Scotsman Guide - December 2009 Residential Edition

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By William P. Matz President Masters Touch Mortgage Corp.

Options for Borrowers in Loan Distress
Consider 10 alternatives when helping to advise troubled homeowners

millions of homeowners in loan distress are swamping mortgage brokers and other advisers, asking questions and pleading for solutions. Unfortunately, urgency causes many homeowners to make decisions before they’re aware of all their options. The fact that few advisers, including attorneys, have a broad-enough background to advise adequately about all categories of borrower options compounds the problem.

There’s no substitute for competent, professional advice that helps borrowers make fully informed decisions, however. In most cases, it’s best if a team of advisers collaborates to evaluate options because one adviser is rarely capable of considering all alternatives. Also, the tax implications of each solution can be extensive and must be considered.

Loan distress typically takes one of two forms:

valuation distress, 1. which occurs when borrowers owe more than their home is worth.

payment distress, 2. which occurs when payments become unmanageable, typically because of increasing payments or financial woes such as a job loss or health emergency.

Some borrowers experience both types of distress at the same time. Mortgage brokers working with distressed homeowners should ensure they have a team competent of evaluating all options or limit their advice to those areas in which they are competent.

Only with comprehensive advice can distressed borrowers make fully informed decisions about their best course of action.

Here are 10 primary solutions for distressed homeowners:

sale of the home. 1. This may be advisable when borrowers have equity and payment distress and when no alternative allows continued ownership. In tight markets, homeowners may consider a lease option to an otherwise-well-qualified buyer who can’t close immediately.

refinancing. 2. When owners still have
some equity and sufficient, provable
income, this option can help relieve
payment distress.
reverse mortgages 3. and sales of op-
tions or future appreciation. These
represent good choices for some
homeowners ages 62 and older. Age
restrictions and equity requirements
exist. These programs can pay off all
or part of a mortgage and/or provide
monthly income.
loan modifications. 4. This option
received a boost from the U.S. De-
partment of the Treasury’s Home
Affordable Modification Program
(HAMP) and various changes to
state foreclosure laws. Trained bro-
kers may be able to help clients
make preliminary determinations
of HAMP eligibility. The program’s
payment-reduction-estimate calcu-
lator can be found online at sctsm.
in/HAMPcalc.
short refinances. 5. These differ from
loan modifications and occur when

continued on page 36 »
the existing lender writes down the
current loan to an amount that al-
lows a normal refinance. Removed
principal can be forgiven or con-
verted to an unsecured debt.
bankruptcy. 6. This represents the best
solution for some borrowers. A pro-
posed change to bankruptcy laws
would give judges authority to im-
pose loan modifications on primary
residences, something they can al-
ready do for rental-home loans.
short sales. 7. This well-known op-
tion involves selling a property
for less than the loans against it.

William P. Matz is president of Masters Touch Mortgage Corp. and an attorney and broker. He focuses his law practice on real estate, finance and tax. Having also run an active mortgage business since 1992, Matz has a unique perspective on the mortgage crisis. He practices in Windsor, Calif., and can be reached at (707) 837-2161, ext. 121.

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