©Salvatore Vuono - freedigitalphotos

©Salvatore Vuono – freedigitalphotos

A nonperforming loan is one that is in default or just about to be.  People who are facing foreclosure that have missed their mortgage payment for three months would now be considered in default.  When you have a nonperforming loan the payments will be past due by 90 days, or 90 days of interest payments have been capitalized, refinanced or delayed by agreement and there are good reasons to believe that payments are not going to be made in full by the home owner.

To understand a nonperforming mortgage a bit better, one must first grasp the difference between secured and unsecured debt.

Debt that is backed by something that is close to or equal to the amount you owe is secured debt.  For instance, the mortgage on your home is collateral toward the debt you owe.  If you don’t pay your mortgage, the lender has the security of knowing they can come in take your house from you and resell it to, hopefully, pay off your owed debt.  A secured debt is security for the person who loaned you money, in case you default on your payments.

Unsecured debt is the exact opposite: it is when the person who lent you money has no collateral on what you owe.  For instance most credit card debt is unsecured, so if you don’t pay your bills, you will have blemishes on your credit record and most likely harassing phone calls for debt collectors, but they can not come and seize your property. This is because the credit card is unsecured.

What do secured and unsecured debt have to do with a nonperforming mortgage? First of all, if a lender holds a note on a home that is worth less than the amount stated on the secured loan, then that portion of the note is unsecured.  If a lender is in a second lien position on a secured loan, and the loan defaults, there must be enough equity to pay off the second after the first is paid or the second lien holder becomes an unsecured creditor.

If a homeowner is behind on his mortgage payments or even in default on more than a secured debt is worth, you would think the lender would want to restructure the mortgage, before foreclosing on the homeowner.  If this always happened through, we wouldn’t be seeing so many foreclosures on the market today.

The reason we have most of the foreclosures is that, instead of lenders working out the plan for the homeowners, a basic a lack of communication exists.  Most people do not know how to negotiate their nonperforming loans, even though lenders may want to help to avoid carrying unsecured debt on their books.  A homeowner needs to find a lawyer to represent them and try to work out a loan modification with their lender.

If your are in financial trouble and facing default along with possible foreclosure, go to your lender and see if you can work out a loan modification.  Hiring a skilled foreclosure attorney may be the route to go as well, if you would like someone on your side and negotiating a more affordable mortgage for you.

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