Dealing with a Pending Foreclosure

I have worn many hats over the years. My bio is at the left of the blog. One of my jobs was managing problem loans for the biggest bank in Denver and one of my responsibilities was managing the foreclosure and sale of real property securing defaulted loans.

On the off-chance that some reader of this little blog may be facing financing problems, I offer the following advice on how to deal with a banker if you are facing foreclosure. Please take note that although I am an attorney, I am not offering legal advice. You must rely on the advice and counsel of your own personal attorney who is familiar with the specific facts and circumstances that affects your particular problem loan. My advice instead is that of a former banker in the hope I can help you understand how to deal effectively with your banker.

Rule Number One: Stay in contact with your banker. Don't hide. Return phone calls promptly. Keep appointments with your banker. Bring all documents that your banker requests to any and all meetings. Respond promptly to any written communication from your banker in writing. Keep a copy of everything you give to your banker and every thing he sends or gives to you. You may need these items at some future time if you end up in court or if your banker leaves and you have to start a new relationship with another banker.

Rule Number Two: Tell the truth. That's a good rule to follow in life anyways. But do not lie or misrepresent the truth to your banker. Do not give a false or misleading financial statement. Do not omit assets or overstate liabilities when you submit a financial statement. If you are uncertain as to the amount of an asset or liability, make a side note stating that the amount shown is an "estimate". Act in Good Faith.

Rule Number Three: Don't give up the ship. Many people think that if they cannot repay a loan when it becomes due and they receive a notice in the mail demanding payment under the threat of foreclosure that all hope is lost. Not so. Start a dialogue with your banker. Ask for a meeting. If you own a lot of money or have complicated loan, take your attorney with you. But don't let the attorney turn the meeting into an adversarial relationship. Lawyers like to do that. That is how they make money: they sue people. If you can't pay your loan, you probably can't afford to file a suit against a bank. Banks have more money than you. But banks don't sue people if they think they are going to spend a lot of money on a hopeless cause.

Banks make mistakes in documentation. Your attorney should examine your loan documents just to make sure that the collateral the bank thinks it has is really properly documented. Each state has different rules regarding the recordation of a mortgage or deed of trust, or other collateral for a loan. The date and time of recodation also control the rights of various creditors that may claim an interest in property that you own or that you gave as collateral for a loan. I have seen many cases where a bank does not have a correct mortgage or security instrument filed. The odds favor the banks, but it is always best to make sure that the bank has the collateral it thinks it has. If it does not, your chances of getting a better deal with your lender improve immensely.

Some borrowers can only see foreclosure, litigation, or bankruptcy as the way out of dealing with a banker who insists on repayment. Banks do not want your home or business. They already own too many. They don't need another lawsuit either. And bankruptcy may seem like an easy way out now, but it may cost you dearly in the future. And if you were dumb enough to give any false or fraudulent information when you obtained your bank loan (mortgage), you may face a tenacious lender or trustee in bankruptcy that will hound you. Bankruptcy is not a cakewalk. If you lied to get a loan or attempt to hide assets to avoid turnover to a bankruptcy trustee, you are courting disaster.

Rule Number Four: Be realistic. If you honestly know that you will never be able to repay the bank loan, admit that fact to yourself and to your banker. Offer to cooperate with the bank so that the bank can minimize its expenses to minimize its loss. Offer a deed in lieu of foreclosure if that will help the lender. But ask the lender to release you from any future or further obligation once the deed in lieu is given or once the foreclosure is completed. The bank is under no obligation to grant any request, but some lenders may work with you. On the other hand, a bank could agree to release you from further payment, but also file a FORM 1099 with the IRS showing the amount of debt forgiveness. That debt forgiveness becomes a tax obligation on your part. Not good. I used the threat of filing a FORM 1099 to secure borrower cooperation on many occasions.

Rule Number Five: Keep your promises. If you enter into a workout arrangement with your banker, make all payments when due. Drive them to the bank on the due date if necessary. If you fall short of the amount when due, go directly to the banker and explain why you are short. Ask for a short extension so that you can get current.

There is an old saying that goes something like "Fool me once, shame on you! Fool me twice, shame on me!" As a banker I tried to always give a borrower a second chance if he acted like he was going to try to repay his debt. I always required a new financial statement (which I could use against him later if he misstated assets or liabilities to secure debt forgiveness). I usually tried to get some new collateral as an abundance of caution. If our loan documents were messed up, I would always work with a borrower so that I could get my documentation corrected and get the documents properly recorded and seasoned so that if the borrower did file bankruptcy my bank would be a secured creditor as opposed to an unsecured creditor.

I did find that most borrowers respond well to being treated as a human being caught up in a difficult situation. I have even made new loans to borrowers in trouble just so that they could earn money to repay a prior debt that was in default. This tactic does work. But few borrowers can get that kind of loan because it requires new unencumbered assets of real value and an ability to generate cash to repay the new loan quickly. The excess income goes to pay down the prior debt.

Borrowers who make promises and who don't keep them make the lender look weak or stupid. Not a good idea. Shame on you. Lender's tend to get angry when a borrower takes advantage of a lender's forbearance.

Rule Number Six: Maintain your dignity. Most people recognize a con from the get go. Don't try to con your banker. Be honest and sincere and ask if there is any way that "we" can work this problem out amicably. Don't grovel and cry. Some people (men-successful men)try it. It doesn't look good. And it usually doesn't work.
But if you come across as a straight shooter that is realistic about what you can repay, you may get a chance to save your home or business. And that is worthy goal.

There are a lot of homes in the process of foreclosure in Key West. If you are facing foreclosure please think about calling me to list your home so that we can sell it before it does get foreclosed upon. You can maintain your credit. And maybe you can walk away from the obligation with a few bucks left in your pocket.