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Pre-Foreclosure Solutions Guide to

Easily Prevent and Stop the

Foreclosure Process!

“How you can do it, common sense for

the common man”

“Knowledge is POWER, POWER to the

people!”

Real Options and Solutions most

Homeowners can use to Stop the

Foreclosure Process

By Charles Galan

Pre-Foreclosure Solutions Guide to Easily Prevent and Stop the Foreclosure Process



Foreclosure is all about losing. The homeowners lose their home and thelender loses money. If the homeowners understand the process, they canusually save their home. The problem is that most people don't understandthe process, and are at a disadvantage from the beginning in this strugglewith their lender.

Over the years, the legislature has tried to create a system of foreclosurewhich is fair to both the lender and the defaulting homeowner. Thissystem attempts to give the homeowner ample time to cure a default,while at the same time, giving the lender a speedy remedy in the event thehomeowner cannot cure the default.

Unfortunately, the lawmakers’ efforts toward fairness do not balance theadvantage that well-prepared and well-practiced lenders have over thehomeowner who is relatively inexperienced in foreclosure proceedings.

The lender has all the advantages. These include:

1. Their lawyers, who are trained professionals, and who can and willenforce the lender's legal rights against the borrower.

2. The knowledge, experience, and understanding of how the bankingcommunity deals with mortgages in foreclosure.

3. The financial resources to pursue the foreclosure and enforce theirrights.

4. A sympathetic judicial system which applies a basic truth that thehomeowner borrowed the money and did not pay it back.

The homeowner, on the other hand, has all the disadvantages. Theseinclude:

1. A lack of money and financial resources.

2. Fear, concern, and worry that they are about to lose their home.

3. No law firm or financial consultant to advise and assist them.

4. A total lack of any knowledge, experience or understanding of how

the mortgage business functions and how foreclosures are treated by thebanking industry.

5. The emotional distress which very often prevents them from actingto protect themselves in this upcoming foreclosure battle.

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The sooner Homeowners act the more time they will have.

The longer they wait to act, the less time they will have. Feelingpowerless and confused, many homeowners in foreclosure spend toomuch precious time denying their predicament until the last minute when

only the most extreme of remedies remain available.

Homeowners must not delay.

It is vital that they respond to any legal notice or document and assembletheir defense team and their foreclosure strategies immediately.

What is foreclosure?

The legal process that a bank or mortgage company uses to force the sale of

your home to repay a debt; usually the mortgage on your home. Even if onepayment is missed the lending institution can take the property back andthen sell it to repay the money owed them. Typically, a foreclosure notice isfiled after three or four payments are missed.

What is the foreclosure process and how long does it take?

Each state governs the foreclosure process differently. However, in everystate the law requires that the borrower receive sufficient warning or notice,before the foreclosure can take place. Other rights and responsibilities are

disclosed in the mortgage and deed of trust.

Do I have any options and if so, how much time do I have to exercise my

options?

You have several options available to you as long as you own your home.Once your house is sold, whether by you or through foreclosure, many of your options are no longer available.

Knowing what your options are, you are in a much stronger position to deal

effectively with the foreclosure process. Once the foreclosure process hasbegun, if you're armed with the right information, you may be able to saveyour home from foreclosure and, in some instances, avoid the foreclosureprocess altogether.

I get letters and notices from people claiming they can help me save my

home - are they for real?

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Most of these offers are legitimate; however, none of them will do anythingthat you can't do yourself!

When foreclosure documents are filed they become a matter of public recordand many people review these records for various purposes such ascompiling lists to sell to bankruptcy attorneys, investors, real estateprofessionals and other people interested in either purchasing your home orhelping you save it.

First, you must decide what you to do, keep your home or sell it, and thenwhether or not you want to save your home yourself or hire an attorney orother service to help you. It's a good idea to know your options beforeproceeding.

Options ;

What if I want to keep my home, how can I save it?

The best place to start is to familiarize yourself with the options available toyou, and then, contact your lending institution to discuss your options.

I would rather sell my home than lose it to foreclosure . . . is this

possible?

Yes! It's called the Compromise Sale or the "Short Sale" and a foreclosurenotice does not prohibit you from selling your home as long as you own it.However, you must act quickly and select the right real estate professional,one well versed in these types of sales.

Can I just walk away? I don't want to keep the house nor bother with

trying to sell it. What would happen?

There is a legal process for walking away from your home or forfeiting yourproperty. You should seek the advice of an attorney and a real estate

professional well versed in this area because you could face catastrophicconsequences if you just walk away.

What happens when they foreclose?

While the actual process may vary from state to state, the Trustee announcesthe sale, informs the public who the lending institution is, who the

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borrower(s) is (are), the amount of overdue debt, and your totalindebtedness.

Then the trustee opens the bidding, (your lending institution may also openthe bidding). Either someone purchases the property or it reverts back to thelending institution. Once the property is sold or reverts back to the lender,the eviction process begins!

What does "Short Payoff" mean?

Your lender agrees to accept less than the total owed in exchange forreleasing the mortgage as a lien on the property. (it is also called pre-foreclosure sale, short sale, pre-sale and compromise sale).

Can they sell my house for less than what I owe?

Yes! Banks are not in the business of owning or selling homes and they donot like to foreclose on property because it's expensive and they usually losemoney. They must prepare the home for sale, hire a real estate agent to sellit, and until it's sold, it remains a non-producing asset on their books. Thelending institution would rather take a loss on the home than have it remainon their books as a non-producing asset.

They sold my house for more than I owe, do I get any money?

Yes! Any amount over the total debt owed will be paid to you upon thetransfer of ownership (closing).

However, if they sell it for less, the balance is called a deficiency and yourbank can use whatever means they deem necessary to collect the outstandingbalance. Most states treat this as an unsecured debt (just like credit carddebt) and give the bank (or creditor) the same legal rights to pursue you,usually by suing you in court.

Who can bid on my home at the auction?

Anyone, including you can bid at the auction. However, some states requirea cashier’s check in the amount of the purchase price or bid, some statesrequire a deposit and the ability to fund within a specified period of time asrequired under the terms of the contract.

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What happens if no one bids on my property?

The bank simply takes possession of your property, through eviction if necessary, and then hires a real estate agent to sell the property.

How does a Sheriff's Sale work?

If you fail to pay your property taxes the city to where the taxes are due canforeclose through a Sheriff’s Sale. Some cities will use this option after oneyear of non paid taxes while other cities may wait 3 years or more.Additionally, any creditor or lien holder can use this option once you defaulton a loan.

If I'm evicted, how many days notice do I get?

Typically you'll get 3 days notice! Most banks will start the eviction processimmediately after the foreclosure process but the FHA and VA are slower. If you own rental property, your tenants will normally be given 30 days notice.If you need more time than given, contact your lending institutionimmediately to ask for an extension.

Do I really stand a chance of saving my home from foreclosure?

Yes! If you are willing to fight for it. Knowing and understanding what

options are available to you is the first step. Your success will depend onimplementing the proper option in a timely manner.

I've missed a few mortgage payments, now what happens?

Foreclosure may occur. This is the legal means that your lender can use torepossess your home. When the actual foreclosure happens you must moveor you'll be evicted anyway. Also, you may still owe the lender if they sellthe house for less than you owe. You do have several options but becauseforeclosure or a deficiency judgment could seriously affect your ability to

qualify for credit in the future, you should avoid it if all possible.

I received a foreclosure notice, what should I do?

Determine the solution that fits your needs from this guide. Contact yourlender, or the appropriate agency immediately. Explain your situation and

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why you are having trouble making your payments and ask for a workoutadministrator. Do not ignore this letter!

What options do I have once I've received a foreclosure notice?

Your options include the following:

Special Forbearance

Your lender may be able to arrange a repayment plan based on yourfinancial situation. Your lender may even provide for a temporary reductionor suspension of your payments. You may qualify for this if:

1. You have recently lost your job or source of income or;2. You had an unexpected increase in living expenses.

You must furnish information to your lender to show that you would be ableto meet the requirements of the new payment plan.

Mortgage Modification. You may be able to refinance the debt and/orextend the term of your mortgage loan. This may help you catch up byreducing the monthly payments to a more affordable level. You may qualifyif you have recovered from a financial problem but your net income is lessthan it was before the default (failure to pay).

Partial Claim. Your lender may be able to work with you to obtain aninterest-free loan from HUD to bring your mortgage current.

You may qualify if:

1. your loan is at least 4 months delinquent but no more than 12 monthsdelinquent;2. your mortgage is not in foreclosure; and3. you are able to begin making full mortgage payments.

When your lender files a Partial claim, HUD will pay your lender theamount necessary to bring your mortgage current. You must execute apromissory note, and a Lien will be placed on your property until thepromissory note is paid in full. The promissory note is interest-free and willbe due if you sell or leave your property, or when your mortgage matures.

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Pre-foreclosure Sale. This will allow you to sell your property and pay off your mortgage loan to avoid foreclosure and damage to your credit rating.

You may qualify if:

1. The "as is" appraised value is at least 70% of the amount you owe andthe sales price is 95% of the appraised value;2. The loan is at least 2 months delinquent prior to the pre- foreclosuresale closing date; and3. You are able to sell your house within 3 to 5 months (depending onwhat your lender agrees to).

An additional benefit to this option is the assistance you will receive with theseller-paid closing costs.

Deed-in-lieu of foreclosure

As a last resort, you may be able to voluntarily "give back" your property tothe lender. This won't save your house, but it will help your chances of getting another mortgage loan in the future.

You can qualify if:

1. You are in default and don't qualify for any of the other options;

2.

Your attempts at selling the house before foreclosure wereunsuccessful; and3. You don't have another FHA mortgage in default.

What about foreclosure scams?

If you're selling your home without professional guidance, beware of buyerswho try to rush you through the process. Unfortunately, there are peoplewho may try to take advantage of your financial difficulty. Be especiallyalert to the following:

Equity skimming

In this type of scam, a "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sumof money when the property is sold. The "buyer" may suggest that you moveout quickly and deed the property to him or her. The "buyer" then collects

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rent for a time, does not make any mortgage payments, and allows the lenderto foreclose. Remember that signing over your deed to someone else doesnot necessarily relieve you of your obligation on your loan.

Phony counseling agencies

Some groups calling themselves "counseling agencies" may approach youand offer to perform certain services for a fee. These could well be servicesyou could do for yourself, for free, such as negotiating a new payment planwith your lender, or pursuing a pre-foreclosure sale. If you have any doubtabout paying for such services call a HUD-approved housing counselingagency.

How can I avoid foreclosure scams?

Follow these precautions:

1. Don't sign any papers you don't fully understand.2. Make sure you get all "promises" in writing.3. Beware of any loan assumption where you are not formally releasedfrom liability for your mortgage debt and contracts of sale.4. Check with a lawyer or your mortgage company before entering intoany deal involving your home.5. If you're selling the house yourself to avoid foreclosure, check to see

if there are any complaints against the prospective buyer. You can contactyour state's Attorney General, the State Real Estate Commission, or the localDistrict Attorney's Consumer Fraud Unit for this type of information.

So, what are the main points I should know about Foreclosure?

1. Don't lose your home and damage your credit history if you can helpit.2. Call or write your mortgage lender immediately.3. Stay in your home to make sure you qualify for assistance.

4. Arrange an appointment with a HUD approved housing counselor toexplore your options.5. Cooperate with the counselor or lender trying to help you.6. Explore every alternative to losing your home.7. Do not sign anything you don't understand. And remember thatsigning over the deed to someone else does not necessarily relieve you of your loan obligation.

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8. Act now. Delaying can't help. If you do nothing, You will lose yourhome and your good credit rating.

Can the bank remove me from my home?

No. Only a court order, called eviction, can force you to leave your home.The lender must follow first file a foreclosure notice, and then, only after theforeclosure process is complete, can the bank start eviction proceedings.

How many people actually lose their home to foreclosure?

About 5% to 7% are unable to save their homes! Most people eitherrefinance or file a chapter 13 bankruptcy. About 20% are able to reinstatetheir existing mortgage.

What is the Soldiers and Sailors Act?

This was a law passed during World War II to protect active duty militarymembers from financial difficulty. One portion of the law may be able tostop foreclosure for anyone on active duty if they meet certain requirementsoutline in the law. the real foreclosure date will be 3-6 weeks following thesoldiers and sailors answer date.

Who gets the money when the house is sold at auction?

First, all real estate taxes are paid. Then first, second, third etc., mortgagesare paid. Next comes any lien holders or attaching creditors. Finally, you'llget any money left over after all debts are satisfied.

What does merged debts mean?

This applies only if you have a second, third, or more mortgages! If thelender holding your first mortgage forecloses then the second, third and soforth lenders no longer hold any right or title to your home. Although, you

will probably still owe them money, they have neither security interest in thehome nor any right to foreclose on the home.

However, if you buy your own home back at the foreclosure auction, thedebt may "merge" back (reattach) to the property, as if the foreclosure neverhappened.

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Note: If you file chapter 7 bankruptcy prior to the foreclosure sale andreceive a discharge (released from all debts) you will not owe any moneyand the lenders will no longer hold a security interest in your home.

What is the redemption period for buying my house back?

This varies by state. Many do not have a redemption period except whenyour house is sold at a sheriff's sale or for back real estate taxes.

What's the difference between a foreclosure and a sheriff's sale?

Foreclosure sales are auctions held by the mortgage holder while a sheriff'ssale is held by a lien holder or attaching creditor.

FORECLOSURE RESOLUTION STRATEGIES:

Following are some examples and explanations of Foreclosure ResolutionStrategies:

Total Reinstatement

Repayment Plan

Forbearance Plan

Loan ModificationPartial Claim Program

RefinanceShortsale/Preforeclosure Sale

Bankruptcy

Total Reinstatement

This process involves totally bringing your loan current in one payment.You will be required to provide a certified check in an amount, which willinclude all past due payments, late charges and any fees and costs, whichhave been assessed to your account.

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Repayment Plan

This process involves making up the amount past due over a period of months by paying a full payment plus a partial payment on the past due

balance each month. You will be required to give your lender a castcontribution equivalent to 40-50% of your total arrears (total of latepayments, bank fees and attorneys fees). Coming up with such a lumpsum is quite difficult for homeowners who just faced a hardship.

The keys to getting into one of these plans are:

1. Your hardship

2. A financial statement that qualifies

Forbearance Plan

This process involves the reduction or suspension of payments for aperiod of time followed by a period of time during which the deferredpayments are made up, similar to the repayment plan.

Loan Modification

This process involves the change of the original terms of the mortgage

through one or a combination of the following methods:Delinquent interest amount to the current unpaid balance, and / or anextension of the term of the mortgage.

A loan modification requires the prior approval of the loan company orinvestor. A modification fee will be charged. A cash contribution towardcompliance with any additional requirements of the lender and/orinvestor.

