The Good, The Bad, And The Non-Performing Mortgages!

A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms.

"A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full"

What is secured debt?

Debt backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt. Assets backing debt or a debt instrument are considered security, which means they can be claimed by the lender if default occurs. Obviously unsecured debt is higher risk, and as such lenders of unsecured money typically require a much higher return.

What is unsecured debt?

The concept of unsecured debt is easily understood when its opposite is considered. A good example of secured debt would be a mortgage. The bank loans out money to a lender who uses it to buy a house; the house becomes the asset backing the loan. In the case of unsecured debt, a lender loans money without the security that an underlying asset provides. For this reason, unsecured debt carries more risk for the lender, which in turn makes the loan more expensive. The more additional risk that a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher rates.

So what does this mean to a lender who holds a non-performing secured note on an upside down home?

If a lender is holding a note on a home that's worth less than the amount on the loan then a portion of that note is basically unsecured. If a lender is in a 2nd lien position on a secured loan and the loan defaults there must be enough equity to pay off the 2nd after the 1st is paid or the 2nd lien holder becomes an unsecured creditor.

If a home owner is behind on mortgage payments or in default and owes more than the property (secured debt) is worth then what makes the most sense to the lender?
One would think the lender would be encouraged to work out the loan or take back the property and write off the losses... Like they need more write-offs!

So why do we have such a high rate of foreclosures and the lenders work outs not working?

The answer is simple, lack of communication and the inability to properly negotiate through these non-performing loans. They are just trying to collect a debt and they' they only know one way, a forbearance agreement the borrower can't afford! So you have to ask yourself why can't they just take the past due amount and put it on the end of the loan then have the borrower just continue to make the payments? There are several reasons why this is not practical. I mean really, these borrowers think they got screwed and many of them are right! The rates went up with the cost of living, the property values went down with most home owners income, and some got a double whammy trying to leverage their home with an Option ARM home loan or equity line.

So what's the answer?

Loan modifications...If you want to negotiate with your lender then hire a pro. Hire an Attorney!

Having the knowledge and know how necessary to facilitate a successful resolution is what they do... While most individuals have the ability to negotiate face-to-face with another party, the terms of the deal must be properly memorialized in a contract in order for them to be legally binding. Attorneys can do that by not only negotiating on your behalf, but also making sure that the contract adheres to all state laws as well as addresses any specific issues that might affect the future use of the property while keeping their client's best interest at heart.

For example, in New Jersey, the law stipulates that the buyer and the seller have three days to review a real estate contract signed in conjunction with a realtor before it becomes legally binding. Some home buyers/sellers aren't aware of this. A lawyer will not only make the client aware of it, the attorney will also review the contract for any legal glitches, make any necessary changes to it, and insert any contingencies that you might have. In addition, if you have a subprime or option ARM loan the Attorney can threaten to rescind the loan if they find TILA or RESPA violations and use these violations as leverage in negotiating a loan modification on a secured debt.

Bottom line... If you're in trouble, facing default or foreclosure you may need to hire an Attorney to handle the negotiation to save your home from foreclosure. A skilled Attorney may be able to negotiate your interest rate, principal balance and the terms of your loan. A "make sense" offer to the lender with supporting criteria showing them how bad it could be for them if they don't modify the existing terms of your mortgage may be the best solution for both parties. The loan performs for the lender and the client keeps their home.