What You Need to Know If Foreclosure Looms
Whether you find yourself in trouble with your mortgage servicer due to poor financial planning or simply because of circumstances out of your control such as COVID-19, know that all may not be lost. This article outlines your rights and certain actions to consider.
We should start by saying that, the CARES Act currently applies only to government backed loans, and although the President recently issued executive orders that direct agencies to “identify any and all available Federal funds to provide temporary financial assistance to renters and homeowners who, as a result of the financial hardships caused by COVID-19, are struggling to meet their monthly rental or mortgage obligations,” and to “promote the ability of renters and homeowners to avoid eviction or foreclosure resulting from financial hardships caused by COVID-19,” at the time of this writing, no specific programs have been announced, so these considerations do not factor in any special programs or guidelines that may be announced.
Please keep in mind not all servicers offer all options discussed below, and even the ones that do may have certain prerequisites of their own. Despite this, if you find yourself in the midst of a foreclosure it is good to know there ARE alternatives to foreclosure or replevin, and that you can always ask or push for these. Ultimately, even if it does not work out, you want to know you tried everything you could.
Not all servicers consider all of the following “loss mitigation.” However, in New Mexico, and probably around the country, the Courts tend to consider ANYTHING that does not end in a default or summary foreclosure judgment against you “loss mitigation.” This is why you may want to challenge your mortgage company even if they advise you they do not offer any loss mitigation. I will note below which options are considered “retention” options (goal is to keep your home) and which are considered “non-retention” (you do not get to keep your home).
Foreclosure/Replevin in NM: First, to understand the alternatives and reasoning behind them, it is good to understand the basics of a foreclosure and a replevin. When you purchase real property with the help of a loan, you likely signed what is referred to as a Promissory Note (the contract in which you promise to pay back the loan) and a Mortgage (the security instrument providing for the property to be used as collateral should you default on the loan). New Mexico is a recourse state, meaning that in order for a mortgage servicer to foreclose on your home, they must file suit and obtain a court order for judgment before they have the legal right to sell/auction the home.
A replevin action is one in which a mobile home or manufactured home is involved, but in which the land was not mortgaged. Mobile/manufactured homes are considered personal property. Under certain circumstances though, they may be assessed as real property. If you obtained a loan to purchase your mobile/manufactured home and also mortgaged the land all under the same loan, then the servicer will pursue a normal foreclosure.
In either case, if you do not respond to the foreclosure suit your servicer may obtain a Default Judgment against you and sell real property through a foreclosure sale, oftentimes being the successful purchaser themselves. Do not wait until judgment or sale to try to save your home, as the longer you wait the more difficult and less sympathetic your servicer and the courts may be. No matter how difficult it may be to accept, the terms of your loan contract likely provide for no option once a judgment is entered or the home is sold. For the most part, judges understand this and therefore, offer less opportunity for you to defend or even delay the foreclosure/replevin if you wait too long.
Reinstatement (Retention Option): If you have fallen behind, the terms of your contract likely provide for the option to reinstate your loan at any time prior to judgment or a foreclosure sale. Reinstatement requires you to pay back all of your arrears at once. The terms of your loan likely state that arrears must be paid in full. As such, rarely will a servicer allow partial payments. If you do make a partial payment but it is not enough to fully reinstate your loan, your servicer may chose to return the payment to you, or they may chose to apply the payment towards your arrears. If they do apply the payment to the arrears and your loan remains in default, they still have the right to file suit against you. Note that because you never reinstated the loan and you remain in default, a new notice of default is not necessary, the next notice you receive could be a summons. You should always ask for an updated reinstatement quote from your servicer, as fees and costs will continue to accrue. Reinstatement may include any attorneys’ fees and costs spent up until that point as well as your next normal monthly payment. Again, the longer you wait to reinstate, the harder and more expensive it will be.
Payoff (Retention & Non-retention Option): If you happen to have the money or are able to obtain a loan, either through another creditor, friends, or family, to fully payoff your loan, you can do so at any time prior to judgment or foreclosure sale (depending on the terms of your loan). Make sure to review your loan documents to make sure there is no penalty for early payoff. As with a reinstatement quote, you should ask for an updated payoff quote from your servicer, as fees and costs will continue to accrue. The payoff amount may also include any attorneys’ fees and costs spent up until that point. Especially after suit has been filed, the longer you wait to payoff your loan, the harder and more expensive it will be.