Partial Claim Program

Certain loans qualify for this program, in which the homeowner isrequired to give a cash contribution equivalent to 40-50% of total arrears,and the remainder of arrears is loaned to the homeowner interest free.The homeowner will have the remaining term of the mortgage to pay off this loan in full.

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Refinance

This is another one of the more heavily marketed solutions. The mainbarrier that most people run into with refinancing is not having enough

equity to obtain a "sub prime" or "bruised credit" loan. This is the type of loan that you will most likely need to refinance into due to yourforeclosure situation.

Another problem is that mortgage companies have a history of reportingto their borrowers that "everything is fine", when in fact nothing is usuallyset in stone until the final loan papers are drawn up.

It is generally not recommended to leave your entire fate in the hands of a

mortgage company. It is too easy for them to back out in the final hour,leaving you in a very dangerous situation.

In many cases where enough equity exists, refinancing can be a simplesolution. This can be done through a new mortgage company, or througha negotiation with the current lender in which they refinance the currentmortgage to include the past due amount (the arrears). With this form of financing, new loan documents are drafted.

Be aware that if there are any other mortgages on the property, secondmortgage, home equity loans, etc., these junior lien-holders must agree toremain in their present lien-holder position by entering into asubordination agreement with the primary lender. If there are no othermortgages, the process is much simpler. The homeowner will benefitfrom this type of refinancing in that the lender will wrap the past duepayments into the new loan. (much like a loan modification)The biggestbarrier that is faced in exercising this option is a lack of equity. A straightrefinance usually works only if you have substantial equity in your

homes.

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Shortsale/Preforeclosure Sale

This strategy can be attempted with great success if you don't have thefunds or the ability to keep your home.

A shortsale is when the lender agrees to accept less than the full principleplus arrears as payment in full in exchange for being paid off right away.The most the lender will usually discount is ten to fifteen percent of thefull amount owed. The prudent lender will cut their losses, saving moneyfrom being spent on additional foreclosure costs and legal fees versustaking the property back and then having to market and sell the property.

This strategy of a shortsale is usually performed through a third partyprofessional and who is also experienced in negotiating shortsales. The

lender factors in something that they call the "time-value of money". Theexperience and expertise of the professionals that you use will have muchto do with the success or failure of the technique. Make sure that thepeople you use specifically have experience successfully negotiatingshortsales.

Bankruptcy

Generally speaking, of the various chapters of Bankruptcy available, the

option that provides the most protection to a homeowner who hassubstantial arrears and is trying to save his/her house is Chapter 13.

Discussing the many details of the differences between Chapter 7 andChapter 13 is beyond the scope of this information being provided

Bankruptcy is a severe form of financial reorganization since it involvesgovernment intervention into your financial affairs as well as publiclyblemishes your credit report for several years.

In order to file for bankruptcy, a filing fee must be paid, plus any attorneycosts, and an assortment of forms and schedules must be filed with theclerk of the Federal Bankruptcy Court. Both extreme care and honestymust be exercised while filling out these forms and schedules. Mistakescan result in a dismissal of the petition as well as non-discharge of certaindebts.

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To find out more about these forms and all the details of bankruptcy, youshould consult with a bankruptcy attorney.

If your goal is to keep your home, first you must assess your personal

situation. The decision you will make is more of a business decision andshould be thought of as such.

Because your decision will depend on the availability of cash now and inthe future…your decision should be business-like. This is only saidbecause if you make a decision solely based upon your personal desires,you could be setting yourself up to lose your home and ruin your chancesof having another home for 7-10 years.

Once you have a good understanding of your personal financial situation,you will need to make a realistic assessment on whether your priority willbe to KEEP YOUR HOME or SELL YOUR HOME.

Be realistic…if you can barely afford your payments each month now,agreeing to a repayment plan with your lender will only make trying tokeep your home extremely difficult.

Emotional and personal reason must be balanced against financial realityand what is better for you in the long run. Keep in mind that should youconsider keeping your home, to do so you will have to get caught up withyour current lender. This is called a reinstatement.

The reinstatement process is very time consuming and can getcomplicated if you are not prepared. A homeowner normally is unawareof the assistance available to them and their Lender doesn’t counselcustomers about what rights they have.

Most homeowners who attempt to work things out with their Lender ontheir own, end up extremely frustrated. The Lenders have LossMitigation departments that are understaffed and overworked.

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When you call them, you usually end up in voicemail. It is rare for themto call you back right away and sometimes it will be days before your callis returned, if at all.

When you get lucky and actually talk to a Loss Mitigation employee, theycan be insensitive and sometimes rude. Treating you like a delinquent isnot professional, but their frustrations run high and that normally getstaken out on already stressed homeowners like you. After this point mosthomeowners would give up and think that their Lender doesn’t want themto keep their home.

The Foreclosure Process In Your State

It's a two-step process: Pre-foreclosure and Formal foreclosure. The process

is essentially the same in each state.

Pre-foreclosure

1. You miss a payment (usually it take 3 or 4 missed payments to kick off a foreclosure process)2. The bank sends you late notices and, if you fail to respond, theyattempt to contact you (in writing or by phone) to resolve situation.3. You continue to miss payments and, you and the bank, fail to agreeupon payment arrangements.4. The bank invokes the acceleration clause and demands the mortgageor lien be paid in full. Now you are legally obligated to immediately pay thefull amount plus back interest, late fees, and any legal fees incurred by thelender.5. You have made no payments or arrangements acceptable to the bank.

Formal Foreclosure Process

1. You receive a formal foreclosure notice, either by certified mail, or in

many states, by the local sheriff.2. The lender begins foreclosure action in court.3. Legal notices are published in local papers.4. You still have not been able to reach a payment or settlementarrangement with the lender.5. Your notice and waiting periods expire.6. The court holds a hearing regarding the bank's claim.

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7. The court issues a foreclosure order. This gives the bank the legalright to sell the home.8. Legal notice of actual foreclosure sale and advertisements publishedin local papers.9. You still have not been able to reach a payment or settlementagreement with the lender.10. The house is sold at auction to the highest bidder or not sold and thebank take possession of the home.11. You move out or the bank or new owner evicts you.12. You are notified of any debt still outstanding as a result of the sale.(i.e. the home is sold for less than you owe)

How long does the foreclosure process usually take?

It depends on your state and how aggressive the lender is. It could be asquick as 60 days or longer than six months.

What actually happens during an eviction?

This varies by state but generally it follows one of two paths . . .

First path:

1. You receive a notice to vacate the premises within 72 hours.

2. You leave within the time limit.

Second path:

1. You receive a notice to vacate the premises within 72 hours.2. You fail to leave3. The bank or new owner goes to court to ask for a hearing to decide if and when you should be evicted.4. At the hearing the judge decides whether or not you should be evictedand if evicted, how long you can stay before moving out. (offering to pay

rent will often sway the judge to grant you more time)5. If the judge decides you are to be evicted, most states allow you 10days to appeal the decision.6. Once the court orders your eviction and you have not moved out bythe court designated date, the bank or new owner may obtain an execution of the eviction judgment which gives the sheriff the right to physically removeyou from the premises.

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rights, and to identify the solution that meets your needs thereby giving youthe means to save your home and most valuable asset.

You Are Protected By The Law Most collection activities fall under the purview of two federal laws; the FairDebt Collection Practices Act and the Fair Credit Reporting Act. Anyservicing agent, or a representative, must be in compliance with these laws.In general the law forbids any unusual, abusive or misleading practices suchas:

• Contacting the borrower at unusual times or places• Using abusive or threatening language or harassment.• Speaking with a third party about your debt, or obligation.• Using a false identity or third party to contact you.

If you believe your rights have been violated ask to speak with the caller'ssupervisor immediately.

Before The 60th Day If you are delinquent you can expect certain events totake place sometime during the first 60 days.

• A credit letter.• Face-to-face interview

• Property inspection

After 90 days

• Breach Letter The Breach Letter is the precursor to the foreclosureaction. If a Loss Mitigation Agreement (foreclosure workout) has not beencompleted within approximately 45 days of this letter the case is generallyreferred to an attorney for filing. This example is taken directly form FannieMae's Delinquency Prevention And Management Manual.

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FORECLOSURE TIMEFRAME BY STATE

TIME LAPSES BETWEEN REFERRAL TO FORECLOSUREATTORNEY AND AUCTION SALE DATE

The following represents the aforementioned average time frames in therespective state to complete an uncontested foreclosure.

State Months State Months

Alabama 3 Montana 6Alaska 4 Nebraska 4Arizona 3 Nevada 4Arkansas 3 New Hampshire 3California 4 New Jersey 10Colorado 5 New Mexico 5Connecticut 6 New York 10Delaware 7 North Carolina 4District of Columbia 4 North Dakota 4Florida 7 Ohio 8Georgia 3 Oklahoma 7Guam 11 Oregon 5Hawaii 7 Pennsylvania 9

Idaho 9 Rhode Island 3Illinois 10 South Carolina 6Indiana 9 South Dakota 4Iowa 7 Tennessee 3Kansas 4 Texas 2Kentucky 7 Utah 5Louisiana 6 Vermont 10Maine 10 Virginia 4Maryland 5 Washington 5Massachusetts 5 West Virginia 4Michigan 3 Wisconsin 10Minnesota 4 Wyoming 3Mississippi 4 Puerto Rico 12Missouri 3 Virgin Islands 10

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Foreclosure Procedure by State

State Predominate Predominate Redemption During Possession Security Foreclosure Period Redemption

Device Method

Alabama Mortgage Power of Sale 1 year BuyerAlaska Trust Deed Power of Sale None --Arizona Trust Deed Power of Sale None --Arkansas Mortgage Power of Sale 1 year BuyerCalifornia Trust Deed Power of Sale None --Colorado Trust Deed Power of Sale 75 days MortgagorConnecticut Mortgage Strict Foreclosure None --Delaware Mortgage Judicial None --

Washington DC Trust Deed Power of Sale None --Florida Mortgage Judicial 10 days --Georgia Mortgage Power of Sale None --Hawaii Trust Deed Power of Sale None --Idaho Trust Deed Power of Sale None --Illinois Mortgage Judicial 1 year MortgagorIndiana Mortgage Judicial 3 months MortgagorIowa Mortgage Judicial 6 months MortgagorKansas Mortgage Judicial 1 year MortgagorKentucky Mortgage Judicial None --Louisiana Mortgage Judicial None --Maine Mortgage Entry/Possession 1 year MortgagorMaryland Trust Deed Power of Sale None --Massachusetts Mortgage Power of Sale None --Michigan Mortgage Power of Sale 6 months MortgagorMinnesota Mortgage Power of Sale 6 months MortgagorMississippi Trust Deed Power of Sale None --Missouri Trust Deed Power of Sale 1 year MortgagorMontana Mortgage Judicial None --

Nebraska Mortgage Judicial None --Nevada Mortgage Power of Sale None --New Hampshire Mortgage Power of Sale None --New Jersey Mortgage Judicial 10 days --New Mexico Mortgage Judicial 1 month BuyerNew York Mortgage Judicial None --North Carolina Trust Deed Power of Sale None --

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North Dakota Mortgage Judicial 1 year MortgagorOhio Mortgage Judicial None --Oklahoma Mortgage Judicial None --Oregon Trust Deed Power of Sale None --Pennsylvania Mortgage Judicial None --Rhode Island Mortgage Power of Sale None --South Carolina Mortgage Judicial None --South Dakota Mortgage Power of Sale 1 year MortgagorTennessee Trust Deed Power of Sale None --Texas Trust Deed Power of Sale None --Utah Mortgage Judicial 6 months MortgagorVermont Mortgage Strict Foreclosure 6 months MortgagorVirginia Trust Deed Power of Sale None --Washington Mortgage Judicial 1 year Buyer

West Virginia Trust Deed Power of Sale None --Wisconsin Mortgage Power of Sale None --Wyoming Mortgage Power of Sale 6 months Mortgagor

_____________________________________________________________________

Example Delinquency letter

Date

Borrower Name

AddressCity, State, Zip

Re: Loan #

Property address

Dear Borrower:

You have fallen behind on your mortgage payments. You must bring the

mortgage current within 30days of the date of this letter by sending theamount shown below to [company name} in the form of a money order orcertified check.

The total amount due as of date is $ .

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You must also include any payments or late charges that become due duringthis 30-day period along with the amount shown above to bring your accountcurrent. Acceptance of less than the total amount includes, but is not limitedto, the principal, interest and all other outstanding charges and costs.Acceptance of less does not waive our right to demand the entire balancedue under the terms of your mortgage.

If you do not bring your current within 30 days of the date of this letter,[name of company} will demand the entire balance outstanding under theterms of your mortgage. This amount includes, but is not limited to, theprincipal, interest, and all other outstanding charges and costs. [Name of company] will start legal action to foreclose on the mortgage, which willresult in the sale of the property. We may also have the right to seek a

judgment against you for any deficiency.

You have the right to bring your loan current after legal action has begun.You also have the right to assert in the foreclosure preceding thenonexistence of the default or any other defense to our legal action and saleof the property.

We want to work with you to resolve the problem and help you bring youraccount into good standing once again. We urge you to contact [name] at[telephone number] who will work with you to try to solve your currentdifficulty.

Sincerely,

• Attorney Referral: This is likely to occur with 90 to 120 days fromthe first missed payment. However, there remains plenty of time to completea Loss Mitigation Agreement with the lender. The table below shows the

average time between attorney referral and the foreclosure sale in theindividual states and territories. Taken from Fannie Mae's "DelinquencyPrevention And Management Manual"

STATE MONTHS STATE MONTHS

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ALABAMA 3 MONTANA 6

ALASKA 4 NEBRASKA 4

ARKANSAS 3 NEVADA 4

ARIZONA 3NEWHAMPSHIRE

3

CALIFORNIA 4 NEW JERSEY 10

COLORADO 5 NEW MEXICO 5

CONNECTICUT 6 NEW YORK 10

DELAWARE 7 NEW JERSEY 10

DISTRICT OFCOLUMBIA

4NORTHDAKOTA

4

FLORIDA 7 OHIO 8

GEORGIA 3 OKLAHOMA 7

GUAM 11 OREGON 5

HAWAII 7 PENNSYLVANIA 9

IDAHO 9 PUERTO RICO 12

ILLINOIS 10 RHODE ISLAND 3

INDIANA 9SOUTHCAROLINA

6

IOWA 7 SOUTH DAKOTA 4

KANSAS 4 TENNESSEE 3

KENTUCKY 7 TEXAS 2

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LOUISIANA 6 UTAH 5

MAINE 10 VERMONT 10

MARYLAND 5 VIRGINIA 4

MASSACHUSETTS 5VIRGINISLANDS

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MICHIGAN 3 WASHINGTON 5

MINNESOTA 4 WEST VIRGINIA 4

MISSISSIPPI 4 WISCONSIN 10

MISSOURI 3 WYOMING 3

Other Lien holders

If other liens have been recorded against the property those lien holders willbe contacted by the lender in order to determine the condition of those loans.Once contacted junior lien holders may initiate separate foreclosure action toprotect a security interest pursuant to terms and conditions contained in

the mortgage, or deed of trust. Separate action by junior lien holders usuallywill not affect the ability to complete a Loss Mitigation Agreement withFannie Mae, or any other lender. In fact, these lien holders may agree toparticipate in the workout solution.

