Things have been pretty crazy out there for the mortgage market recently. The Coronavirus pandemic has flipped the mortgage industry on its head, but lenders who were around for previous housing bubble crashes are likely familiar with restructuring loans in their portfolios.
For those who haven’t experienced these kinds of issues before, let’s get back to basics. Here are seven tips for how to ease the journey of restructuring loans during difficult times.
Tip 1: A Lender’s Legal Requirements (Due Diligence)
Prior to the workout, it’s always good to conduct their due diligence regarding the loan in question. Sitting down with the borrower before having a full understanding of the loan and the circumstances surrounding it would be ill-advised. Comprehensive due diligence can also provide leverage when the time comes to meet with the borrower.
Each situation is different, so it’s important for the lender to have a full understanding when deciding how to proceed.
Lender due diligence generally consist of four main tasks:
- Reviewing the necessary loan documents
- Evaluating the conditions of the home
- Investigating the borrower’s finances
- Detailing any potential risk
Tip 2: Determining Other Necessary Parties
Even though a loan workout will primarily involve the borrower and the lender, it’s common for other parties to become involved as well. These parties are determined during each stage of a workout. And as each stage is commenced, more necessary parties become apparent.
Determining the appropriate parties takes practice and comes with experience. Too few parties and the workout likely won’t succeed, too many parties and the process will be chaotic and drawn-out. Each situation is different and the best way to learn is to go through the process.
Tip 3: Notices
Following these guidelines can help reduce the risk of liability during the workout process.
- Drastic measures should only be taken as a last resort
- Never make false threats
- Never overreact
- Always allow the borrower time to make necessary arrangements
With that being said, all default and acceleration notices should always be taken seriously.
Having policies already in place for handling notices can help ease the workout process for a lender. Sending of notices too late can result in further difficulties. Prior to sending notices, all aspects of the loan should be well scrutinized to decide what exactly is necessary. Not all documents require the same amount of notice.
Additionally, all notices should be analyzed to help prevent unexpected results.
Tip 4: Establishing a Framework
Pre-workout agreements exist to allow the necessary parties to meet together to discuss the specifics of the loan workout agreement. This will establish the structure for the workout itself. It’s important for the lender to focus on the main issues, the problem loan, and not spend too much time negotiating the pre-workout agreements terms.
Tip 5: Hiring Specialists
It’s common for lenders to find themselves in situations where reaching out to a 3rd party specialist would be beneficial. These independent specialists could have knowledge that the lender themselves do not have, resulting in a better loan workout.
Independent specialists tend to be more objective than the loan officers who originated the loan in question. A past relationship with a borrower or partner could cloud the lender’s view on the situation, where an independent specialist could help the lender reach a better deal. An independent specialist can also help act as a mediator between the borrower and lender, reducing potential personality conflicts.
Even switching the originating loan officer to a brand new one can help provide some freshness to a problem loan, without needing to hire an independent specialist.
Tip 6: Analyze the Loan’s Specific Problems & Determine Goals
The first step to determining the remedy for a problem loan is to determine what caused the problem in the first place. Some loans are troubled due to a single event such as the Coronavirus pandemic, but others are caused by a domino effect of smaller issues. Common causes include:
- Issues with the individual borrower’s finances
- Geographic or environmental issues
- Inadequately underwritten loan
- Failing local markets
- Physical damage, such as flood or fire
- Partner disagreements
- Complications due to death
The list of remedies can vary just as much as the causes.
Once the catalysts are determined, the lender can begin developing a solution. Solutions can range from foreclosing and liquidating, to obtaining ownership and rehabilitate the property, to restructuring the loan.
It’s important for lenders to remain flexible when trying to determine a solution. New developments will arise as the workout process continues. Objectives should be revisited as the process continues and new information becomes apparent.
Tip 7: Understanding Your Borrower
Understanding a borrower’s non-economic motivations are what sets the good workout officers from the bad. Borrowers are typically much more understanding of a lender’s motivations than the other way around.
Being able to put yourself in the borrower’s shoes is often the key to a successful loan workout. It’s also important for the lender to provide a workout that gives the borrower some sort of obtainable home equity, especially if the borrower is to be involved with the future of the property in question.
The trick is coming up with a solution that remedies the situation while remaining beneficial to both the lender and the borrower.