Even if a suit has already been filed against you, you have the right to pay off your loan at any time prior to judgment or sale. Thus, if you have exhausted all other options or maybe you’re just ready to move out, it may be a good idea to talk to a real estate agent to list your home. You may be able to ask for extensions on the foreclosure from your servicer should a sale be highly probable. A servicer will almost always rather be fully paid off than have to keep the property on their books. You still need to make sure you always have an updated pay off quote so that you can be sure whatever amount you accept from a purchaser is sufficient to pay off the loan. If your home appraises for less than what you owe on the loan, see below for short sale option.
Loan Modification (Retention Option): A loan modification may allow you to re-negotiate the terms of your original loan. Perhaps your monthly payment or interest rate may lower, or perhaps the arrears are put towards the back of the loan and your loan term extended. Regardless, a loan modification allows you to save your home and essentially start fresh as if the default never happened. Keep in mind that arrears may include additional fees, including attorneys’ fees and costs. Loan modifications are not always easy to obtain. Some servicers, especially if your loan is not a government backed loan (i.e. FHA, Fannie Mae, or HUD being some of the more popular ones), may not offer a loan modification. Even the ones that do have specific application processes, as well as internal and sometimes strict federal guidelines, to adhere to. Some servicers require you to possess an actual hardship (i.e. loss of job) to pre-qualify. As the application process may be lengthy and tedious you want to make sure you pay attention to all deadlines and requests for submissions.
Short Sale (Non-retention Option): A short sale may be available when the current appraised value of your home is less than what you owe on your loan. You may still need to submit an application to your servicer to qualify. Even if approved for a short sale, there will be certain requirements such as the length of time you will be allowed to market and sell the property as well as the minimum purchase price you are allowed to submit to the servicer. Remember that because the servicer is accepting less than what is owed on your original loan, this may qualify as debt cancellation.
Deed-in-lieu of Foreclosure “DIL” (Non-retention Option, real property only): This is literally what the name states. You execute a deed in lieu of a foreclosure. The servicer becomes title owner of the Property, and you do not have a foreclosure judgment against you, and best of all, you no longer owe the debt if the terms properly state so. This does require you to seek advice from a qualified tax expert as some of these agreements may implicate cancelled debt for tax purposes. The good news is that the terms and conditions under which a borrower will grant and a servicer or lender will accept a DIL may be negotiated. The general rule of thumb for servicers is to only accept a DIL if title is clear, meaning that no other mortgages or liens appear on title. If they do, you may be able to work on paying off or otherwise clearing these liens from title yourself. A DIL agreement typically includes the deed itself which encompasses the agreement terms, a waiver and release agreement, and a release of Mortgage- most if not all which get recorded with the County.
Move-Out Extension or Cash for Keys / Reallocation Funds (Non-retention): Perhaps you have come to terms with the foreclosure, or perhaps all that is preventing you from moving out is lack of funds. Some servicers may be willing to provide you with an extension on the date they require you to fully vacate in exchange for your stipulation/agreement to let them obtain a foreclosure judgment. Whether that means they stay the foreclosure for some time, hold off on asking for judgment, delay the foreclosure sale, or delay eviction proceedings post foreclosure sale, it all accumulates to more time for you to find a new home. Even better, some servicers may even offer you cash in addition to an extension. On the other hand, some might offer cash to speed up the process. In either case, know that this may be an option, and although it does not save your home, it does provide some financial help during this difficult time. Note that this may also be something that is agreed upon through a DIL.
Forbearance or Repayment Plan (Retention Option): A servicer may reduce or suspend your payments for a set amount of time through a forbearance agreement. If at the end of the forbearance period they do not then apply those arrears to the back of your loan, you may be able to agree on a repayment plan. Even if you did not have a forbearance agreement in place, some lenders will allow you to enter into a repayment plan. Keep in mind that through a repayment plan a lender temporarily increases your monthly payment by adding part of the overdue amount to your current payments until you get caught up (reinstate your loan). This means that you will need to be able to afford a higher monthly payment for a limited time. This also means that the longer you have been in default or in the forbearance plan, the larger that monthly payment will be. Attorneys’ fees and costs may also be included in this amount. As such, some servicers limit this option to a loan that has been in default for one year or less.