Evaluating Individual Circumstances

The lender's policy is to evaluate individual circumstances as soon aspossible. Individual cases are evaluated based on the following conditions:

• The reason for default.• The borrower's attitude towards the debt.• Is the delinquency considered temporary or permanent.

It is very important that you attempt to open communication with thesupport counselors before the situation becomes more serious. Be honest andforthcoming about your situation. If you agree to a delinquency cure be sure

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you can comply, and be faithful to your commitment. If there is a change inyour circumstances contact the lender immediately. If your situation isexpected to be long term it would be useless and in bad faith to negotiate adelinquency cure. Request, instead, a Relief Provision or a ForeclosurePrevention option covered later.

Counseling Services

Fannie Mae offers home ownership counseling services to assist delinquentborrowers in managing debt. For the home-buyer education specialist inyour area call 1-800-7FANNIE. For a nearby HUD approved counselingagency call 1-800-569-4287. These numbers may be subject to change.

Measures For Curing Delinquency

Fannie Mae's management policy offers some simple solutions fortemporary hardships. Most other loan administration programs will followsimilar policy.

Late Charges

Late charges that have been imposed may defer to a later date, or waivedaltogether in cases of extreme hardship.

Partial Payments

Most lenders do not encourage acceptance of partial payments as a matter of practice. However, the VA and HUD require acceptance under certainconditions. Fannie Mae will accept partial payments as a means of curingdelinquency if the borrower:

1. Respects the mortgage obligation.2. Is not habitually delinquent.3. Does not have a history of returned checks for insufficient

funds.4. Balance can be paid in 30 days

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Reapplying Principal Payments

If you have previously made principal reduction payments to reduce yourmortgage balance you may request to have these payments reapplied to thedelinquent balance provided:

1. The request is in writing.2. The result is not a higher loan balance than the amortized schedule.3. An additional amount will be paid, as needed, to cure the totaldelinquency.

• Assignment of Rents If the property is being rented (incomeproperty) most lenders will seek to secure the rents under the followingconditions.

1.

The mortgage has an assignment of rents clause.2. The decision is not in conflict with local laws3. The decision does not confer additional rights to the tenant, or those inpossession, pursuant to foreclosure.

Listing The Property

Listing the property for sale or rent is a delinquency option, however aPreforeclosure Option under Foreclosure Prevention may be a betteralternative.

Special Relief Provisions

Fannie Mae makes available special relief provisions in an attempt to spanperiods of financial hardship that cannot be resolved by delinquencycounseling, or with simple a simple cure. While the following relief provisions possess standardized features, Fannie Mae will not object to anyreasonable plan provided it does not compromise the lien position or comeinto conflict with any other policy or commitment.

When Is A Relief Provision Offered ?

When it is determined that a delinquency is the result of a temporarycondition, such as illness, unexpected expenses, or military service, andthere is a reasonable chance the borrower can bring the mortgage current.During the term of a Relief Provision the property will be subject toscheduled inspections.

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Methods For Relief

Temporary Indulgence; This is a grace period, usually 30 to 60 days thatmay be granted to being the mortgage current. If requested the borrowerwill have to demonstrate evidence to comply, and is considered to beappropriate in the following situations.

1. A contract for the sale of the property has been ratified pursuant totenant occupancy or a closing date.2. An insurance settlement.3. Pending receipt of approved funding.4. Pursuant to the completion of an approved Relief Provision.

Liquidating Plan

This is an option which allows additional proceeds to be added to the regularmonthly payment after the hardship has passed and the borrower canresume regularly scheduled payments. Fannie Mae, HUD and VA policyallows most any creative solution agreed to under a Liquidating Plan thatwill remove the delinquency in the shortest amount of time.

Special Forbearance

This provides for the suspension of payments for a specified period of time,

and usually for no longer than 18 months (for Fannie Mae) from the date of the first payment under this agreement. At the end of the suspended periodthe borrower may be expected to resume payment under a Liquidating Plan.This plan is used to assist borrowers experiencing a temporary loss, orreduction, in income that is expected to be restored at a later date. Mostlenders provide Special Forbearance in any situation for which there isdocumentation and relief is warranted.

Long Term Special Forbearance

In certain situations Special Forbearance can be extended. (up to 24 monthsfor Fannie Mae)

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Military Indulgence

A civilian borrower who later enters the military is entitled to MilitaryIndulgence granted under the terms of the Soldiers' and Sailors' Civil Relief Act. There are Two components of this provision:

Interest Rate Reduction

Fannie Mae policy requires a reduction in the interest rate from the time theborrower begins active duty to the date of release at the current rate of 6%.This benefit is retroactive should the borrower notify the servicing agentsometime after beginning active duty.

Additional Forbearance

In certain cases related to the financial hardship usually associated with theloss of greater civilian pay the veteran may request special consideration inthe form of a reduction in the monthly mortgage obligation. The differencebetween the scheduled payment and the reduced payment is referred to asarrearage by Fannie Mae. Upon release from active duty the borrower isresponsible for bringing the arrearage current.

Most lenders probably will not foreclose on a delinquent borrower that hasbeen granted Military Indulgence. Currently it is Fannie Mae's policy to

offer the borrower Additional Forbearance in this situation. If paymentscannot be made the borrower should seek a court order granting a stay inenforcement of the mortgage obligation until released from active duty.

Most all lenders observe Fannie Mae's broad range of short and long termrelief options for the management of delinquent mortgages. It is particularlyimportant that you understand your rights, and that your servicing agent hasbeen given a liberal mandate in most situations to provide any reasonablesolution.

FORECLOSURE PREVENTION

Fannie Mae Philosophy Fannie Mae's loss policy is derived from thephilosophy that diligent management of delinquent mortgages isfundamental to foreclosure prevention. When the best efforts areinsufficient to bring mortgages current, and when significant losses wouldoccur if delinquency ended in foreclosure, aggressive workout solutions

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become the means of protecting the profit objective of the FNMA. FannieMae has, therefore, created five specific Foreclosure Prevention plans. Eachof these plans is administered, more or less, by all institutional lenders, andare excellent models for workout in the private market as well. Work carefully through this Guide. Select the plan that you think will work foryou. Then complete the Workout Request Package and submit it to the loanmitigation representative for your lender. Follow the guidelines forsubmission, and be complete. It is extremely important that you formalizeyour request in this manner.

Repayment Plan A structured arrangement in which the borrower repaysdelinquent installments or advances and thus brings the mortgage current.Fannie Mae's formal repayment plans include Special Forbearance.

Modification One or more of the terms are changed to bring the delinquentmortgage current

Assumption An enforceable "due-on-sale" clause is waived to allow aqualified buyer to assume the mortgage of a delinquent borrower.

Pre-foreclosure Sale The proceeds of a sale are accepted as fullsatisfaction for the mortgage obligation even if it is less than the mortgagebalance.

Deed-In-Lieu Of Foreclosure The borrower voluntarily deeds theproperty to the lender to avoid foreclosure.

Each of these workout solutions will be covered in more detail. You arereminded again that while these solutions possess standardized features,Most lenders will not object to any reasonable plan provided it does notcompromise the lien position or come into conflict with any other policy orcommitment.

Fannie Mae Management

Goals Fannie Mae continues to support the goal of offering borrowers theopportunity to keep their property, and loss mitigation remains the highestpriority. In addition to improving the quality and availability of counselingservices, Fannie Mae continues attempts to improve the approval processand turnaround time.

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When Is A Workout Plan Offered

Foreclosure workout is considered when a borrower's financial condition hasbeen severely or permanently impaired and:

• All collection efforts have failed.• Temporary Simple Cures and Relief Provisions have not beensuccessful, or are considered impractical.• Delinquency cannot be resolved under existing terms. Foreclosurewould result in a loss.

First Contact

Your success will be measured by the manner in which you respond to the

first contact. From the time you are first contacted by the servicing agent, orthe agent's attorney, you should begin to establish a relationship based onhonesty and credibility. The first question you should ask is, "What workoutsolutions are you authorized and required to offer", and "Who is the loanmitigation authority for the lender". You are entitled to this information. Itis absolutely essential that you communicate with the right person. Speak only to an individual with the authorization to enter into an agreement. Usean attorney to enforce this request if necessary. Ask for a Workout RequestPackage. If it is not offered submit your own. Make it clear that your areprepared to offer complete cooperation and that you will comply with a

workout agreement. Do the following:

• Gain the servicing agent’s confidence.• Answer all questions honestly.• Completely disclose the reason for delinquency, or default.• Be honest about the extent of your hardship and how long it isexpected to continue.• If you believe you require a foreclosure workout provide specificguidance for the counselor as to the plan and terms. Keep in mind that youknow your situation far better than they do. The following reasons fordelinquency generally qualify as hardship.1. Death of a borrower2. Unemployment3. Reduction in the number of working hours4. Loss of overtime or a second job5. Increase in expenses resulting from unemployment

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6. Salary reduction7. Decline in earnings if self-employed8. Business failure9. Disability10. Health related expenses11. Involuntary employment relocation12. Divorce13. Bankruptcy14. Incarceration15. Catastrophe or natural disaster

The foreclosure prevention counselor will probably attempt to qualify any of these reason in more detail. Insure you offer a complete explanation, and beprepared with important related details.

The basic foreclosure plans are described below. It is absolutelyESSENTIAL that you select a plan that you can comply with. You willWIN or LOSE, right here. If you select, or create, a plan intended to allowyou to remain in the property you must be prepared to satisfy the loanmitigation authority that you can, and will, comply with an establishedagreement. The lender will have to be satisfied that your plan will not onlybring the loan current, but that you will continue to make all future paymentsas agreed. Prepare a letter which outlines you plan, and the means by whichyou are prepared to effect success. Be completely honest and sincere If you

are employed, ask your employer to prepare a support letter which assuresthe lender of your continued employment. The letter should include any payincreases, bonuses or additional benefits you can expect to receive as well asany additional information which supports your employment history andcredibility. If you are self employed you will need to do more than promiseto pay. You will need to offer a plan that will fulfill the lender's expectationfor compliance. Finally, be sure the Workout Request Package is neatlyprepared and complete as to all details.

Properly Preparing For Financial Disclosure To receive consideration for a workout plan your income and assets will becarefully evaluated. Analysis of your financial information is intended todetermine if you have assets which can be applied to the delinquent balance,and the extent to which your debt and expenses are appropriate for your

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particular personal, business, professional or corporate situation. Beprepared to provide the following information:

Employed

• Federal tax returns for the last two years, including W-2s• The last two months pay stubs• Most recent bank statements

A written statement describing the nature of your financial

• hardship

Sole Proprietorship

• Most recent federal tax return with all schedules• Year-to-date profit and loss statement

Partnership

• Most recent federal tax return with all schedules• Form 1065, U.S. Partnership Return of Income• Schedule K-1 as applicable• Year-to-date profit and loss statement

Corporation

• Most recent federal tax return with all schedules• W-2 forms• Form 1120, U.S. Corporate Income Tax Return• Form 2106, Employee Business Expense files with the U.S.Corporate Income Tax Return if applicable• Year-to-date profit and loss statement, if applicable

S-Corporation

• Most recent federal tax return with all schedules• Form 1120-S, U.S. Income Tax Return For S-Corporations• Year-to-date profit and loss statement, if applicable

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Establishing The Highest Property Value

Your equity is the key determinant of whether The lender will sustain a lossin foreclosure, and influences the type of workout solution considered to beappropriate.

Broker Price Opinion (BPO)

An opinion of the market value of your property is prepared by an approvedreal estate broker or an appraiser to determine the condition of the property,general marketing conditions in the area and an opinion of "as is" and"repaired" value. The BPO asks the broker to supply information regarding:

General Marketing Conditions

Provides for a description of the general area and information about theneighborhood, property location and local employment

Marketability

Establishes the relative marketability of the property based on lot size,design, square feet of improvements and amenities.

Listings And Sales

The BPO form provides for the relative location of current listings andclosed sales.

Market Strategy

Establishes repair and deferred maintenance needs, determines the mostlikely buyer (owner-occupant, or investor) and recommends financingoptions

Competitive Closed Sales

A complete property description and sales data for all properties consideredto be comparable in condition, location and size that have recorded closedsales within the last four to six months.

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Probable Value

The broker's opinion of the final selling price.

Recorded Liens

A title search will be done to determine al liens of record.

Be sure that your are aware of the liens against your property, and thereason for their existence.

A Local Agent

The services of a local real estate agent are available at no charge with theunderstanding the agent will receive your listing if you make the decision to

sell. Your agent can be a very valuable asset, supplying important localknowledge that can add value to the BPO giving you added financialstrength when fashioning a workout solution. Obtain a copy of the currentFNMA approved BPO Form. Become familiar with the format and, with theyour agent, offer whatever assistance you can when the designated broker orappraiser arrives.

CHOOSING YOUR WORKOUT PLAN

The Basic Plans

Forbearance The formal Repayment Plan is based on the SpecialForbearance provision discussed under DELINQUENCY PREVENTIONAND MANAGEMENT section , and is Fannie Mae's preferred workoutoption because it is the least costly workout alternative.

When;

A Repayment Plan is considered when the delinquency is the result of:

• The death of a contributor to the monthly mortgage payment. Thisdoes not necessarily have to be a person on the mortgage• Illness, catastrophe or natural disaster for which the borrower is notinsured, or Any other similar or contributing factors.

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Keep in mind that Forbearance provisions may be customized to fit most anyneed or solution, however, Special Forbearance (under Fannie Maeguidelines) cannot not exceed 24 months.

What Is A Modification

This option involves changing the terms of a mortgage in order to removedelinquency and avoid foreclosure and is completed with the execution of a replacement mortgage. Fannie Mae will consider modification thatincludes, but is not limited to, reducing the interest rate, extending the termof the mortgage, negative amortization, replacing an adjustable rate with afixed rate and capitalizing the delinquent payments.

When Is Modification Appropriate

This option will be considered only when the potential for a Repayment Planhas been illuminated due to the probability of a permanent or long termreduction in income. Lien holders having a recorded interest in yourproperty must agree to subordinate their interest to the new loan. If there issufficient equity in the property Fannie Mae might consider including thepay-off of junior liens in the new loan. This would be a particularlyattractive workout solution if the resulting monthly mortgage obligation isless than the combined payments preceding the workout.

Eligibility

This option is normally available to borrowers experiencing permanent orsevere financial hardship. Your obligation-to-income ratio should not exceed36-38%. (Divide your total debt with a remaining term of more than sixmonths by your total income for an approximation). This plan is not likelyto be approved if the ratio is greater than 50%.

