Mortgage Modification Pitfalls

September 25, 2009 at 3:45 pm Leave a comment

As the commercial real estate market enters into steep decline, lenders are scrambling to work out their loans, whether it be by foreclosing, obtaining deeds-in-lieu, modi-fying, refinancing, or selling loans at a discount.

A mortgage modification should be structured to avoid the possible loss of priority for the lender and also to reduce closing costs to the borrower. This requires a two step analysis to determine (i) whether the modification may affect the lien’s priority against future purchases, and (ii) obtaining title coverage for the lender at the least possible cost to the client.

With clever planning, modifications can avoid the possible loss of priority and also savings for the customers. For example, a future advance can sometimes trigger substitution loan rates on the entire amount of the loan, and a possible loss of priority. However, in some situations, the modification can be structured as a second loan instead of a future advance, thus preserving the priority of the original mortgage, and saving the client substitution loan rates on the original amount of the loan.

Once a property is in foreclosure, many different concerns come to the forefront in structuring a workout. Friendly foreclosures have the advantage of foreclosing out junior lienors; however, those are time consuming and the lender does not control the property. A deed-in-lieu of foreclosure eliminates the time consideration but does not eliminate the junior lienors. Again, though, with intelligent preparation, the original loan may be kept in place, so that junior lienors may be foreclosed out in the future, all while the lender maintains control of the property.

Please feel free to contact us with any questions regarding the consequences of your loan workouts.

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