Today “workouts” are the way we refer to the variety of solutions that homeowners and lenders are using to deal with the housing crisis. Workouts include re-finance, mortgage modifications, repayment plans, forbearance, deferments, deed-in-lieu, short sale and foreclosure. Whew! With all these options, you’d think we would be moving more quickly towards stabilization, no? Well, since they are all very costly…every party involved is slow to “take-the-medicine”. Here is an update on each:

Re-finance: As the housing bubble inflated it was periodic re-financing (to take out equity) that contributed to the pain that many of us now feel as the bubble rapidly deflated.

Today, re-fi activity is less as values have fallen so low. For the fortunate ones who still have considerable equity in their homes re-financing to a lower rate can be a great value. It is projected that interest rates will remain low for an extended period, so activity in this area should continue for some time.

President Obama’s Housing Assistance Program encourages the use of re-fi’s to help homeowners who are only very slightly underwater on their mortgages.

Mortgage Modifications: This is the hot workout for 2009. It is expected that over 2 million modifications will be granted this year. Initially mods were limited to interest rate adjustments only and for a short (3-5 year) timeframe.

Now, as the crisis has deepened and as bailout money is spent we see more use of principal reductions, length of loan extensions, and lower interest rate mods.
President Obama and virtually all of his HUD executives have endorsed modifications as the primary weapon in the fight to slow the rate of foreclosures and provide some stability to housing prices.

Repayment Plans: If a borrower only needs temporary relief from a short-lived financial hardship, these plans are the best. The lenders are quick to agree to them as they really are revenue and profit neutral to them. They simply add the arrears to the note and require 3-4 on-time payments to restore the loan to ‘current” status.

These plans are also often used in conjunction with mortgage modifications. Especially if a borrower is over 90-days late on payments, a lender may require a 3-4 payment plan to be met before granting the modification.

Forbearance: These are commonly used for foreseen temporary financial hardships…situations such as short periods of unemployment or poor health. In the simplest of terms, mortgage forbearance enables you to temporarily stop making your mortgage payments.

Interest continues to accumulate on the mortgage forbearance and is added to the remaining balance of the loan. You are generally also asked to sign a forbearance agreement that states when the lender will require you to pay the amount you owe. Once the forbearance period comes to an end, you are once again obliged to make full payments on your home loan.

While mortgage forbearance may only serve as temporary fix, it does buy you some time to overcome the near-term hurdle, and can avoid the credit rating damage of default.

Deed-in-lieu: This practice was more common at the beginning of the housing decline. It is the free transfer of title of the property from the borrower to the lender. Lenders were willing to accept the property “in lieu” of foreclosure when values were closer to amount owed. They would simply assign the property to one of their REO agents and “net” an amount close to what was owed. Now that values are so low it has become only rarely used. It is certainly an easy solution for homeowners who have given-up on retaining the home. The lender reports the loan “paid as agreed” to the credit bureaus.

Short Sale: This workout enjoyed a prominent place in foreclosures in 2007 and 2008. It is the practice of selling the home for less than is owed…the lender authorizing the sale by approving a “short payoff” of the mortgage.

This process is now being used somewhat less often as 1) it is massively expensive and 2) it puts people out of their homes (very unpopular these days). For homeowners it is still a far-superior alternative to foreclosure as it avoids the dreaded “F” word (foreclosure) reported to the credit bureaus. Typically, borrowers suffer a credit decline due to the late/missed mortgage payments but that is not nearly the problem that foreclosure is.

Foreclosure: Last resort. When all else fails this is the remedy that lenders may exercise…legally taking the property away from the homeowner. Homeowners can pretty easily avoid it in MOST cases…I sure advise it.

Please feel free to post questions and comments below.