What Is An Assumption

This option involves transferring the ownership to a buyer willing to assumefull responsibility for the mortgage obligation. While some loans, includingmost adjustable rate mortgages (ARM) are assumable without prior approvalor buyer qualification, many others contain a "due-on-sale" clause allowingthe lender to accelerate the loan balance thereby requiring the full amount tobe paid in the event of an unauthorized transfer of ownership. Fannie Maepolicy will waive existing, enforceable "due-on-sale" clauses on

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conventional mortgages ("fixed rate"" and fully amortized) in order tocomplete a sale and avoid foreclosure.

When Is Assumption Appropriate While Most lenders will probably consider any assumption agreementleading to a desirable outcome, it is an excellent workout solution if themortgage balance exceeds the BPO estimate of probable value (final sellingprice), and particularly attractive if the property is in need of maintenance,or repair. In certain situations Fannie Mae will accept the cost of removingdeferred maintenance and repair needs for the right buyer.

Eligibility

The borrower is usually required to assign the property to the lender'sservicing agent, and the property must be free of liens. When removing liensFannie Mae may:

• Require the borrower to pay-off the lien, or negotiate subordination

Offer junior lien holders a nominal pay-off based on how close the unpaidmortgage balance is to the "as-is" value.

What Is Pre-foreclosure

This option provides for the sale of property in which the lender andborrower agree to accept the proceeds of the sale to satisfy a defaultedmortgage, where the proceeds may be less than the mortgage balance and toavoid foreclosure.

When is Pre-foreclosure Appropriate? This option is also used when themortgage balance exceeds the BPO estimate of probable value (final sellingprice).

Eligibility: The borrower must be experiencing financial hardship that is theresult of involuntary reduction in income and an unavoidable increase inexpenses to the extent that expenses exceed income. Causes would includesuch things as:

• Lay-off • Loss of job

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• Disability, or prolonged illness• Death of a mortgage contributor• Business set-back for a self employed borrower

In the event of an approved Pre-foreclosure Sale, the borrower will have toaccept the following conditions:

• Listing the property for sale will not delay initiating or continuinga foreclosure action, but the terms of the agreement will be honored pursuantto a sale before the foreclosure date• The borrower agrees to properly maintain the property• The borrower may be required to off-set Fannie Mae'slosses.(Negotiable)• The borrower may have a tax liability if any of the debt is forgiven.• The property is free of liens. When other liens exist Fannie Maepolicy agrees to workout pursuant to the Eligibility requirement for anASSUMPTION

Fannie Mae policy retains the right to negotiate and approve the transaction.

What Is Deed-In-Lieu Of Foreclosure

This option permits the borrower to voluntarily surrender the property bydeeding the property to the lender as satisfaction for the debt, thereby

avoiding foreclosure. This is usually considered to be the least desirableoutcome for the lender.

When Is Deed-In-Lieu Appropriate

• When the property has been on the market as a Pre-foreclosure Salefor three months or more.• There are legal obstructions to foreclosure action• Deed-in-lieu allows the lender to take possession of the propertysooner than would be possible through foreclosure.

Eligibility In accordance with the aforementioned hardship situations andpursuant to removing junior liens based on the procedures discussed earlier.

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Natural Disaster And Bankruptcy

Natural Disaster Fannie Mae policy makes every effort to avoid forecloseon properties affected by catastrophe or natural disaster. These propertiesalmost always protected by insurance or government policy.

Bankruptcy

Foreclosure can be delayed by filing a bankruptcy petition, but not avoided.If you are contemplating bankruptcy be sure that you are conferring witch anexperienced attorney or paralegal when determining foreclosure optionsand strategy.

Fannie Mae Regional Offices

The contact information shown in this directory is subject to change. Shouldthat occur contact your HUD office

Fannie Mae Washington Office3900 Wisconsin Avenue. NWWashington, DC 20016-2892(202) 752-7000

Midwestern Regional Office

One South Wacker Drive, Suite 1300Chicago, IL 60606-4667(312) 368-6052

Serving: Illinois, Indiana, Iowa, Michigan,Minnesota, Nebraska, North Dakota,South Dakota and Wisconsin

Northeastern Regional Office1900 Market Street, Suite 800

Philadelphia, PA 19103-0012(215) 575-1400

Serving: Connecticut, Delaware, Maine, Massachusetts,New Hampshire, New Jersey, New York, Pennsylvania,Puerto Rico, Rhode Island, Vermont and the Virgin Islands

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Southeastern Regional Office950 Eat Paces Ferry Road, Suite 1900Atlanta, GA 30326-1161(404) 365-6000

Serving: Alabama, District of Columbia, Florida, Georgia,Kentucky, Maryland, Mississippi, North Carolina, South Carolina,Tennessee, Virginia and West Virginia

Southwestern Regional OfficeTwo Galleria Tower13455 Noel Road, Suite 600Dallas, TX 75240-5003(972) 773-7456

Serving: Arizona, Arkansas, Colorado, Kansas, Louisiana,Missouri, New Mexico, Oklahoma, Texas and Utah

Western Regional Office135 North Los Robles Avenue, Suite 300Pasadena, CA 91101-1707(818) 0396-5100

Serving: Alaska, California, Guam, Hawaii,

Idaho, Montana, Nevada, Oregon, Washington and Wyoming

Making Foreclosure Profitable

If you have become the subject of a foreclosure action you will almostimmediately be contacted by real estate agents, mortgage brokers,foreclosure consultants and investors who work the foreclosure marketaggressively. If you view this as an opportunity rather than an insult youmay have the opportunity to create benefits you had not considered. ThisSpecial "Aggressive Strategies" Supplement offers a broad array of

financing techniques that can add value to your property and create adependable income stream even if you decide on a sale. While many of thesetechniques may not seem to offer hope immediately you will find as you talk to those who contact you that one or more of these techniques will be aperfect fit for your situation. With an open mind and some creativeapplication of these ideas you can make a good thing out of a bad situation.

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Important Terms Defined

Breach Letter; The Breach Letter is a formal letter sent to you in an attemptby the lender to avoid foreclosure action. The lender hopes this letter willencourage you to contact them to work out an agreement called a foreclosureworkout.

Foreclosure Workout; (AKA Loss Mitigation Agreement)

The Loss Mitigation Agreement or Foreclosure Workout; refers to theagreement that you work out with the lender to bring your loan current. If you do not work out a plan within approximately 45 days of the breach letteryour case is normally referred to an attorney to file foreclosure action.

Attorney Referral; The lender will refer your case (delinquent loan) to anattorney, usually with 90 to 120 days, who then files a petition in court toforeclose your mortgage and get the lender the right to sell the home to payoff the outstanding balance of your loan. The average time between attorneyreferral and the foreclosure sale varies by state.

Junior Lien holders; These are also known as secondary or other lienholders. It refers to people who have a recorded lien against the property

Your primary lender may contact junior lien holders to determine the status

of your loan with them. Once contacted these other lien holders may initiateseparate foreclosure action to protect their interest pursuant to the terms andconditions of the mortgage or deed of trust.

Special Relief Provisions

Fannie Mae provides Special Relief Provisions that attempt to span periodsof financial hardship that cannot be resolved by delinquency counseling orwith a simple workout plan. Most lenders follow Fannie Mae's lead and donot object to any reasonable workout plan provided it does not compromise

the lien position or come into conflict with any other policy or commitment.

Relief Provisions are normally offered when a delinquency is the result of atemporary condition, such as illness, unexpected expenses, or militaryservice, and there is a reasonable chance the borrower can bring themortgage current. During the term of a relief provision the property will besubject to scheduled inspections.

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Temporary Indulgence

A grace period, usually 30 to 60 days that may be granted to allow you tobring the mortgage current. If requested, you will have to demonstrateevidence that you can bring the loan current such as proof that you . . .

1. Have a contract for the sale of the property and a closing date.2. Have an insurance settlement or one pending.3. Have or are pending an approved funding from another source.4. Have an approved "Relief Provision" completion date.

Liquidating Plan

This option allows additional proceeds to be added to the regular monthlypayment after the hardship has passed and the borrower can resumeregularly scheduled payments.

Fannie Mae, HUD and VA policy allows most any creative solution agreedto under a Liquidating Plan that will remove the delinquency in the shortestamount of time.

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Workout Request Form

Financial Statement

Your lender requires financial information so that they may evaluate yoursituation and determine what, if any, options you have to resolve themortgage delinquency and avoid foreclosure. The information you providemay be used to collect the debt but is necessary to meet investor/insurerguidelines. Complete this form fully and accurately and return it with thefollowing documents for each borrower:

· If you are Employed provide Pay stub copies showing at least one month'sworth of income if possible

· If you are receiving Unemployment or other forms of income/assistance,provide copies of benefits letter or other proof of receipt of income

· If you receive rental income, provide copies of the rental agreement(s)

· If there is no income coming into the household right now but you canprovide proof of future income (i.e. hiring letter, proof of payment of sometype of claim or liquidation of an asset), provide this information. A

specific date for receipt of funds must be listed on the paperwork.

· Bank Statements are not required but can be used to prove a stable sourceof income by showing a deposit history (include at least 2 months worth)

· If you are Self Employed, Complete Section VI of this form or attach aYear- to- Date Profit and Loss Statement

· If your Property is listed for Sale, provide a copy of the listing agreementand real estate agent contact information and Estimate of Net Proceeds. Amarket analysis is helpful also.

· If your Property is Under Contract to Sell, provide a complete copy of theSales Contract and Estimated Net Proceeds Sheet (i.e. settlement statement,escrow instructions, estimated HUD-1)

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I. Borrower Information: Please use a pen and print clearly

Borrower Name: ______________________ Co-Borrower Name:__________________

Current mailingaddress:Street:_______________________________City:________________________________State:__________ Zip: ____________Daytime PhoneNo: ____________________Time to Call during business hours:________Evening Phone No: ____________________ Current mailingaddress:Street:_______________________________City:________________________________State:__________ Zip: ____________Daytime PhoneNo: ____________________Time to Call during business hours:________Evening Phone No: ____________________

Social Security #: ______ - ______ - _______ Social Security #: ______ -______ - _______

# of Dependents: _______ not including Co-Borrower

Are you currently employed? _Yes _ No Are you currently employed? _Yes_ No

Employers Name: Address:

_____________________________City:_________________________________State: _______________ Zip: ____________Telephone #__________________________ Employers Name: Address:_____________________________City:_________________________________State: _______________ Zip: ____________Telephone #__________________________

Your Position:

Length of employment:

II. Liquid Assets

Description Estimated Value Amount Available for Use (include dateavailable)

1. Cash, Checking and/or Savings

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2 All Retirement Assets (401K's, etc.) /Stock/Bonds/Mutual Funds

3 Total Liquid Assets:

III. Monthly Income Information (Complete Section VI if Self-Employed):

Description Borrower Co-Borrower Total

1 Monthly Gross Salary Wages

Please circle types of income received regular wages, overtime, commission,bonus other___________ Regular Wages, Overtime, Commission, Bonus,Other___________

2 Less Deductions from paycheck (taxes, medical, dental, and 401k) DO

NOT INCLUDE LOANS

Net Personal Income: (line 1 minus line 2) A

Borrower's Monthly Pay Schedule: (please circle one) weekly / biweekly / twice a month / monthly

Notice: Alimony, child support, or separate maintenance income need not berevealed if the Borrower/Co-Borrower does not choose to have it consideredfor repaying the mortgage.

IV. Monthly Expenses

Description (Monthly) Borrower Co-Borrower Total

1 Primary Home Mortgage Payment

2 Other Mortgages

3 Property Maintenance, HOA fees

4 Alimony/Child Support /Child Care/Tuition

5 Automobile Loan(s)

6 Transportation Expenses (gas, parking, auto maintenance, taxi, bus)

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7 Credit Cards, Installment Loans (minimum payments due)

8 Groceries/Dry Cleaning/Clothing/Spending Money/Lunches

9 Health/Life/Auto Insurance (DO NOT INCLUDE HERE IF DEDUCTED

FROM PAYCHECK)

10 Utilities (cable TV, internet, heat, electric, telephone, water, sewer, cellphone, pager)

11 Other: Explain (uninsured medical expenses, religious or charitablecontributions, vacation, clubs):

Total Expenses: (add lines 1 through 11) B

V. Calculations:

Borrower/Co-Borrower Income Total (Block A): Less Total MonthlyExpenses: (Block B): Balance remaining for arrearage payment (A minusB):

A $ - B $ equals = $ circle one: + / -

Self Employed Calculations. Please indicate if Borrower or Co-Borrowerowns the business, name and type of business, and how long it has beenoperating:__________________________________________________________________________________________

1 Year-to-Date Gross Receipts (Sales/Income/Commission) $

2 Less Product Supplies -$

3 Less Office Rent/Lease, Business Insurance, Legal/Professional Fees -$

4 Less Travel, Entertainment, Advertising, Office Supplies, Salaries toOthers, Auto Expenses, Other Business Expenses -$

Net Self-Employed Income (Line 1 minus Lines 2-4) Include this amount inBlock A of Section III (Monthly Income Information) $ circle one: + / -

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on my financial information, credit report, and payment history, and abilityto meet Investor Loss Mitigation Requirements.

I agree that discussions and negotiations of a possible foreclosure alternativedoes not constitute a waiver of or defense to commence or continue anyforeclosure or other collection action.

__________________________ __________________________________

Borrower Printed Name Borrower Signature Date

__________________________ __________________________________

Co-Borrower Printed Name Co-Borrower Signature Date

VIII. (OPTIONAL) LETTER OF AUTHORIZATION

Complete this section if you wish to allow a third party (anyone who did notsign the original note and mortgage) to discuss your account with yourmortgage company. This form is required in order to protect your privacyrights.

On this day I, _________________________________, authorize (InsertYour Mortgage Company Name), _______________________________theinvestor, and mortgage insurer (if applicable) to engage in discussions andnegotiations regarding my mortgage with__________________________________________________. He/she is mydesignated representative in the capacity of (circle one) listing agent / attorney / relative / third party / other________________________________.

__________________________ _________________________________

Borrower Printed Name Borrower Signature Date

__________________________ __________________________________

Co-Borrower Printed Name Co-Borrower Signature Date

__________________________ ___________________________________

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Additional Information:

Credit counseling.

Please note, if you have an FHA insured mortgage and have not received

consumer credit counseling, you should contact a HUD approved creditcounseling agency for assistance. To contact one of these agencies in yourarea dial 1-800-222-CCCS (2224). Please contact them today for additionalfinancial assistance. If you have a VA loan, please contact your localRegional VA Office for additional assistance.

Complete Package

Required for processing: Please note that your financial statement must becomplete; you must include the required documentation. If you return anincomplete package, your lender may not be able to process your request forassistance immediately.

