When There Is A Foreclosure Sale Scheduled, Every Day Is Critical If You Want To Refinance

For those clients facing an imminent foreclosure sale date, they must act fast to avoid losing their property forever. I get calls from frantic clients about this daily. Some I can help. Some not. It depends on several factors, including the value of the property, the payoff amount for the mortgage loan, income and expenses, other debts, and prior bankruptcy filings. There are different alternatives that might be possible, including refinancing, bankruptcy, workouts and litigation. The one thing that is always distressing is the client who calls me the day before the sale.

That client may have been waiting for a family member to bail him or her out. Or may have been counting on a refinance that was promised by a mortgage broker. Or maybe was just afraid to face reality and take some action.

Chapter 13 is sometimes an option and I can file what we call a “skeletal” filing, which means filing a petition and the minimum necessary papers with the Bankruptcy Court in order to invoke the automatic stay protection and stop the sale. But, of course, bankruptcy should always be a last resort. There is a high failure rate for Chapter 13 repayment plans and if someone has a better option, they should take it.

One option that might be better is to refinance. The problem that the homeowner faces here is that even if they qualify there is little time to get it done without losing the property at an auction. The first issue is whether a refinance is even possible. Most lenders and mortgage brokers that we work with will look at the “LTV” or loan to value ratio. They will make a loan if the homeowner’s LTV is less than 70 to 75% LTV, even if there is a pending foreclosure. These are usually specialized lenders, as most conventional lenders will not do foreclosure bailout lending. The mistake that many clients make is wasting months of time with a mortgage broker or lender who really does not handle foreclosure refinancing.

I often help clients with the loan process and attend the closing with them as their counsel. After closing, I follow up with their old mortgage company to make sure that the foreclosure action has been discontinued, the lis pendens on their property removed, and the loan satisfied.

However, even where the loan can be approved to solve the foreclosure, there is still the problem of timing. Most mortgage companies want their money now. Not a promise that they will be paid later. By the time that a sale date is set, they have already incurred substantial costs for their lawyer’s fees (which, by the way, are tacked on to what the homeowner must pay back) and for court and advertising costs. To sell in New York, the lender usually must advertise once a week for four straight weeks in a newspaper of the Court’s choosing. So it is understandable why a mortgage company might be reluctant to cancel or postpone a sale just because you tell them you are refinancing. In the world of foreclosure, every homeowner says they are refinancing. Lenders need more than pie in the sky promises. They need it in writing.

If a homeowner can obtain a firm written loan commitment to refinance just before a sale date, and wants to avoid filing bankruptcy, it is sometimes possible to send the commitment letter to the bank or it’s attorneys and ask for a postponement. The bank should have a higher level of comfort in granting a short postponement (of a few weeks) if it can confirm that there is a real loan approved in an amount sufficient to pay off the full indebtedness.

One thing that sometimes causes a problem in this scenario is that the mortgagee does not always provide a payoff statement quickly. Some lenders are just slow. Some don’t seem to care. Others may be waiting for outside counsel to provide the total figures for legal fees to include in the amount due.

Without the payoff letter from the old lender, the new lender won’t know how much money is required to refinance. In those cases, where the payoff letter is delayed and time is running out, some mortgage brokers may be able to convince the new lender to rely on the amount in the judgment of foreclosure and sale and then add in some additional estimated amount to cover the additional anticipated charges. Hopefully, the payoff will be provided by the time of the closing. And, if it is not, this may give the homeowner a claim against the foreclosing mortgage company for preventing the cure of the mortgage default.

Another potential item that can cause delay is obtaining a new appraisal. That can take 1 to 3 days and in some cases the new lender will also require a “BPO” (broker’s price opinion) to double check value.

If the homeowner, can overcome these obstacles and get the appraisal done quickly, obtain the payoff letter, and then obtain a written approval for a new loan, there is still the problem of the sale date to contend with. There may not be enough time to close the loan. If the present lender will not consent to a postponement of the sale, then the homeowner may want to file an order to show cause for a temporary restraining order with the Supreme Court in the foreclosure action and ask the Court to stop the sale on the ground that the loan will be paid very soon at a closing. Some Judges will give the homeowner a short time period of perhaps a few weeks to close the loan.

Of course, it can also take time to prepare the necessary papers to submit to the court. Some clients have simply gone to court and filled out an order to show cause by hand, but I think that doing that weakens the request and detracts from the client’s credibility with the court. Whenever possible, a formal motion is better and looks more credible. Another important matter to note is that the stay in the Supreme Court is discretionary, unlike the “automatic” stay in Bankruptcy Court. So, if the Supreme Court Judge does not believe you, the Court can deny your request for a stay and permit the sale to proceed.

All in all, you can see how urgent this can be at every step of the way. The homeowner who leaves a few extra days stands a much better chance of avoiding a sale. The moral: when there is a sale date looming, every day is critical. Don’t delay!