Very rarely is a lender able to recover the original mortgage balance that was owed at the time of foreclosure.
Why is this?
The lender incurs expenses during the foreclosure process. Foreclosing on a property is a legal process with stringent rules and almost all lenders will use a law firm to execute the foreclosure. This creates attorney's fees. Also, the lender will generally have to spend a certain amount of money to get the property back into shape to sell it. Then, the lender will have to pay a sales commission to the Realtor who sells the property. All these fees combined with the fact that foreclosed properties usually sell at a significant discount anyway, makes the foreclosure a losing proposition for the lender.
A significant portion of people facing foreclosure fall into a general group; People who have an adjustable rate mortgage and have experienced a significant increase in the monthly payment due to the interest rate adjusting upward. Many borrowers bought their homes with no down payment and were placed on a loan program with an adjustable interest rate. Most of these loan programs had an initial two or three year period during which the interest rate was fixed. Many borrowers went into these adjustable rate loans with the intention of refinancing to a lower fixed rate loan before their loans transitioned to adjustable. However, due to larger issues such as the meltdown of the mortgage market and the credit crisis, approval standards changed, and the majority of people with adjustable rate mortgages no longer qualified for a refinance. They ended up stuck with their original loan. Most borrowers experienced a 30% increase in their monthly payment when their loan made the first rate adjustment. For many, such a large increase in the monthly payment was simply unaffordable.
Knowing this back story is important to the large pool of borrowers out there attempting to cope with their rising monthly mortgage payments. Almost every major mortgage lender has created their own version of a note modification program to help borrowers who are stuck with an adjustable rate mortgage. Essentially, the lender modifies the interest rate back down to the original lower contract rate and keeps it there.
Remember, it is in the lender's best interests to work with the borrower to help them avoid the foreclosure.
Even though lenders are very motivated to work with a borrower to avoid having to foreclose, the borrower will still have to take initiative to avoid the foreclosure. Specifically, the borrower needs to communicate with the lender's loss mitigation department and clearly explain the situation, detailing what factors have made the monthly payment unaffordable.
With this knowledge, the loss mitigation department can go to work and attempt to work out a solution to avoid the foreclosure. Typically, the lender will want the borrower to provide the following in order to process a note modification request:
The lender usually takes close to 30 days to process note modification requests, so it is a good idea for the borrower plan for this delay and attempt to budget for it. Again, communication is key. The lender has to be able to talk openly and honestly with the borrower in order to assess the situation and come up with solutions to avoid foreclosure.
An important side note to the loan modification process can be found in this post about what to watch out for when dealing with a third party loan modification company.
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