Magazine article Mortgage Banking

Guidance for the Critical Forbearance Agreement

Magazine article Mortgage Banking

Guidance for the Critical Forbearance Agreement

Article excerpt

No one need tell servicers why loss mitigation or settlement of foreclosure actions is a favored approach. Clarification of mechanics and details, though, is worth some scrutiny.

Begin with the thought that informality can be dangerous. A friendly, amenable phone chat with a borrower about sending some past-due checks comports nicely with public relations, and may be the sincere manifestation of the servicer's attitude. Even a casual letter might seem appropriate. But if there is a later dispute about just what the borrower was to do to reinstate or avoid foreclosure (or the continuation of a foreclosure), lack of a clear writing defining mutual obligations opens the door for litigation that servicers can lose. Suffice it to say, there are a considerable number of case-law decisions where courts chose to believe borrowers' versions of events.

Mindful, then, that whatever form the agreement takes (stipulation, standstill agreement, forbearance agreement, settlement agreement), it should be reduced to a carefully crafted writing, who should prepare it? Servicers can rely upon their counsel in the various states, but should nonetheless themselves be familiar with the structure of these documents. Certainly if drafted in-house, knowledge of various provisions is essential.

This column provides some suggested points to consider.

Length

In a commercial mortgage situation there is more room for lengthy, complicated agreements. That need not be so in the residential case, though. A forbearance agreement can be short and yet fulfill the goal of protecting the servicer. Brevity is desirable also because servicers should avoid intimidating borrowers with daunting, complex documents.

Signators

This concept might seem unworthy of much thought, but there is nuance to it. Typically, the parties who sign are those liable for the mortgage debt and those who own the property. Usually, they are one and the same people, thought of as "the borrowers." It might not always be that way, however.

For example, if "A" and "B" are the borrowers and they sell the property to "C" and "D," unless "A" and "B" have been released upon the obligation (and an assumption agreement doesn't necessarily do that), then "A" and "B" remain liable for the debt even though "C" and "D" own the property. ("C" and "D" would also be liable for the debt if they entered into an assumption agreement.) Then there could be guarantors who neither sign the note nor the mortgage, but instead sign guarantees. When a foreclosure action is begun, most often everyone who is so threatened by the foreclosure would desire to enter into a forbearance agreement. Note that if obligors (here, "A" and "B") and guarantors do not sign, and if the obligation is changed by the forbearance, those obligors and guarantors might be released from liability. If the forbearance later fails--as often occurs--loss of such liability can be unwelcome.

Then there is the scenario of a husband and wife living apart and the wife (for example), anxious to save the house, seeks forbearance. But the husband either cannot be found or spitefully refuses to do anything that might save the dwelling. The question then is, can the agreement be entered into solely with the wife? Because the thrust of the forbearance agreement is to remit a series of payments leading ultimately to a reinstatement of the mortgage, there should be no downside in having the wife alone sign. If the ultimate result will be reinstatement of the mortgage, everyone benefits--including the recalcitrant husband who never wanted any part of it. So it would be difficult for him to make a fuss arising out of non-participation.

Authenticity of signatures

Stipulations that settle litigation--a forbearance agreement fits the definition--are generally treated as binding contracts that are set aside only upon exceptional circumstances such as fraud. …

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