to make sure that they will qualify and that all of the paperwork is properly filed.

The Process

Borrowers seeking a foreclosure mediation will need to fill out the appropriate paperwork and file it with the court at the appropriate time. This paperwork will need to include the borrower’s information, the property information, and the docket number of the foreclosure action. If the court has previously issued an order permitting foreclosure mediation, this should also be attached to the mediation request as well.

Once this information is received and reviewed a determination will be made either approving or denying the request. If the request is approved then the court will notify the borrower of the timing for the first mediation, which will occur over the phone. Having an attorney with experience in these types of negotiations will be of great help to anyone that has reached this stage of the process.

If the request is denied then the borrower will receive a letter stating that the court has determined that they do not qualify for foreclosure mediation at this time. It’s still possible to get approved at this point, but it will require filing a motion in the county where the property is located requesting the mediation once more. Again, it will be very helpful to consult with an experienced attorney at this stage to determine why the original request was denied and to ensure that the following attempt is successful.

Importantly, if a request has been approved, but the scheduled date of the mediation is after a previously scheduled sheriff’s sale (where the property in question will be auctioned off), a motion will need to be filed with the court requesting that the sale is halted until after the mediation takes place.

Once mediation has been approved and all of the additional documents have been provided, the mediation process can truly begin. A state employee with no personal interest in the outcome will assist in finding a resolution.  Resolutions often discussed include loan modification, forbearance agreements, deed in lieu of foreclosure, cash for keys, and short sales.

Loan Modification

The most common method of mediating a foreclosure is with a loan modification. Loan modifications work by adjusting the terms of the loan in a way that will allow the borrower to be brought current while not actually relieving them of any of the debt owed. This is usually done in one of two ways:

  • Adding the arrears to the end of the mortgage: basically this means that the unpaid amount owed will be added to the back end of the mortgage with both sides agreeing that by the time those payments are due the borrower will be able to make them. This method will extend the term of the mortgage.
  • Amortizing the amount owed: this method takes the unpaid amount and splits it across the remaining monthly payments in equal amounts, allowing the borrower to complete the term of the mortgage on the original schedule but requiring them to pay more on a monthly basis going forward.

In addition to the above, interest rates are often negotiated and reduced to allow the borrower some breathing room in making the new payments as discussed in the agreement.  Every lender will have their own modification options and applicants will need to fill out forms that extensively lay out their finances in order to come to an agreement. 

Having an experienced attorney assist in this process will help when explaining to the lender why there is a hardship, how the borrower will be able to repay in the future, and negotiating on the borrower’s behalf to reach the most advantageous agreement. 

Forbearance Agreements

Sometimes a borrower doesn’t need to modify the terms of the loan, they just need some time to get their finances in order before making payments again. In this scenario, the lender may offer a forbearance agreement. Forbearance agreements are a form of short term relief where the lender agrees to either reduce or temporarily pause payments. 

During this time, the lender agrees to not initiate foreclosure and the homeowner agrees to begin payments again at the end of the forbearance period. Most of the time these agreements occur when the borrower is already behind on payments. In such a scenario the borrower will likely be required to get current on past due payments either in monthly installments or in a lump sum given to the lender.

Deed in Lieu of Foreclosure

If a loan modification cannot be reached and the borrower is unable to make the mortgage payments based on the original terms, then they will have to consider their options for returning the property to the lender. One such option is offering the deed in lieu of foreclosure. 

This occurs when the borrower and the lender agree to forgive the debt after the borrower conveys ownership of the property to the mortgage company. Repossessing the property in this manner saves the lender both time and money by avoiding a drawn-out foreclosure proceeding. 

However, the lender may not forgive all of the debt and the borrower may still end up owing them money after giving up the property. An experienced attorney may be able to convince the lender not to go after any remaining debt by showing the savings achieved through the borrower’s decision to offer the deed in lieu of foreclosure.

Cash for Keys

Sometimes the lender will decide that it’s in their best interest to let go of debt and repossess a property as quickly as possible by offering the borrower money to surrender the property immediately, rather than going through a foreclosure proceeding or short sale. This situation will depend on the size of the debt, the value of the property and the bank’s internal directives on how to handle “underwater” mortgages.

It’s called “cash for keys” because this is literally what will happen. The lender will offer the borrower a lump sum of money, typically several thousand dollars, to be used as relocation funds. The parties agree on a date and the borrowers are to leave the home in a broom swept condition. 

This cash settlement is often not provided until after the borrowers have moved out or at the time of exiting the property, hence the cash is given for the keys to the property. The size of the cash settlement will depend on the negotiating ability of the parties and their attorneys.

Short Sale

When a borrower’s mortgage debt is higher than the value of their home it may be possible to initiate a short sale. A short sale occurs when the lender agrees to let the borrower sell the home and give the lender the entirety of the sale proceeds. As the value of the home is less than the mortgage debt, the lender, in turn, agrees not to go after the borrower for any loss that occurs from selling the home “short” of the mortgage value.

Both the mortgage company and the homeowner can benefit from this option. For the bank, it’s far less expensive and time-consuming than going through a foreclosure. For the homeowner, it reduces the negative impact on their credit score that would have happened had the house been repossessed via the foreclosure.

Banks and lenders are generally not inclined to offer a borrower the short sale option because it guarantees a loss in profit for the holder of the mortgage. It’s often necessary to involve an experienced attorney who can negotiate on the borrower’s behalf and convince the lender that it is in their best interest to go forward with the short sale.

The process of foreclosure mediation can be complex and requires both an accurate understanding of the various options available as well as experience in negotiating with powerful banks and lenders who deal with these situations on a regular basis and are always going to approach this process with their best interests in mind. At Rosenblum Law our attorneys are ready to help, call us today.

Do I need to leave my house when it’s in foreclosure?

Not yet. Foreclosure is the procedure by which the lender regains possession of the property and they will need to get an eviction order before you are forced to vacate. This process can take several months.

Will a short sale affect my credit?

Yes. Since the lender is accepting less than what is originally owed to them, the short sale will be reported to credit agencies and will have a negative impact on a person’s credit score. The level of the impact will depend on the person’s previous credit score and the amount the lender is able to regain through the short sale itself.

Is a “cash for keys” payment taxable?

Yes, this money is considered income and is fully taxable.

Why will a bank pay me to move out?

Banks will pay tenants of foreclosed homes money to move out because the costs of maintaining the home and initiating the eviction process are usually more than what they will offer the tenant to leave. In addition, tenants will need to leave the home in “broom swept” condition, meaning clean and free of debris, which again saves the bank the costs of cleaning up a house that could potentially be left in disarray by an upset tenant.

How long does it take to get a loan modification?

It can take 60-90 days, or more, depending on the complexity of the original mortgage. The bank will essentially need to underwrite a new loan in modifying the current one, and this process involves several people at the bank who will need to have an accurate understanding of the borrower’s financial situation.

Can I get a second loan modification?

Yes, though it will likely be difficult. Lenders will need to be assured that the new modification will be sufficient for the borrower to make timely payments and not be coming back to them for a third modification down the line. Proving this may require extra documentation relating to one’s financial situation.

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