Agreed/Stipulated Judgment and In Rem or Waiver of Deficiency (Retention and Non-retention Option): Even a foreclosure judgment is not always a be-all and end-all. In New Mexico, Judgments are typically drafted and submitted to the Judge for signature and filing. The judge may also make changes as necessary. What this means is that Judgment orders are negotiable as well. You might be able to negotiate your extended vacate date or cash settlement into the Judgment itself. Having a judge sign off on those terms is an extra protection for everyone. The judgment might even incorporate an agreed upon repayment as discussed above. If that is the case, the judgment may provide the Plaintiff with the right to an immediate writ of execution or right to foreclosure sale should you default on the repayment plan itself.
Moreover, the servicer may agree to proceed in rem if it means you agree to allow them to obtain Judgment. This means that the judgment will only be against the property and the servicer cannot then sue you personally for money. They are waiving all deficiency (difference between the judgment amount and proceeds from the sale of property). Again, you want to make sure you discuss this option with a tax expert as this is also a form of debt cancellation.
New Mexico Foreclosure Settlement Program (Retention and Non-retention Option): A number of courts in New Mexico (specifically, 2nd, 13th, and 1st Districts) order all or some of their foreclosure cases to a foreclosure settlement program (“FSP”). The program provides settlement assistance in residential mortgage cases. “The program brings homeowners and lenders together with a settlement facilitator to seek alternatives to residential foreclosures which are agreeable to both.” When a Judge orders a case to FSP, the foreclosure itself and any and all deadlines are stayed until the parties are ordered out of FSP. The program is free of charge to the parties. During telephonic status conferences, the parties are encouraged to explore all of the options referred to here. The Judge’s FSP Order, and any orders and deadlines from the settlement facilitator must be followed carefully. Having a neutral third party facilitate negotiations can often be beneficial for all parties involved. Take advantage if this or similar program is available to you.
Redemption and Assignment of Redemption Rights (Retention and Non-retention Option): Should all else fail, you might have to pull out your dusty Mortgage from the bottom of your office drawer to notice but I bet your Mortgage has a redemption provision. In New Mexico, the statutory redemption period is nine months if your contract does not state otherwise. As such, most mortgages reduce this period to one month (subject to an extended federal right of redemption that typically does not apply). The right of redemption allows homeowners who lose their home to a foreclosure to have the right to repurchase the property from the foreclosure buyer. In New Mexico, the property may be redeemed at any time during the redemption period, by any of the named defendants (with the debtors having first right of redemption) or their assignees, by providing funds equal to the foreclosure purchase price plus interest in the amount of ten percent per year. As the redemption period is a statutory right, no one, not even Courts, have the legal power to extend the redemption period. However, you may be able to get the foreclosure purchaser (normally the Plaintiff) to agree to allow you to redeem after the period is over. Certified funds in the total amount will almost always be required. Note that this does not get rid of the foreclosure judgment against you.
Did you notice that assignees of redemption rights are also able to redeem? That’s right, you can assign your redemption rights to a third party. There are certain entities in New Mexico in particular that are in the business of purchasing redemptions rights. Yes, you heard right, someone might be willing to pay you for your right of redemption. Make sure you read over any assignment of redemption agreements carefully, and that you receive a fair and just compensation for that assignment.
In Conclusion, the terms of your loan (Note and/or Mortgage) control. If you get served with a summons, follow the instructions on the summons carefully. If financially possible, hire an attorney who can better help you navigate the legal process, litigation, and your loss mitigation options. Remember, these options are not always available and some of these options are ultimately a business decision for the Plaintiff. Even though you cannot require a Plaintiff or servicer to offer one these foreclosure alternatives, you can at least try. Please note this is for information purposes only, and is not meant to be legal advise. We also encourage you to seek out professional tax advice as to each of these options.
For more information or questions, contact Penelope Quintero in New Mexico.