Processing Time Frame:

All packages are usually reviewed in the order in which they are received.The average review period for a new package can be as long as 30 days.Please be aware that collection, and or foreclosure activity will usuallycontinue on your account until such a time that a loan workout has been

approved or sometimes completed.

If your loan is in Foreclosure and/or has a foreclosure sale set:

If there is a foreclosure sale scheduled on your property, the lender will notautomatically cancel or postpone the foreclosure sale just because theyreceive a package from you. A complete package must usually have to bereceived at least 5 to 10 business days before your foreclosure sale to beconsidered for a workout.

An Overview of the Foreclosure Problem and Possible Solution

Ask most realtors today where the best real estate investments can be foundand they will point you to the booming REO (real estate owned) marketplaceto purchase foreclosed properties. The flip side to this is that behind each of these real estate bargains is a story of a family that has lost their home.Moreover, this is not a small problem -- industry figures indicate that several

49



hundred thousand families lose their homes each year. Many times thatnumber end up filing bankruptcy as a last resort to avoid chronicdelinquency and compounding late payment charges.

The most tragic aspect of these foreclosure statistics is that there arealternatives to foreclosure! Known in the mortgage lending industry as "Pre-Foreclosure Workouts" or simply "workouts," these programs allowdefaulting homeowners to work cooperatively with their lenders to avoidforeclosure, eviction, and typically even bankruptcy.

Upon initial consideration, it may seem surprising that mortgage lenderswould bother to do a workout with a defaulting homeowner instead of goingahead with foreclosure. Their motivation is squarely based on the economicsof the situation, however. Each step in the process -- foreclosure, eviction,

and reselling the property after repossession -- requires time, resources andfurther expense for the lenders. In fact, lenders are losing hundreds of millions of dollars annually on repossessed / foreclosed properties. Asuccessful workout is therefore always grounded on a proposal that makessense to the lender and saves them money in the long run.

So why are so many people losing their homes or filing bankruptcy if thereare alternatives that most lenders are willing to consider? First, fewhomeowners are even aware that there is anything that can be done to avoidforeclosure.

Second, most lenders lack the resources to proactively contact borrowers toeducate them on their options and counsel them through the process. Third,even for those homeowners that get in contact with their lenders, the processof dealing with multiple lenders / lien-holders and decoding all the industry

jargon can be discouraging.

Therefore, in the end the key to completing a workout program is all aboutself-help -- homeowners must educate themselves on their options, initiatecontacts with their lenders to begin the process and be prepared to providedocumentation of their financial situations.

Overview -- The Anatomy of a Pre-Foreclosure Workout

1. Analyze your circumstances and make some decisions -- Collectfinancial information right away (pay stubs, bank statements, taxforms, a detailed list of assets and debts). Write down a summary of

50



the hardship that is preventing you from making ends meet. Decidewhether your goal is to keep your home or eliminate the debt.

2. Learn your options -- a variety of pre-foreclosure workout programsexist that lenders are open to considering. Learn the pros and cons of

each.

3. Contact your lender or get help from a foreclosure assistance service -- call your lender and ask for their "loss mitigation" department orcontract a foreclosure assistance company to work on your behalf.

4. Select a workout strategy, cooperate and be honest! Based on yourcircumstances, select the workout program that provides the bestsolution. Your lender or foreclosure assistance company will have aworkout packet you will need to complete. Along with this, you

should submit a detailed hardship letter explaining your situation.

How should a homeowner go about pursuing a pre-foreclosure

workout?

A "Pre-Foreclosure Workout" is an umbrella term for a variety of negotiatedsolutions a homeowner and lender can undertake to avoid the foreclosureprocess. Each workout will be structured differently depending on theparticulars of the situation at hand. The following four steps are a generaloverview on how to proceed.

1. Analyze your circumstances

Before undertaking a workout, the homeowner should try to make a clearassessment of their circumstances: How much do they owe on theirmortgage(s)? How much is their home worth? What are their total assets?And how much do they owe in other debts? Also, homeowner should begincollecting supporting documentation early (pay stubs, bank statements, tax

forms, a detailed list of assets and debts) because these materials will berequired as part of the workout proposal to your lender.

Finally, based on a realistic assessment of the above, the homeowner shouldconsider whether their priority will be to try a workout that allows them tokeep their home or one that seeks to sell / surrender it to cure the debtoutright. Emotional and personal reasons must be balanced against financial

51



reality and what is better in the long term. No one can provide a definitechecklist whether it is better for a homeowner to keep their home or not, butthe following factors should be weighed thoroughly to arrive at a finaldecision.

Reasons to Sell Reasons to Keep

• Negative Equity

• Long Term Financial Hardship

• Significant Drop in Income

• High Cost of Living in Area

• Severe Indebtedness

• Home Has Equity

• Temporary Hardship

• Personal Reasons

• Financial Recovery in Sight

It is usually possible to propose a workout to keep the home initially and

then to fall back on another strategy if that is declined.

2. Learn about your options

Broadly speaking, the appropriate workout should be selected based on thetype of financial hardship a homeowner has experienced and whether theycan afford to keep their home. The most common workouts that lenders aregenerally open to are described briefly below.

Workouts to Keep the Home Workouts to Cure the Debt

• Loan Modification

• Repayment Plan

• Short Sale

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• Forbearance

• "Deed In Lieu"

A loan modification workout program seeks to avoid foreclosure bynegotiating with the lender to modify the terms of the loan. This workoutmakes sense in a situation where a homeowner has experienced a decline inincome and can no longer afford the original loan but could afford thepayments with a little adjustment. Example loan modifications includelowering the interest rate, extending the loan period, or adding thedelinquent portion and fees back onto the principal of the loan to be repaidovertime.

A repayment plan is suited to a homeowner who has had a short-termfinancial hardship but is now getting back on their feet. Although ahomeowner is recovering, they may be several months (and thus severalthousand dollars) behind on their mortgage payments and they need time tobring this amount current. Once foreclosure has been initiated, however, alender often will not accept any further payments less than the entiredelinquent amount (this is so that they do not jeopardize their rights underthe current foreclosure proceedings). A repayment plan requests that thelender stop the foreclosure process and structure a repayment schedule in amore lenient fashion to allow the recovering homeowner time to catch up

their loan and save their home.

A forbearance is a request that the lender forbear (stop) from proceeding anyfurther with the foreclosure for a short period of time. This is usually donealong with another workout. For example, a lender would issue forbearance,while the homeowner tried to sell their home to cure the debt (see "shortsale" below).

A "short sale" is the best solution when the homeowner is "upside down" intheir home due to a decline in the local real-estate market (meaning they owemore on their home than it is worth). By doing a short sale, the homeowneris asking the lender to discount their mortgage principal to a level that can bedischarged by selling the home at market value. In other words, if thehomeowner owes $110,000 on their mortgage, but the home is only worth$100,000 due to current real estate conditions -- the homeowner wouldrequest that the lender accept the $100,000 (less closing costs) to payoff the

53



loan. To complete a short sale, the homeowner must find a realtor or servicethat will be able to market their home as a short sale (often with reducedcommissions) and is skilled at competently following up with the lender tohandle all the details. Short sales can be done with multiple mortgages / lienholders, but the negotiations involved become more complicated.

Under a "deed in lieu" workout a homeowner surrenders their property to thelender in exchange for forgiveness of their mortgage. These workouts arerarer than the others mentioned here because it still leaves the lender holdinga repossessed property that needs to be resold. Therefore, lenders are muchmore open to a short sale scenario as a more complete solution.

3. Contact your lender or get help from a foreclosure assistance service

Once you are more informed about your general options, you should contactyour lender to find out what kind of workout programs they have available.The first thing to realize when you deal with your lender is that theirfrontline contact point for delinquent borrowers is probably a collectionsgroup whose goal it is to persuade homeowners to bring their mortgagecurrent. Another department, typically referred to as the "loss mitigationgroup", works with homeowners who cannot get their loans current withoutsome form of a workout program.

As an alternative to attempting to coordinate a workout on their own,

homeowners could instead seek the assistance of a foreclosure assistanceservice. These companies work on the homeowner's behalf as a negotiator,advisor, and coordinator. Often, a workout can be complex (especially incases where a 2nd or 3rd mortgages are involved) and the averagehomeowner might not be able to handle all the details themselves.

4. Select a workout strategy, cooperate and be honest!

After you have contacted your lender yourself or are working with aforeclosure assistance service to do so, you can begin the workout strategy

that is best for your situation and that your lender is open to considering.

If you have done your homework up to this point, the rest is just a matter of providing all the requested documentation and cooperating with the process.It is of the utmost importance to be honest and thorough in the materials andinformation that you provide your lender or foreclosure AssistanceCompany. Hiding assets or misrepresenting details could ruin your chances

54



to negotiate any kind of solution with your lender -- and lenders do in factverify the information you provide!

Pre-foreclosure workouts, largely unheard of a few years ago, are becomingincreasingly accepted in the mortgage lending and real estate industries as animportant strategy to mitigate losses from defaulting borrowers.

However, as described in Part 1, most homeowners will find that pursuing apre-foreclosure workout is a self-help undertaking with no guarantees andlots of work required on their part. The following items are final pieces of general advice for a homeowner attempting a workout with their lender.

No Guarantees

Unfortunately, there are no guarantees when it comes to a pre-foreclosureworkout. Acceptance criteria vary from lender to lender, but a homeowner'spayment history, credit rating, and the details of their financial situation areall considered by the lender when granting a workout.

It should be noted that there is little likelihood that a lender will grant aworkout without evidence of a compelling hardship that has prevented thehomeowner from meeting their mortgage obligation. Even though aforeclosure is expensive in the end for lenders, they will not give ahomeowner with resources a workout or reward poor money management.

Example hardships that lenders have recognized as warranting a workoutinclude divorce, loss of income, unemployment, or medical expenses. Otherpossible hardships that lenders may recognize include forced relocation,severe indebtedness, or a large financial loss.

A Good Hardship Letter is Crucial

Beyond the financial figures, the key component of your workout proposal isa well-written hardship letter. This personal statement explains to yourlender why you have fallen behind on your mortgage and therefore need aworkout package. It personalizes your file and is your best opportunity toensure that the proper decision-maker at your lender hears your side of things. Your letter should put your financial adversity in perspective anddetail what you have done to try to recover. If you utilize a foreclosure

55



assistance company, one of their biggest advantages is their experience withthese letters. Make sure you ask them to review your letter before it is sent tothe lender!

A Workout Proposal that Makes Sense

Above all, lenders do not want a stop gap solution. Therefore the mostimportant factor besides a compelling hardship that has been well articulatedin a hardship letter is whether the workout makes sense as a good, long-termsolution.

A successful request for a loan modification, for example, must walk thefine line between showing that the homeowner cannot pay their mortgageunder the current loan terms but could pay a modified loan without further

delinquency. As such, a homeowner may find that when proposing aworkout that keeps the home (such as a repayment plan or loanmodification) they have a greater burden than they would if they pursued ashort sale.

For this reason, when pursuing a repayment plan or loan modification, it isprobably wise to be prepared to follow up that request with a short saleproposal if the first workout is refused.

Possible Tax Consequences

Some forms of pre-foreclosure workout--most notably a short sale--can beconsidered a taxable event.

There are many variables involved in determining the tax repercussions ashort sale may have -- including whether the property is recourse verses non-recourse debt, the difference in fair market value and what the home wassold for, as well as the amount of "debt relief" granted by the lenders.

If the above seems a bit confusing -- don't worry--even among industry

professionals, there is disagreement on some the particulars. To protectthemselves from any unpleasant surprises, a homeowner considering a shortsale should consult with their tax advisor to be sure they understand what taximplications they may face, if any."

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A Word of Caution

Due to the complexity of a pre-foreclosure workout program, mosthomeowners find that seeking professional assistance relieves many of theirheadaches and helps avoid the pitfalls of the uninitiated.

Checking the Internet or local yellow pages will reveal that there are severalcompanies that claim to offer foreclosure assistance services. However, thehonesty, qualifications, services performed and fees vary widely fromservice to service. Worse yet, there is an alarming number of less thanscrupulous "companies" looking to take advantage of the unwary.

Before using any foreclosure assistance company, a homeowner shouldknow who they are entrusting with such an important task, what exactly they

will do for them, and how much they will charge! It is absolutely a goodidea for a homeowner to check with their local Better Business Bureau orconsumer agency to verify the track record of any foreclosure assistancecompany that they are considering. Finally, homeowners should carefullyread everything they are asked to sign to be sure what they understand thecontract terms.

A homeowner should be extremely careful with any of the following"foreclosure solutions" because their legitimacy is highly questionable:

• Deeding their property to a third party

• Rental schemes where a homeowner sells their home to company thatpromises to lease it back to them.

• Quick sales where a company promises to quickly find a buyer butdoes not negotiate with the lenders to release the homeowner fromtheir obligation (in contrast to a legitimate short sale)

• Claims to exploit bankruptcy laws with frivolous filings to

indefinitely delay the foreclosure proceedings

A valid pre-foreclosure workout will always focus on negotiating a solutionwith all lenders / lien-holders. A homeowner is obligated to their lender bythe terms of their mortgage -- selling, surrendering, or deeding away theirhome does not remove that obligation unless it has been expressly negotiatedwith all lenders beforehand.

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Conclusion:

In all cases, it is best for a delinquent homeowner to evaluate some form of apre-foreclosure workout with their lender before filing bankruptcy orallowing a foreclosure to damage their credit for up to ten years. Asuccessful pre-foreclosure workout can be a key to a homeowner regainingcontrol of their financial future!

Hints for a Successful Workout

· Call your mortgage company and ask specifically for a loss mitigationrepresentative who can explain your options to you. They may be able totake your information over the phone rather than have you complete awritten explanation.

· Obtain a fax number to fax your financial information to them. Be sure toinclude your loan number on all pages and include a cover page that lists allattachments.

· If you mail your information, make sure that you use some type of mailservice that can be traced to help locate the package if it gets routed to thewrong department

· Call after 24 hours to confirm receipt of your information. It often takes

this long for large companies to sort through their mail and faxes and log thedocuments into their computer system.

· If you find yourself playing "telephone tag" with your mortgage company,return the call and provide a specific date and time that you will be available.Consider time zones and normal business hours when making your requestFor example, if your mortgage company is on the East Coast and you live onthe West Coast, consider calling them in the morning before you go to work instead of trying to arrange a special evening call.

· Be as up-front and honest with your mortgage company as possibleconcerning your employment and household expenses. Your mortgagecompany is measured by their investors not just by how much lossmitigation they offer but how well they do it.

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BONUS INFORMATION

Preface; In the course of a foreclosure workout you may very likely beconsidering a settlement whereby the lender agrees to a payoff which is lessthan the current balance on the loan. This often occurs when the marketvalue of the property falls below the outstanding balance of loansencumbering the property. It is particularly important that when enteringinto a workout agreement with the lender, or when yielding to foreclosure,that you clearly understand the Federal Tax implications of your decision.

