I got a call this week from a guy who is going to lose his house next month. He had a $500,000 SBA loan which he defaulted on a few years back. Since then, the business has closed, and there is no collateral remaining except for his house that he pledged at the beginning of the process. He went on to tell me that he’s desperate for a way to avoid foreclosure, but his attorney told him it was pretty hopeless. Except for the SBA loan, he had no other liens on the home, which meant that all the proceeds from a foreclosure would go to the SBA Lender.
Below you will find my advice to him, and answers to his major questions:
1) My Advice: SBA Lenders are willing to make reasonable business decisions, therefore if you offer an amount equivalent to the equity in your home, there is a chance the lender would call off the foreclosure sale. In this case, the guy said the home was worth $250,000, so coming up with that much cash could be problematic. I suggested that he quickly look into a cash out refinance of his home, as a lump sum payment would give him the best chance. He could also make an offer to pay over time, but that’s a less attractive option for a lender. After all this guy already stopped paying back his loan once, the bank says, so what’s to stop him from doing it again? Bottom Line: If the lender will end up with about the same amount of cash by making a deal with you then they would by foreclosing, they should be willing to make a deal with you.
2) Borrower’s Question: I read a newspaper article that banks don’t want to foreclose on houses anymore because its costs a lot of money to foreclose and maintain a house. Why don’t they just make a deal with me? While its true that in general, lenders may be more patient with borrowers, when push comes to shove, if a borrower stops making payments, the only way to recover money that they have lent out out is to liquidate the collateral (ie foreclose). Even though the housing market is battered in many areas of the country, it certainly doesn’t mean that home are completely devoid of value. It just means that the lender will get less cash when they sell. Bottom Line: Trying to reason with a lender about how your house isn’t worth much, and that it will cost them a lot to foreclose is a pointless argument that you will lose. Banks will foreclose if they have to, regardless of what you read in the newspaper.
3) Borrower’s Question: Why can’t I try to settle for less than the value of my house? In this case, the borrower could not understand why his SBA lender would not accept a settlement offer of $50,000, despite the fact that his home was worth $250,000. Again, the borrower tried to reason that with the housing market being so bad, the lender should take $50,000. Under no circumstances is your SBA lender going to settle for less than the value of the collateral. Why take $50,000 when they can get $250,000 (or $250,000 less the costs of foreclosure)? Also, with an SBA loan, the lender is held accountable for their actions by the SBA. This means that if the bank settled for $50,000, they’d end up getting a bill from the SBA for about $200,000. No lender wants to ever see such a bill arrive in the mail. Bottom Line: With the SBA looking over the lenders shoulder, the lender will not settle for less than the net value of their collateral.