An Assignment

On
ALTERNATIVES TO FORECLOSURE
Course Title: Real Estate Finance
Course Code: FIN-424

Submitted By
Hridoy saha
ID: 18100078
Department of Business Administration

Submitted For
SM Akber
Lecturer
Department of Business Administration

Date of Submission
June 03, 2021
RANADA PRASAD SHAHA UNIVERSITY (RPSU)

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Table of Contents
1) Source From Book ............................................................................................................... 3
2) Source From website ............................................................................................................ 5
3) Source From Journal ............................................................................................................ 7
4) Summary .............................................................................................................................. 8
5) Reference............................................................................................................................ 10

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Source From Book
Alternatives to Foreclosure: Workouts
Foreclosure involves the sale of property by the courts to satisfy the unpaid debt. Because of the time
involved and the various costs associated with foreclosure, lenders often prefer to seek an alternative to
actual foreclosure. Although mortgage contracts normally indicate definite penalties to follow any breach
therein, experience has shown that in spite of provisions for prompt action in case of a Recasting of
mortgages to admit interests not present at the time the mortgages were executed is sometimes necessary.
For example, the mortgage may make no provision for an easement of a public utility company that requires
access to the rear of the site covered by the mortgage. Since the installation of the services of the utility will
normally add to rather than subtract from the value of the security, the mortgagee will usually be glad to
approve the change. Nevertheless, it will require a recasting of the mortgage to the extent indicated. default
in mortgage payments, many commitments are not met in strict accordance with the letter of the contract.
Instead, whenever mortgagors get into financial trouble and are unable to meet their obligations,
adjustments of the payments or other terms are likely to follow if both the borrower and lender believe that
the conditions are temporary and will be remedied.
The term workout is often used to describe the various activities undertaken to deal with a mortgagor who
is in financial trouble. Many times, the parties make a workout agreement that sets forth the rules by which,
during a specified period of time, they will conduct themselves and their discussions. The lender agrees to
refrain from exercising legal remedies. In exchange the borrower acknowledges his or her financial
difficulty and agrees to certain conditions such as supplying current detailed financial and other information
to the lender and establishing a cash account in which any rental receipts from the property are deposited
and any withdrawals are subject to lender approval.
Six alternatives can be considered in a workout:
1. Restructuring the Mortgage Loan
Loans can be restructured in many ways. Such restructuring could involve lower interest rates, accruals of
interest, or extended maturity dates. If the original loan is nonrecourse to the borrower, the lender may want
to obtain personal recourse against the borrower as part of the loan restructuring agreement. This makes the
borrower subject to significantly more downside risk if the restructuring fails.
Recasting of Mortgages
Once a mortgage is executed and placed on record, its form may change substantially before it is redeemed.
It may be recast for any one of several reasons. A mortgage can be renegotiated at any time, but most
frequently it is recast by changing the terms of the mortgage (either temporarily or permanently) to avoid
or cure a default.
Extension Agreements
Occasionally, a mortgagor in financial difficulty may seek permission from the mortgagee to extend the
mortgage terms for a period of time. This is known as a mortgage extension agreement.
Alternative to Extension Agreements
An alternative to an extension agreement has the mortgagee agree informally to a temporary extension
without making any changes in the formal recorded agreement between the parties.

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2. Transfer of Mortgage to a New Owner
Mortgagors who are unable or unwilling to meet their mortgage obligations may be able to find someone
who is willing to purchase the property and either assume the mortgage liability or take the property “subject
to” the existing mortgage. The new purchaser may be willing to accept the transfer of mortgage if he or she
thinks the value of the property exceeds the balance due on the mortgage. In either case, the seller retains
personal liability for the debt. However, if the seller is about to default and expects to lose the property
anyway, he or she may be willing to take a chance on a new purchaser fulfilling the mortgage obligation.
The risk is that the new buyer will default, and the seller will again have responsibility for the debt and get
the property back.
3. Voluntary Conveyance
Borrowers (mortgagors) who can no longer meet the mortgage obligation may attempt to “sell” their equity
to the mortgagees. For example, suppose that the mortgagors are unable to meet their obligations and face
foreclosure of their equity. To save the time, trouble, and expense associated with foreclosure, the
mortgagees may make or accept a proposal to take title from the mortgagors. If they both agree that the
property value exceeds the mortgage balance, a sum may be paid to the mortgagors for their equity. If the
value is less than the mortgage balance, the lenders may still be willing to accept title and release the
mortgagors from the mortgage debt. This voluntary conveyance might be done because the cost of
foreclosure exceeds the expected benefit of pursuing that course of action. When voluntary conveyances
are used, title is usually transferred with a warranty or quitclaim deed from mortgagors to mortgagees.
4. Friendly Foreclosure
A “friendly foreclosure” is a foreclosure action in which the borrower submits to the jurisdiction of the
court, waives any right to assert defenses and claims and to appeal or collaterally attack any judgment, and
otherwise agrees to cooperate with the lender in the litigation. This can shorten the time required to effect
a foreclosure.
5. Prepackaged Bankruptcy
The mortgagee must consider the risk that the mortgagor will use the threat of filing for bankruptcy as a
way of reducing some of his or her obligation under the original mortgage agreement. Bankruptcy can have
significant consequences for secured lenders. In a prepackaged bankruptcy, before filing the bankruptcy
petition, borrowers agree with all their creditors to the terms on which they will turn their assets over to
their creditors in exchange for a discharge of liabilities. This can save a considerable amount of time and
expense compared with the case where the terms are not agreed upon in advance.
6. Short Sale
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a
loan secured by the property sold. In a short sale, the mortgage lender agrees to discount the mortgage loan
balance because of an economic or financial hardship on the part of the mortgagor. In a short sale, the home
owner/borrower sells the mortgaged property for less than the outstanding balance of the loan and then
turns over the proceeds of the sale to the lender, usually in full satisfaction of the loan.