This condensed Guide is not intended to be complete treatment of thecomplex nature of real estate taxation but, instead, a guide to the tax issueswhich normally arise in the course of a foreclosure transaction. Pleasecontact a tax professional.

A short sale is a transaction in which the lender accepts as a final payoff theseller's net proceeds from an open market sale based on fair market valuewhich is any amount less than the outstanding loan balance non-recourse, orpurchase money, loan. The difference between the loan balance and the netamount of the proceeds form sale is the discount.

If your loan is FHA insured and you occupy the home the lender may accepta short payoff pursuant to FHA pre-foreclosure rules. This also applies if your loan is underwritten with private mortgage insurance.

Individuals in foreclosure are often contacted by companies referring tothemselves as facilitators, or coordinators. The owners are told by therepresentatives of these companies that they will incur income taxes on theamount of the debt forgiven by the lender as a discount, called discharge of indebtedness by the IRS.

For a fee, usually a percentage of the loan amount, the coordinator promisesto relieve the owner of the adverse tax consequences of the discount by:

• Taking title to the property, and• Completing any short sale themselves, or• Allowing the lender to foreclose against the coordinator due tononpayment of installments

The discount resulting from a short sale does not trigger a tax liability for anowner occupant with a non-recourse loan. The tax liability, if any, is

59



computed by subtracting your cost basis from the selling price. The costbasis is computed by adding your original purchase price tothe transactional, or acquisition costs plus the cost of any improvements youmade to the property. The selling price, in the particular case, is not what theproperty actually sells for, or fair market value, but the amount of the unpaidloan balance. [Commissioner of Internal Revenue v. Tufts (1983) 461 US300].

Do not fall prey to this common fraud, since deeding to a third party will notprotect you from the tax or credit consequence of the foreclosure. Forvirtually all homeowners in foreclosure the basis is greater than the loanbalance resulting in a tax loss, and not a taxable gain. However, this does notapply to recourse, or equity loans made after the purchase. Nor does it applyto refinanced purchase money mortgage loans.

The tax liability resulting from a Trustee, or foreclosure sale, if any, iscomputed by subtracting your cost basis from the selling price. The costbasis is computed by adding your original purchase price tothe transactional, or acquisition costs plus the cost of any improvements youmade to the property. The selling price, in this particular case, is the bidaccepted by the Trustee.

At a Trustees sale, the price paid by the high bidder is considered the fairmarket value of the real estate. [BFP v. Resolution Trust Company (1941)

311 US 513]

Lenders occasionally accept a deed-in-lieu from the owner of theencumbered property, in exchange of the cancellation of a note when theoutstanding principal balance is greater tan the market value of the realestate

When the note evidences a non-recourse debt the owner will report the sametax consequences on a deed-in-lieu conveyance as reported on a voluntarysale or a foreclosure sale of the real estate, since the IRS considers a sale tohave taken place.

The owner reports any profit or loss on the deed-in-lieu conveyance of thereal estate to the lender in exchange for cancellation of the non-recoursenote. [Rogers v. CIR (9th Cir 1939) 103 F2d 790]

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Occasionally, a homeowner obtains an equity loan or refinances the existingloans encumbering the residence. Equity loans and refinancing are recourseloans since their net proceeds do not themselves finance the purchase of improvements of the residence occupied by the owner. While the rules forcalculating the federal tax liability resulting from a short sale, foreclosuresale and deed-in-lieu are the same, their may be a discharge of indebtednesssubject to the recourse note resulting in ordinary income on the discountedportion of the payoff. Usually the tax loss resulting on the sale will off-setthe tax liability created by the discharge of indebtedness. Be sure to consultwith a tax professional if this affects you.

When real estate is conveyed subject to an existing recourse note, the owneris still liable for any deficiency on the recourse loan should the lender elect a

judicial foreclosure? [Braun v. Crew (1920) 183 C 728]

In the absence of a formal assumption agreement between the buyer andlender the seller will remain liable should a deficiency judgment be soughtby the lender.

"Paper Profit & the Discounted Mortgage"

Preface is there an investment that yields a return of up to 50% each year inwhich your principal is secured, management free and that can be createdwith very little money? Yes there is, but you will not find it in the usual

places.

Exceptional investment opportunities arise form exceptional economicconditions. When Albert Einstein was asked if the Theory of Relativity washis most important discovery he thoughtfully replied, "No, compoundedinterest." Ever since man began trading in the "coin of the realm" the powerof compounded interest has been the driving force of all financial institutionsand those behind them. Your bank lends money to make money, and youshould too.

This publication is all about creating and purchasing mortgage notes securedby real property for profit and income. It is not about buying notes taken inexchange for retail services. It is not about buying notes taken in exchangefor rental income. It is not about buying notes secured by small businessassets, or anything else. And, it is not about spending years developing the

61



knowledge, experience and networking data base required to be a successfulnote broker.

There are many numbers of programs available on the internet, andelsewhere, promising success in the "note brokerage" business. There are132 reasons why you may wish to avoid this endeavor. Reason number 1:The successful note broker, particularly in the beginning, spends 95% of abusiness day engaged in an exhausting search for note sellers and buyers,then the remaining 5% packaging, promoting, selling or otherwiseattempting to make a profitable purchase and sale. Reason number two:Reason number 1 multiplied by 131. So, do the math, before you set out tobecome a note broker.

However, as an investor in discounted mortgages you can enjoy the

profitable upside without the backbreaking downside. Consider thepossibilities:

• You structure the note to meet your yield expectations.• You make all the profit rather than a commission, or percentage,sandwiched between seller and buyer.• You never have to look for buyers for your notes because as an ownerthey will come to you.• You make more money on fewer transactions with less time.• You may buy, sell and trade your notes profitably using the same

methods that apply to real property without the same ownership andmanagement risk.

The opportunity to make money in discounted mortgages is boundless, andcreative note solutions lead to returns that simply cannot be captured in anyother reasonable investment other than real property. We will focus on thesimple basics here in order to establish a safe and easily understood startingpoint for the inexperienced. Your particular requirements and continuinginterest will dictate the extent to which you become involved in the moreaggressive purchase solutions requiring more skillful application of basicfinancing principles. You will learn everything you need to know at theappropriate time and place.

Almost all mortgages that are sold, or assigned, are junior liens. A juniorlien is any mortgage recorded after the first. These mortgages representsecondary financing and are commonly referred to as seconds, thirds and so

62



on ordered by the earliest date each was recorded. While most secondaryfinancing is provided by institutional organizations there remains asignificant amount of private financing which is the object of the discountedmortgage market. These loans are made by the owner of the property inorder to facilitate the sale, or enhance return on investment usually for aterm of three to ten years. If the holder, or beneficiary, of a private notewants money before the maturity date of the note it may be sold , all, or inpart, to an investor specializing in the acquisition of mortgages at adiscounted rate. The discount required by the investor can range from aslittle as 10% to more than 50% depending on risk and the yield expectations.Although privately financed mortgages represent a very small part of thetotal financing market, private financing is active in every community everyday.

"Mortgage" is a generic term referring to a real estate financing obligation.In many states the mortgage obligation is represented by a note which is

evidence of the obligation and a trust deed which is the security instrumentfor the note. However, in some states the term mortgage assumes a moredefined meaning. In these states the "mortgage" is both the evidence andsecurity instrument for the indebtedness.

Some states use both the mortgage and deed of trust as the securityinstrument. Visit your local county recorders office. Find out how realestate obligations are recorded and secured. The recording clerk will assist

you in understanding these documents, and will answer you questions.

Purchase strategy is really a matter of style and expectation. If you aresatisfied with a better than market annual rate of return of 10 to 15 percentyou will not find negotiations difficult since the professional investor isgenerally seeking a minimum YIELD of 20%. However, swimming indeeper water requires a life line. This means you will need to prepare morethan one offer for the seller's consideration. Two is good, three is better andfour is best.

While the purchase of a note can be as creative as the human mind iscomplex, there are four basic offers that you will consider in the beginning.You may offer to purchase the entire note, or a partial note. The partial

offer may be for all, or a portion of a fully amortized payment schedule. Or,if the note is interest only with a balloon payment you can purchase theinterest only payments, part of the interest only income stream and part of

63



the balloon payment, or just the final balloon payment upon maturity. Eachoffer provides the seller with a different option, thereby enhancing youropportunity to a create purchase with an investment yield acceptable to you.Sounds like a calculation nightmare? Perhaps for the money changers of ancient Rome, but it is quite simple for you.

The payment schedule is nothing more than the agreed upon rate, or speed,at which the interest is paid and the principal is returned to the lender. Thereare many ways in which interest and the return of principal can bescheduled, but most are some variation on four basic methods.

• Amortized A computer generated schedule that provides for thepayment of principal and interest over the term of the loan in equal monthlyinstallments.• Simple Interest This schedule provides that interest and principlewill be in the form of one payment at the end of the loan period, or upon thematurity date.• Interest Only The interest only schedule provides for periodicinterest payments, most often monthly, with the principle due at the end of the loan period, or upon maturity. The principle payment is referred to as a"balloon".• Partial Amortization A schedule frequently used for commercialloans in which the loan amount is amortized for a longer period than theterm. A schedule that calls for the loan to be amortized for 30 years with the

balance due in 10 years schedules the loan as though it is amortized for 30years, but the final payment will be the remaining balance in the form of a"balloon" at the end of 10 years.

Every serious mortgage investor is armed at all times with a financialcalculator. It is a constant companion, and as much a part of the investor'sday-to-day needs as car keys and credit cards. It is the final arbiter of financial decisions. Consider the mortgage investor who, when asked by hiswife during a particularly stressful period in their marriage how he would

calculate their chances for success, pulled out his calculator and replied byasking, "Would you like that for 5 years, or 10"

The table below displays the calculator keys on the Hewlett Packardfinancial calculator. These keys, and the related functions, can be usedalmost exclusively to make most any mortgage purchase or sale decision.The calculator will compute for the unknown value when all other values are

64



known. When using other financial calculators the key pad display mayappear different, but the process will be just as easy. Note from the tablehow the total principal and interest changes with the schedule even thoughthe loan amount and interest rate are the same. It is very important torecognize from the beginning that the value of a mortgage is not determinedby the amount of money received during the holding period. Nor, is itparticularly determined by the loan amount, interest rate or the term of theloan. As you will find out very soon the value is determined entirely by thecost of the income stream, and the value measurement is referred to as theyield.

YIELD is the numerical measurement of the speedat which principal and interest is returned to the investor.

TERMTERM INMONTHSORYEARS

RATE/YIELDEXPRESSEDAS ANANNUAL ORMONTHLYRATE

PRESENTVALUETHELOANAMOUNTORAMOUNTPAID

PAYMENTMONTHLYPAYMENT

FUTUREVALUEFINALVALUEORPAYMENT

TOTALPRINCIPAL&INTERESTTOTALPRINCIPAL&INTERESTPAID

n i PV PMT FV

AMORTIZED

12 .67 1000 87.00 0 1044.00

SIMPLE INTEREST

1 8 1000 0 1000 1080.00

INTEREST ONLY

12 .67 1000 6.67 1000 1080.00

PARTIAL AMORTIZATION - 1 YEAR DUE IN 6 MONTHS

5 AMORTIZED PAYMENTS OF $87.00 AND 1 FINALPAYMENT (FV)OF $87.00 +THE REMAINING PRINCIPAL BALANCE OF$509.00

12 .67 1000 87.00 596 1031.00

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Before reading another word purchase a standard financial calculator. It canbe a Hewlett Packard, Texas Instrument, Sharp or any other suitable forbusiness applications. Become familiar with the basic amortization and themortgage applications. You will find the calculator easy to use andunderstand. While we will not employ the use of sign convention in ourexamples, be sure you recognize the sign [+][-] protocol required for yourmodel when making an entry. Soon you will be comfortable with thecommon and frequently used mortgage calculations.

Now that you are familiar with your financial calculator and the morecommon mortgage features we can look at the most basic of dismountedmortgage calculations. Consider a $15,000 second mortgage purchased at a15, 20 and 25 percent discount, and where the first payment has not yet beenmade. The PV values represent the investors purchase, and since the loan is

fully amortized the RATE [i]and the TERM [n] are shown as monthlycalculations. We created this table by first amortizing the mortgage then[RCL] [PV] entering the discounted value (BOLD) and re-computing theRATE [i]. Work through each of these calculations until you are comfortablewith the computer's key stroke protocol. Remember: You can compute theunknown or desired value, by simply entering the known values, the solvingfor the new value.



PRESENT

VALUETHELOANAMOUNTORAMOUNTPAID



TOTAL

PRINCIPAL&INTERESTTOTALPRINCIPAL&INTERESTPAID

n i PV PMT FV

$15,000 SECOND AMORTIZED FOR 5 YEARS

60 1.0 15000 334 0

DISCOUNTED @ 15%

60 1.62 12750 334 0

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60 1.86 12000 334 0

DISCOUNTED @ 25%

As you can see a discount of as little as 15% converts the income from a12% yield to 19.5%, or an increase of 62%. Since most private mortgageinvestors are seeking a minimum of 20% you are likely to find this purchaseeasy to complete.

As we begin to demonstrate the kinds of situations and considerations youwill be offered we will be making reference to due diligence. Due diligenceis the process of confirming all the details in order to confirm that the termsof the note are accurate, and that the transaction is within the bounds of risk you are willing to accept.

The Good

A good note is very easy to recognize. If it is made on good property, withgood equity, good borrower and the note has good seasoning. Anytime yousee a lot of goods in the description it is probably a good note. If it walkslike a duck and quacks like a duck, then it is probably a duck. We all knowthat. A good property as most know is any property that enjoys a desirable

location in the community without regard to size, or condition. Good equitymeans that all loans on the property have a combined loan amount (LTV) nogreater than 80% of the current market value of the property. A wellseasoned note is one with all scheduled payments current, each having beenmade on, or by, the due date required by the terms of the note and is at leastsix months, but preferably one year old. Assuming the $15,000 mortgageillustrated in the table above meets the requirement of a good note, we canexamine some possibilities beginning the second year. The Yield [i] isannualized.



PRESENTVALUETHELOANAMOUNTORAMOUNT



TOTALPRINCIPAL&INTERESTTOTALPRINCIPAL&

67



PAID INTERESTPAID

n i PV PMT FV


60 12.00 15000 334 0

DISCOUNTED @ 15% BEGINNING THE SECOND YEAR FORTHE REMAINING TERM OF 4 YEARS

48 11.67 12750 334 0

DISCOUNTED @ 20%

48 14.95 12000 334 0

DISCOUNTED @ 25%

48 18.54 11250 334 0

What if the seller of the note just needs some cash and does to want to losethe benefits of a good note over time. Consider buying the income streamfor some period of time with increasing YIELD over time. TERM [n] andYIELD [i] are annualized. This is referred to as a Partial.






