Umberto and Tiara, who are married, borrow $110,000 from Sterling Credit Union to buy a home. The loan is a fixed-rate mortgage at 5.25 percent with a thirty-year term, subject to an acceleration clause, and secured by the home, which is their principal residence. When Umberto and Tiara have paid off $10,000 of the mortgage¾still owing $100,000¾they lose their jobs and stop making payments. Sterling Credit makes numerous attempts to contact the couple, but they do not respond. Meanwhile, the market value of their home has declined to $85,000. After six months, Sterling Credit decides to take steps to recover the unpaid amount of the loan. What are the lender's options? Which option seems most likely? Why? What are the steps are involved?

Question

What will be an ideal response?

Answer 1

The lender's options include forbearance, a workout agreement, a U.S. Department of Housing and Urban Development (HUD) loan, a short sale, a sale and leaseback arrangement, the U.S. Treasury Department's Home Affordable Modification Program (HAMP), a deed in lieu of foreclosure, and a prepackaged bankruptcy. Foreclosure is also an option.

Forbearance is the postponement of part or all of the payments of a loan in danger of foreclosure. This may be based on a borrower's securing a new job, selling the property, or some other factor. A workout is a voluntary attempt to cure a default under which, for example, a lender may agree to delay foreclosure in exchange for a borrower's financial information. An interest-free loan may be obtained from the U.S. Department of Housing and Urban Development (HUD) to bring a mortgage current under certain requirements, including the borrower's ability to make full payments. A short sale is a sale of property for less than the balance due on a mortgage. A borrower¾who typically must show some hardship¾sells the property with the lender's consent, and the lender gets the proceeds. In a sale and leaseback deal, an investor buys the property and leases it back to its former owner for less than the mortgage payments. The seller-owner pays off the mortgage with the sale proceeds. HAMP encourages private lenders to modify mortgages to lower the monthly payments of borrowers in default (to 31 percent of the debtor's gross monthly income). A deed in lieu of foreclosure conveys property to a lender in satisfaction of a mortgage. This option works best when the property's value is close to the outstanding loan principal. A prepackaged bankruptcy allows a borrower to negotiate the terms with his or her creditors in advance.

In this problem, because the borrowers are uncooperative, the most likely option is foreclosure. The acceleration clause would allow the lender to call the entire loan due. But because the market value of the home has declined, it would be unlikely to bring enough on a foreclosure sale to recover the unpaid amount of the loan, plus the lender's fees and costs. This means that a deficiency judgment¾if allowed in this state¾would be needed. To accomplish a judicial foreclosure¾which is available in all states¾a court supervises the process. The lender's first step is to file a notice of default with the appropriate state office. This puts the borrower on notice to pay the loan and cure the default. If this does not occur, the lender gives a notice of sale to the borrower, posts it on the property, files it with the county, and announces it in a newspaper. The property is then sold at auction on the courthouse steps. If the sale proceeds do not cover the amount of the loan, the lender can ask a court for a deficiency judgment.