Loan Modifications / Loan Workouts

Prevent Foreclosure

When a borrower is late on their payment(s) or misses them all together, it is a common misconception that they are immediately foreclosed upon. In reality there are several stages of the loan “workout” process.

In the first stage, the lender will usually make a friendly inquiry as to why the borrower’s payment(s) were later or missed. This is a fact finding mission and it usually guides the lender’s next actions.

In the second stage, the lender will attempt to work with the borrower to come up with a solution to whatever their issue is. Often this could involve restructuring the loan or providing a temporary forbearance.

Restructuring

The key point to remember about this stage is that the lender’s financial incentive is to work with the borrower to prevent any further deterioration in the transaction. To that end, the lender will actively work with the borrower and/or their representatives to negotiate a solution that will get the loan back on track. The exact workout strategy is unique to the individual loan and to the borrower’s situation, but such strategies typically include one (or all) of the following:

Forbearance:

A forbearance agreement is a temporary suspension/waiver of the required loan payments. It could be for one month or longer depending on the situation, but generally not longer than 12 months. The goal is to allow the borrower to conserve cash during the forbearance period and come back stronger and ready to resume making their loan payments. However, a forbearance does not make the issue go away. The borrower is still responsible for the missed payments. They could be tacked on to the end of the loan, divided up over the remaining payments, or in some cases, due in full.

Interest Rate / Payment Reductions:

If the borrower’s weakness is temporary, they may be offered a short-term solution in the form of a lower interest rate and/or lower payments. For example, suppose that they are in the middle of negotiating a new lease that will turn the property cash flow positive. They could be given a lower payment for 6 months, which decreases their required debt service, to allow them time to get the lease signed and then get back on track.

Restructure / Loan modification:

If the situation is more serious, the loan could be permanently restructured. In such a scenario, the interest rate, payment, or term could be permanently altered. This change is reflected in updated loan documents, but the lender does not do this for free. Depending on the specifics of the deal, they could charge fees that are added to the loan balance.

Additional Collateral:

To further secure their position, the lender could require the borrower to provide more collateral for the loan. This collateral could be anything from additional property to cash, marketable securities, equipment, accounts receivable, or shares in a privately held company.

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