TOTAL

PRINCIPAL&INTERESTTOTALPRINCIPAL&INTERESTPAID

n i PV PMT FV


5 12.00 15000 334 0

PURCHASING THE 1ST YEAR INCOME STREAM @ A 15%YIELD

1 15.00 3700 334 0 4008.00

PURCHASING THE 2ND & 3RD YEAR INCOME STREAM @

68



A 15% YIELD

2 17.00 6755 334 0 8256.00

PURCHASING THE 2ND, 3RD & 4TH YEAR INCOME

STREAM @ A 15% YIELD3 19.00 9111 334 0 12384.00

You receive your rights to a note under the terms of an Assignment. At theend of the Assignment period the remainder of the note reverts to the seller.Are you wondering yet what happens to your yield in the event of an earlypay-off. Or, more particularly, if the note is paid off while you are a co-beneficiary under the terms of a PARTIAL. The news is good. But we willget to that later.

The Bad

If a good note has a LTV no greater than 80% of the current market value of the property, what about the note secured by a property with 100% LTV.Joe came to us with a $50,000 note on a property he had sold 24 monthsearlier. Joe agreed to sell the property to Dick and Arlene for $250,000subject to a $200,000 first. The bank surely believed that Dick and Arlenewere adding $50,000 in cash to complete the transaction. However, after theclose of escrow Joe quietly recorded a note for the balance which called for

12% interest only payments of $500.00 per month and a 3 year balloon. Itlooked like this:







INTERESTPAID

n i PV PMT FV

12% INTEREST ONLY WITH A 3 YEAR BALLOON

3 12.00 50000 500 50000 $68000.00

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Our appraisal of the property indicated a market value of $260,000. Afterthe cost of sale this property had no equity. Joe had shopped this notearound the local investor community without receiving one offer. On thesurface this is a very bad note, but after turning over some rocks we foundopportunity. Dick and Arlene both had very good jobs, good credit and hadnever been late on a payment to Joe The property was located in a goodarea of town and the house was in very good condition resulting fromimprovements made by Dick and Arlene. This note started out looking likeDaffy Duck, but was now looking more Donald Duck. However, we werenot ready to show Joe the money quite yet. This loan was negotiated on ashort term and the big balloon was due in less than year. We also needed tounderstand Joe's motivation for money. Was it personal, or were Dick andArlene showing signs of going bad. Keep the arithmetic simple. If you donot have a lot more goods than bad you better look for another investment.

But, so far, we liked the math.

It did not take long to discover Joe's motivation was very good. Hisdaughter was engaged to be married and he needed $10,000 to send her off;a small price to pay for a daughter's love and devotion. Joe gave uspermission to speak with Dick and Arlene. There concern was the same asours. The balloooooon. All the goods were in the right place except equity.We were not going to invest in this note without security. Without equitythere is no security. Without security you have a very, very bad loan. Wefound out, however, that Dick and Arlene owned a very nice (another wordfor good) lake side lot given to them by Dick's family, and which they werewilling to offer as security if we could do something about the balloooooon.We now had a very good note; Still risky, but good.

We made the following offer to Dick and Arlene: We lowered the interestrate to 10% and removed the balloooooon by amortizing the loan for 7 yearsadding 6 years to the pay-off. They could easily afford the higher monthlypayments and were very grateful for the solution.







70



PAID INTERESTPAID

n i PV PMT FV

CURRENT NOTE

1 12.00 50000 500 50000

REPLACEMENT NOTE

7 10.00 50000 830 0

When Dick and Arlene accepted the new terms we made the followingoffers to Joe:







n i PV PMT FV

NOTE REPLACEMENT

7 10.00 50000 830 0

OFFER #1

2 25.00 10000 830 0

OFFER #2

3 30.00 19500 830 0 8256.00

OFFER #3

4 40.00 21300 830 0 12384.00

Offer # 1 gave Joe what he needed. For $10,000 we would receive the first25 payments. Offers #2 and #3 proposed to purchase the first 36, or 48payments at higher YIELDS. Our reasoning: The longer we acceptassignment of the note, the greater our YIELD expectation.

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The Beautiful

If you manage to capture a 50% YIELD when purchasing all, or a portion, of a note you have broken the bank. We believe any note purchased with aYIELD greater than 50% most likely exceeds any acceptable boundary forrisk. So how do we increase YIELD without breaking our rules. We Sell It.

Joe accepted Offer #1. This was re-cast into a very good note which wethought was marketable to a passive investor that buys notes through abroker, or intermediary. It was also made particularly attractive for apassive investor due to the relatively short term. This is how we elevated ourYIELD. TERM [n] is shown in months. RATE/YIELD [i] is shown as themonthly rate.







n i PV PMT FV

NOTE REPLACEMENT

84 .83 50000 830 0

OFFER #1

24 2.08 10000 830 0

INVESTOR PURCHASE

24 1.67 16850 830 0

OUR YIELD

1 68.5 10000 0 16850 6850.00

That's right!!. The monthly YIELD 68.5 x 12 , or 822% annualized. Weconverted a $10,000 investment into $6,850 in less than 30 days. Is this acommon occurrence. However, there is a hitch. To sell notes you mustdevelop a passive investor network which takes time. And, there is one

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other important consideration. In many, if not all, states, you are limited asto the number of notes you purchase and sell in any one calendar yearwithout being a licensed real estate broker. Some state also require that notebrokers have a special endorsement. So, know the law in your state.

You now have enough information needed to evaluate the quality andstructure of either a Full, or Partial note purchase. This is a good time tolook at a note. There is no shortage of note brokers in your communitywilling to sell you a note from their inventory. They are easy to find. Theyadvertise in the newspaper, phone book and on the Web. Contact a broker,or seller and have them submit investments for your consideration. Look only at notes secured by property near your home. Drive by the propertyand review the information provided by the seller. The investment packageshould contain a current estimate of property value, payment history, not to

be confused with the payment schedule, and a note purchase contract whichsets forth the terms of sale. If there is more information, that's fine. We willexplain how to complete your due diligence in a later section.

Now that you have looked at some notes for sale you are probably eager tomake your own deal. Negotiating in any business is largely a function of time and experience. There is no substitute for you, or anyone else. Thereare three very important factors, however, that you can manage directly inthe course of negotiating the purchase of a note. The seller's motivation, theborrower's performance and the seller's performance.

When purchasing Joe's note it was important for us to determine hismotivation in order to set the minimum amount required to purchase all, or aportion, of the note. The seller's motivation always leads to a minimumdollar requirement. You must find out what it is. Never make an offerwithout knowing why the seller needs money, and how much. If youdetermine the seller is just shopping the note; break off discussion. You arewasting time. If you are satisfied with the seller's stated motivation thenbe sure the note is current and that the motivation is not being supplied by

the potential for default. There is several ways you can do this. You canrequest the payment record used for tax purposes, a copy of the IRS tax formused to report the payment information or you can request an estoppel letter.

An estoppel letter is a written acknowledgement by the borrower that allpayments are current and in compliance with the terms of the note. And,finally, any accepted offer you make should be secured by a refundable

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acceptance fee paid into the purchase escrow by the seller. Then, uponpurchase, or mutual cancellation, the acceptance fee can be returned to theSeller. This will serve to discourage the seller from abandoning youragreement for a better offer.

Let's look at some of the creative ways that a $25,000 note @ 10% interestfor 5 years can be made, or purchased. Calculate the discount rate.




PAID



TOTALPRINCIPAL&INTERESTTOTALPRINCIPAL&INTEREST

PAID

n i PV PMT FV

FULLY AMORTIZED

60 .83 25000 531 0

30% DISCOUNT

60 2.22 25000 531 0

NEGATIVE AMORTIZATION ON REDUCED PAYMENT OF

$400. FV REGISTER COMPUTES THE BALANCE OWING ATTHE END OF THE TERMFOR A 40% YIELD

60 2.92 13100 400 -10200

PARTIAL W/SPLIT PAYMENT SCHEDULE- HALF THEPAYMENT OF $265 FOR 30 MONTHS. THEN ALL THEPAYMENT FOR THE REMAINING TERM

60 2.5 16000 398 0

5 YEAR INTEREST ONLY W/ALL PAYMENTS DEFERRED@40% YIELD

60 3.33 5300 0 37900

5 YEAR INTEREST ONLY

5 1.79 16250 208 25000

74



GETTING ALL THE MONEY

All of our previous examples assumed the loan was paid as agreed for thefull term. So, does your YIELD change with an early pay-off. Look at whatcould happen if you purchase a new 5 year note at a 30% discount.

TABLE A


RATE/YIELDEXPRESSEDAS AN

ANNUAL ORMONTHLYRATE

PRESENTVALUETHELOAN

AMOUNTORAMOUNTPAID


FUTUREVALUEFINAL

VALUEORPAYMENT


n i PV PMT FV

FULLY AMORTIZED

60 .83 25000 531 0

PAYOFF AFTER 12 MONTHS

12 .83 25000 531 20950 27322.00

PAYOFF AFTER 12 MONTHS W/30% DISCOUNT

12 4.32 17500 531 20950 27322.00


24 2.87 17500 531 16500


36 2.43 17500 0 11500

Is your heart racing? If this doesn't get you excited you’re doing business onanother planet. Notice the YIELD on a fully amortized note for full valuedoes not change with the pay-off. In reality there is a fractional increase, butinsignificant. Compare the TOTAL PRINCIPAL & INTEREST with thePRESENT VALUE for the full value and discounted note and you can

75



immediately see why there is such an extraordinary difference in YIELDwith an early pay-off. What is the strategy if you find yourself holding thisnote? Don't just sit there, get the borrower to refinance the first, and yoursecond, in the form of one note as soon as possible.

In the previous example you owned the note. What if, however, youpurchased a PARTIAL for the first 36 months with a nice 20% YIELD, andthe note is paid off after 12 months. Easy enough, you say. The ownersends you a check for $12,750 the remaining 24 payments of $531 andeverything is cool. But, Let us see if that is what really happens. Yourtransaction began like this:

TABLE #1







n i PV PMT FV

20% YIELD

12 1.67 14300 531 0

When the pay-off occurs after 12 months you are expecting a check for$12,750 and the final computation for the transaction should look like this:

TABLE #2

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TERMTERM INMONTHS

ORYEARS

RATE/YIELDEXPRESSEDAS AN

ANNUAL ORMONTHLYRATE

PRESENTVALUETHELOAN

AMOUNTORAMOUNTPAID

PAYMENTMONTHLY

PAYMENT

FUTUREVALUEFINAL

VALUEORPAYMENT

TOTALPRINCIPAL&INTERESTTOTAL

PRINCIPAL&INTERESTPAID

i PV PMT FV

EARLY PAY-OFF = 35.5% YIELD

12 2.96 14300 531 12750

But when the check arrives it's for $10,500 and the final computation lookslike this:

TABLE #3

TERMTERM INMONTHSOR

YEARS

RATE/YIELDEXPRESSEDAS ANANNUAL OR

MONTHLYRATE

PRESENTVALUETHELOANAMOUNT

ORAMOUNTPAID


FUTUREVALUEFINALVALUE

ORPAYMENT

TOTALPRINCIPAL&INTERESTTOTALPRINCIPAL

&INTERESTPAID

n i PV PMT FV

EARLY PAY-OFF = 24.00 % YIELD

12 1.67 14300 531 10500

"What!!?", you say. "I wasn't bending over." In order to understand the

difference between Table #2 and Table #3 and the manner in which a PartialPurchase-Early Payoff is settled we need to explain the purpose of theamortization schedule.

THE AMORTIZATION SCHEDULE Whenever a loan is made bothborrower and beneficiary are provided with a complete amortizationschedule which tabulates each component of the payment. The first and last

77



scheduled payments on the amortization schedule for the fully amortizedloan in TABLE A would look like this:

SCHEDULE A

PAYMENTNUMBER

DUEDATE

AMOUNTPAID TOINTEREST

PAID TOPRINCIPAL

REMAININGPRINCIPALBALANCE

1 00/01 531 208 333 24677

60 00/05 531 44 487 0

Typically, Schedule A is used to tabulate the amortized scheduled for the

borrower to the note. Schedule C is the commonly used schedule for PartialPurchase pay-off. The difference between each is that Schedule A is a fullyamortized schedule with no other purpose than to tabulate the principalrequired [FV] pursuant to any payment date on the schedule. Schedule C,while appearing the same, calculates the [FV] in order to maintain theinvestor's YIELD for any payment date on the schedule. Therefore TABLE#3 shows the correct [FV] cash settlement required to maintain the investor'sYIELD TABLE #1. If you want the big pay-off benefit shown in TABLEA, you must be the owner of the entire note. So, is this the best you can

expect when receiving an early pay-off from a Partial Purchase. Yes, unlessyou use Schedule B.

SCHEDULE B Schedule B is a more equitable and profitable settlementschedule, and is used by the sophisticated note buyers and institutionalinvestors. Schedule B is actually a combination of Schedules A and C, andis a way of distributing the benefits of early pay-off between the PartialPurchase investor and the Seller of the note. The theory is simple. Thesettlement is based on the present value [PV] of the Partial Purchase ratherthan the YIELD. The [PV] is calculated by using the payment and note

rate shown on Schedules A, and the term of the Partial Purchase shown onSchedule C.

TERMTERM INMONTHSOR

RATE/YIELDEXPRESSEDAS ANANNUAL OR

PRESENTVALUETHELOAN


FUTUREVALUEFINALVALUE

TOTALPRINCIPAL&INTEREST

78



YEARS MONTHLYRATE

AMOUNTORAMOUNTPAID

ORPAYMENT

TOTALPRINCIPAL&INTERESTPAID

n i PV PMT FV

PRESENT VALUE OF THE FULLY AMORTIZED NOTE INTABLE A PURCHASED WITH A 20% YIELD

36 .83 16450 531

This calculation simply shows the loan value for the given RATE [i], TERM[n] and PAYMENT [PMT]. As you can see, the present value of the Partial

Purchase, $16,450, is greater than the cost of $14,300 and accuratelyrepresents that portion of the $25,000 loan purchased by the investor. Keythese entries into your calculator. These calculations are not intuitive, so bepatient. It will come to you with practice and experience.

The table below tabulates the value of the Partial Purchase given an earlypay-off after 12 months. Without clearing your calculator from the previouscomputation replace the TERM [N] with 12 and solve for the FUTUREVALUE [FV].







n i PV PMT FV


12 .83 16450 531 11,500

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The total pay-off on the fully amortized note after 12 months is $20,950. Dothe calculation. The $11,500 shown in the [FV] register is the amount owedto the Partial Purchase. With this information we can now calculate the finalYIELD for this Partial Purchase. Without clearing your calculator replacePRESENT VALUE [PV] and solve for theRATE/YIELD [i]






TOTALPRINCIPAL&INTERESTTOTALPRINCIPAL&INTEREST

PAID

n i PV PMT FV


12 2.28 14300 531 11,500

You have just completed the Schedule B calculation resulting in a finalYIELD to the Partial Purchase investor of 2.28 x 12 = 27.3%. The early

pay-off produced a 37% increase in the investors return. The message, here,for any investor in notes should be very clear. Seek out notes having thepotential for an early pay-off. Or, where possible, attempt to encourage anearly pay by the borrower.