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Source From website
A workout option is an alternative to foreclosure that eliminates or reduces the potential loss that Freddie
Mac would incur if the property securing the Mortgage were acquired through a foreclosure sale. A
mortgage modification is a workout option that will enable the Borrower to retain homeownership.
Alternatives to foreclosure through workouts with lenders
There are some potential ways that homeowners might be able to avoid foreclosure, including by discussing
alternatives with their lenders. Foreclosures are expensive for banks, making it possible that they might be
willing to work with homeowners to resolve the problems rather than foreclosing on the mortgages.
Requesting a workout
A workout involves modifying a mortgage to make it easier for the homeowner to pay when the homeowner
has already defaulted or is likely to soon default.
A lender might agree to a workout that does one of the following things:
• Change an adjustable interest rate to a fixed rate.
• Lengthen the introductory payment or interest rate period.
• Temporarily grant forbearance of up to six months.
• Defer some payments to the end of the loan.
• Lengthen the loan’s term.
• Waive penalties and legal fees.
• Roll the entire arrearage owed into the loan so that it can be paid over a set period of time.
• Agree to a short sale or a deed in lieu of foreclosure.
Avoiding Foreclosure: Basic Workout Options
Repayment Plan: Keeping Current and Catching Up
With a repayment plan, you arrange to make up your missed payments over time and stay current on your
ongoing payments. This approach is usually the most feasible and easiest to work out with your servicer.
For it to work, your income will have to be able to cover both current and makeup payments. Repayment
plans typically last three, six, or nine months. Servicers usually don't offer longer plans because most
borrowers find it difficult to make larger-than-normal payments for an extended amount of time.
Example. Say you're four months behind on your payments of $1,500 a month, for a total of $6,000. Paying
$2,500 each month (an extra $1,000 per month) over the next six months would bring you current.
Reinstatement: Getting Caught Up on the Loan
Many states give you, by law, the right to reinstate your loan (make it current by paying off the delinquent
amount in a lump sum). Or your mortgage contract might give you a set amount of time during which you
can reinstate and stop a foreclosure. Also, the lender might agree to allow a reinstatement.
Redemption: Paying Off the Loan

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In all states, you can redeem the home (pay off the entire loan) before a foreclosure sale. Redeeming will
prevent the sale from happening.
Some states also give the borrower sometime after the sale to redeem the property by paying the mortgage
loan off in full, plus interest and costs, or reimbursing whoever bought the home at the foreclosure sale.
Short Sales and Deeds in Lieu of Foreclosure: Ways to Give Up Your Home
In a short sale, the lender agrees to let the homeowner sell the home to a new owner for less than is owed
on the mortgage loan. In a deed in lieu of foreclosure transaction, a homeowner voluntarily hands over the
home's title to the bank to satisfy the mortgage loan.
Deed In Lieu of Foreclosure: Generally, if a borrower makes a good faith effort to sell the property but is
not successful, a servicer may consider a deed-in-lieu of foreclosure. With a deed-in-lieu, the borrower
voluntarily transfers ownership of the property to the servicer— provided the title is free and clear of
mortgages, liens, and encumbrances.
Modification: Lowering Your Payments
Unlike repayment plans and forbearances, mortgage modifications are designed to lower your monthly
payments over the long term and, often, bring you current on the loan. If you can't afford your monthly
payment now or won't be able to soon, a loan modification is most likely the best approach to remaining in
your house.
Here's how your servicer might modify your mortgage to reduce the monthly payments.

• Reduce your loan's interest rate to the current market rate if it's lower than what you're supposed to be
paying now.
• Convert a variable rate to a fixed rate, which could bring the payment down.
• Extend the loan's repayment period—for instance, from 30 years to 40—which will lower the monthly
payment but delay the time when you can begin to build equity.
• Forbear some of the principal balance. ("Forbearing" the principal means setting aside a portion of the
total debt before calculating the borrower's monthly payment. The borrower typically has to pay the
set-aside amount in a balloon payment when refinancing or selling the home or when the loan matures.)
• Reamortize the loan, which involves adding the amount of the missed payments to the principal balance
and usually issuing a new interest rate for a new period of time. Reamortization can result in an
increased payment (for example, if the interest rate stays the same or increases) or a reduced one (for
example, if the interest rate is reduced and the loan period is increased).
Forbearance: Getting a Break From Payments
Under a forbearance agreement, the servicer or lender agrees to reduce or suspend your mortgage payments
for a specific amount of time. In exchange, you promise to start making your full payment at the end of the
forbearance period and repay the skipped amounts in a lump sum, in a repayment plan, or by completing a
modification in which the lender adds the overdue amounts to the loan balance. Or you might be able to
arrange payment deferral, where you pay the skipped amounts at the end of the loan.

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Source From Journal

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Summary
Introduction
Foreclosure is the action of taking possession of a mortgaged property when the mortgagor fails
to keep up their mortgage payments. Doing foreclosure is not easy. That’s why bank doesn’t want
to go through this process. They want to solve this problem by a process which is workout.
There are six types of characteristics by which they try to collect their money from borrower. The
types are
1. Restructuring the mortgage loan
Lender apply the new structure by changing the old structure. This is known as restructuring.
Recasting of Mortgages: lender will change the interest rate and installment. This means that
borrower loan is reduced to reflect the new balance. Lender do this so that borrower does not
default.
Extension agreements: lender will increase the time to return the money but before increasing
lender will check some issue which are what is the current situation of the asset that is kept as
security, lender wants surety that how borrower will use the benefit which will be given by lender.
Alternative extension: The person who lends the money will change it verbally without changing
it on paper or pen.
2. Transfer of mortgage to a new owner
The borrower understand that he could no longer afford to pay, and if he could not pay, he would
lose his house, and he realized that the longer time he will take to paid, the interest will higher on
his loan, so he would sell his house and pay off. For example: borrower house market rate is 1 core
taka and the loan he takes from lender is 60 lach Taka. So, the borrower will sell his house to a
purchaser and return the money to lender.
3. Voluntary conveyance
The borrower will not seek for a new person and will tell the lender that he will not be able to
repay the loan and ask to the lender to purchase his assets.
4. Friendly foreclosure
The borrower could not sell it to a new person and could not sell it to the bank but the borrower
must repay the loan. If the bank runs to court for an auction, it will take a long time. If both the
bank and the borrower go to court and ask for an auction, it will be easier to sell at auction. Thus,
the borrower will repay the bank money by selling through auction.
5. Prepackaged Bankruptcy
Suppose the borrower has taken a loan of Rs 1 crore from the bank. The price of the house is one
and a half crore rupees. Now with the rise in interest, the amount of loan has become Rs 2 crore.
Now the bank has no profit by selling this house. The bank would not want to fall into such a

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situation. The bank determines the market value of the borrower's home. The bank either make
the borrower to sell the house or goes to the foreclosure before the borrower's loan reaches that
stage.
6. Short sale
The borrower has mortgaged his house and taken a loan. Now the borrower sees that the loan is
actually becoming difficult to repay. Now the borrower told the bank to buy this house from him.
That means the borrower is selling the house with an agreement. Suppose The borrower took a
loan of Rs 60 lakh against the house. The price of the house is 1 crore rupees. 60 lakh taka loans
have become 70 lakh Taka. Now the borrower will sell this house 1 core taka and repay the loan
amount from this money. The borrower will buy the house from the bank according to the market
value of this house after six months.
Conclusion
The lender will never wish that the borrower will fail to repay the money. So, the lender provides
these opportunities to get back the money.

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Reference
1. Textbook [ Real Estate Finance and Investment Jeffrey D. Fisher]
2. https://www.grahamlegalpa.com/blog/2021/05/alternatives-to-foreclosure-through-
workouts-with-lenders/
3. https://www.nolo.com/legal-encyclopedia/free-books/foreclosure-book/chapter4-6.html

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