It's time to get serious if you intend to invest in notes. From the previousField Exercise take a closer look at notes offered for your consideration. Tryto identify those having the potential for early pay-off. Go back to yoursources for more offerings and begin, now, to develop even more sources fordiscounted mortgagees.

Now that you know how the professionals buy a note let's look at how theymake a note. You know from your experience that when making a loan thereare costs attached to acceptance of your application. In addition to thevarious administrative fees such as escrow, document preparation, recording,notary etc. you are required to pay a loan fee, or points. Each point orfraction thereof, represents 1% of the loan amount and is either paid in

80



advance of funding, or added to the loan amount. The loan fee is added toenhance the YIELD to the investor. Consider a note in the amount of $10,000 @ 12% fully amortized for 3 years, and the loan fee is 5 points =$500.

The table below tabulates the YIELD enhancement depending on whetherthe fee is paid in advance, or added to the loan amount. If the fee is paid inadvance the loan proceeds are reduced by the amount of the fee, but thepayment and pay-off is calculated on the full amount. If the fee is added tothe loan it becomes part of the beginning balance and amortized for theperiod of the loan. The TERM [N] and RATE/YIELD [I] are annualized.

LOANFACE

VALUE, OFTHE NOTE -THEBEGINNINGBALANCE

TERM

TERM INMONTHSORYEARS

RATE/YIELD

EXPRESSEDAS ANANNUAL ORMONTHLYRATE

PRESENTVALUE

THELOANAMOUNTORAMOUNTPAID


FUTURE

VALUEFINALVALUEORPAYMENT

n i PV PMT FV

LOAN FEE PAID IN ADVANCE - BORROWER RECEIVES THEFACE VALUE OF THE NOTE LESS THE FEE

10000 36 15.6 9500 333 0LOAN FEE ADDED TO THE LOAN AMOUNT - REMEMBERTHE PAYMENT IS COMPUTED ON THE FACE VALUE OF THENOTE

10500 36 15.4 10000 349 0

It is important to acknowledge that when a purchase money note is sold bythe original holder, or beneficiary, it represents lost equity that is secured bythe mortgage. The following tables serve to demonstrate the importance of mortgage enhancement. It matters little which side you are on. Mortgageenhancement is the process of increasing the YIELD and minimizing thediscount, thereby offering a more profitable solution no matter where yourposition is in the property, or the note transaction. Mortgage enhancementskills are an indispensable tool in the real estate investment industry. Youability to manage this tool will greatly improve your chances for success.

81



Consider the rather common owner financed transaction in which the owneraccepts a $10,000 payment on a $100,000 property and accepts the buyer'snote for the remaining balance of $90,000 @ 10% interest only for 5 years.The note is soon after sold for a 30% YIELD.

PURCHASEPRICE






n i PV PMT FV

100000 5 10.00 90000 750 90000

SOLD FOR A 30% YIELD

100000 5 30 43650 750 90000

Let's try to build some mortgage enhancement for added equity and YIELDpreservation the event this note is sold. Let's add 10 points, $9,000 in loanfee, to the note payable on maturity. All other terms remain the same.

PURCHASEPRICE






n i PV PMT FV

100000 5 12.75 90000 750 99000


100000 5 2.5 45700 750 99000

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Some help, but not much even after increasing the principal balance 10% atthe back end of the loan. This is a good time to return to our definition of YIELD. Do you remember what it is?

The value of a mortgage is not determined by the amount of money receivedduring the holding period. Nor, is it particularly determined by the loanamount, interest rate or the term of the loan. As you will find out very soonthe value is determined entirely by the cost of the income stream, and thevalue measurement is referred to as the yield.

YIELD is the numerical measurement of the speed at which the principaland interest is returned to the investor.

Let' speed things up and see what happens to our Yield.

PURCHASEPRICE






n i PV PMT FV

100000 3 13.3 90000 1000 90000


100000 3 30 60500 1000 90000

100000 2 30 67600 1000 90000

100000 1 30 77200 1000 90000

All we have done is increase the PAYMENT and decrease the TERM whichserves to rapidly accelerate the speed at which the principal and interest isdelivered to the investor. The PRESENT VALUE of the income stream at a30% YIELD is increased from $43,650 to as much as $77,200, or 77%. If you need to sell this loan you have set up the potential for a high YIELDlow discount note.

You are probably wondering if this loan can realistically be written for termas short as one year. This depends entirely on the motivation and financial

83



strength of the Buyer. The basic rule: The weaker the Buyer, the shorter theterm. This is an aggressive loan, therefore you cannot be fearful, and youmust be prepared for the possibility for default.

If you cannot negotiate a shorter term, work on the payment. Institutionalinvestors have long known that borrowers are much more sensitive to theTERM if they can afford, or budget the PAYMENT. The lesson here iswhen accepting, or making, a loan, always think enhancement.

This guide contains more than 80 "no down" and "low down" institutionaland private financing techniques for the purchase and sale of real property.Each of these techniques requires the creation of a mortgage. If you aregoing to work in this aggressive environment it is important that you learnhow to construct marketable paper. Whether you are taking or making the

note, always assume the mortgage will be sold. This will result in a muchhigher YIELD for you as the note holder, and if you can add value as themaker you may be providing the needed profit incentive for the propertyowner to accept an offer using a note. Review these techniques. Practiceusing the techniques you feel comfortable with by building a mortgage intothe purchase strategy. If possible, use properties that you can find in yourlocal market.

Due diligence requirements vary by state. Even though a note is personalproperty treat it as though you are purchasing real property, and observe the

following rules:

• Use an escrow company experienced in the sale and assignmentprocedures for a note.• Identify an attorney skilled in foreclosure procedures. Do not waituntil you need one. And, do not attempt to undertake foreclosureproceedings on your on. This action is very tricky in most states, tends tofavor the property owner and can result in long delays.• Obtain a copy of the recorded mortgage documents.• Many states provide the borrower with the right of redemption in theevent of default. Be sure you understand the law.• Obtain a current income & expense statement if the loan is secured byincome property. Be absolutely certain the net operating income (NOI) willsupport all loans on the property. If you do not understand how to read itfind someone who does, or go to the Real Estate Investment Forum @www.highnoi.com.

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• Never purchase without interviewing the borrower.• Obtain a copy of the borrower's credit report. If possible, get a currentcopy. This requires the borrower's authorization. Tip: If the seller of thenote obtained the original report the borrower's authorization may still becurrent• Ask for an audited payment record.• If an audited payment record is not available ask for a copy of theSeller's tax record for the previous year, and obtain an estoppel letter fromthe borrower.• Get an appraisal for the fair market value of the property. This can beobtained from any source you believe to be reliable.

Locate an escrow company. Discuss your plans with an escrow agent andobtain a check list of the items needed by escrow to effect proper assignment

of the note in your state. The escrow company should also be able toprovide you with a copy of the standard form mortgage and assignmentdocuments for your file.

Hypothecation is the process of offering something as security withoutlosing possession, or surrendering title. A mortgage, or trust deed, is the bestexample of hypothecation. The property is offered, or pledged, as thesecurity for the loan, however the owner can continue to use the propertyand remains in title.

The income stream from a mortgage may be pledged, or hypothecated, forthe purpose of securing a loan. The mortgage, or trust deed, is the security,however the borrower continues too receive the income stream from the noteand enjoy all the benefits of ownership.

As we know the loan value of any property, personal or real, is based on thestrength of security the pledge offers. The better the security, the higher theloan value (LTV) is likely to be. Many banks accept properly secured notesas the pledge of security. The value established for the security is based onthe safe YIELD expectation of the institution which is often much less thanthe private investor.

85








n i PV PMT FV

5 10 25000 531

VALUE TO A PRIVATE INVESTOR WITH A 25% YIELD

5 25 18100 531

VALUE TO A INSTITUTIONAL INVESTOR WITH A 13 %YIELD

5 13 23345 531

Institutional lenders loan on notes using much the same underwritingprocedure as for real property. The loan-to-value (LTV) generally will notexceed 80%, and these notes usually must be fully amortized. Based on theindicated value of $23,300 and LTV of 80%, a lender could approve up to$18,650. Most lenders, however, will not lend more than the purchase price.Given these loan terms the investor could conceivably borrow back theamount paid at an institutional rate considerably less than the 25% YIELD,keep the spread and reinvest the loan proceeds.

You will find many ideas for structuring a syndicated note purchase underPurchase & Sale Strategies. Keep in mind that you can buy and sell notesthe same way you can buy and sell real property.

The Real Estate Agent

86



Begin to build you agent network. Real estate agents continue to be themost intimate business connection within the real estate community. Tryto identify the most active and creative agents and develop a personalrelationship.

The Real Estate Office

The best way to meet agents quickly and efficiently is during the officemeeting. The meetings are usually conducted each weekly. Officemanagers are always seeking a topic of interest to be presented as a specialfeature of the meeting itinerary. Contact the office manager with apresentation proposal which includes a brief commentary on discounted note

construction and that features the service you can offer towards meeting theagent's needs for private financing solutions.

The Real Estate Board

Most local publish a local newsletter for their members. These publicationsgenerally accept ads for industry related products and services. Many Boardsalso schedule meeting rooms at the Board office for the presentation of promotional services. If your state has a continuing education requirementconsider preparing a short course that offers credit. Offer the course at little,

or no cost. This may be an excellent opportunity to present your services inthe presence of a large audience.

Advertising

Since you have already replied to at least one newspaper ad you are familiarwith the procedure and relative effectiveness. Experiment with different adsuntil you are receiving the kind of call you want. Try road side signs andspecialty publications. And, if you live in, or near, an adult communitypromote your business by mail or in the association magazine. Many of the

residents are holding notes as income producing assets.

Mail List

Develop an on-going marketing program that includes routine mail. This isthe most efficient means of connecting with your market. Locate a title orescrow company that offers promotional services for the real estate

87



industry. Often these companies have developed extraordinary printing andmailing services for their clients at below market pricing. Construct amarketing piece in the form of a post card and budget at least four mailings ayear. Your mail list should include agents, real estate companies, andcenters of influence such as attorneys, accounts and financial advisors.

The Local Investment Club

If you have a local real estate investment club attend the meetings. Some of your most profitable notes will be purchased through club members.

These purchase and sale strategies will add extraordinary fire power to yourbusiness arsenal. Review these techniques routinely so that you you arecomfortable with each, and to stimulate recall.

Your outside risk when buying discounted mortgages is that the borrowerwon't make the payments and you may have to foreclose to protect yourinvestment. Risk management is preparation for the expected. Just like thetrapeze artists at the circus, put the safety net under your act for theexpected fall. Circus performers know they will fall, but live to fly anotherday. So, this very important advice is given again.

Identify an attorney skilled in foreclosure procedures. Do not wait until youneed one. And, do not attempt to undertake foreclosure proceedings on youron. This action is very tricky in most states, tends to favor the propertyowner and can result in long delays.

However, be thoroughly familiar with the process, and be willing to startproceedings at a defined point in time. In some states the foreclosureprocess can take years. Do not risk a loss because you were not ready for theexpected. Be prepared, it's so simple.

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BONUS INFO 2

INVESTMENT STRATEGIES USING THE TAX CODE

Preface; Buyers, owners and sellers of income producing properties and

investment real estate need to understand and apply tax rules to their realestate transactions to maximize the financial rewards. This condensed Guideis not intended to be complete treatment of the complex nature of real estatetaxation but, instead, a guide to the tax considerations which normally arisein the course of an investment decision, and to advance the readersawareness of the tax rules that apply to the transaction under consideration.Always seek the guidance of a tax professional for the purpose of determining the proper application of the rules to your particular situation.

Purchase & Improvement Loans Two types of interest deductions exist onloans secured by the principal residence and vacation home :

• interest on purchase or improvement loan to $1,000,000; and• interest on all other loans to $100,000.

The rule applies to that portion of the loan that does not exceed the fairmarket value of the property. The second home may be any residenceselected by the owner, including mobile homes, recreational vehicles andeven boats

Interest on money loans and carry back credit sales, originated to purchaseor substantially improve the owner's first or second home, is fully deductibleon combined loan balances up to $1,000,000, and limited to $500,00 formarried persons filing separately. This division of entitlement remains formost interest deduction rules.

An improvement (repairs do not qualify) is substantial if it increases theowner's basis in the residence by:

• adding to the market value• extending the useful life; or• functional change to residential use

Home Equity Loans Interest on a loan secured by the first or second whichdoes not qualify for the purchase and improvement loan deduction would beloan obtained for any other purpose, commonly referred to as a home equity

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loan, d is limited to $100,000 . This deduction is further reduced by theamount by which a purchase and improvement loan exceed the $1,000,000cap.

Taking The Deductions Interest deductions on home loans are only allowedon interest which has accrued and been paid, referred to a qualified interest.

Interest on loans related to real estate owned and used in the course of trade,or business is given the most favorable tax treatment. Confer with your taxprofessional for details.

Interest Interest on a loan made to purchase investment property isdeducted from the net operating income. Interest paid to acquire, or improvea residence is deducted from the owner's adjusted gross income (AGI)

Points Points paid on the origination of a loan are prepaid interest andgenerally written over the life of the loan. An exception is made for pointspaid on a purchase or improvement loan on the owner's principal residence,and may be deducted in the year of the loan provided:

• the loan is not made for a second residence, or vacation home.• the loan is secured by the principal residence• the points are called "points", "loan origination fees", "loan discount",or "discount points" and are computed as a percentage of the loan amount.

• the payment of points is an established business practice

This exception does not apply to a second residence, or vacation home.Qualifying point may be paid by the buyer, or seller, but not the lender.

Refinance Points paid to refinance a purchase loan are not deductible. Anexception is made for temporary purchase financing such as a short-termballoon note evidenced as all, or part, of the purchase financing.

Profit taken by an individual on the sale of a principal residence is eligible

for the $250,000 profit reporting exclusion if the individual owned andoccupied the residence for a least two to the five years preceding the sale.

Married Exclusion Profit taken by a married couple on the sale of aprincipal residence is eligible for the $500,000 profit reporting exclusion if the couple files jointly and owned and occupied the residence for a least twoto the five years preceding the sale. Each may also take the $250,000

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exclusion on properties owned separately subject to the ownership andoccupancy requirements.

Additional Exceptions The exclusion may also be taken when:

• there is a change in place of employment;• a change in health• unforeseen circumstances defined in regulation [IRC 121(c)(2)(A)]• the payment of points is an established business practice

The exclusion may not be taken on a sale reported within two years of thetaxpayer's use of the exclusion.

When estimating the annual income tax liability, total income and the profitsand losses from all sources are first classified as belonging to one of thesecategories:

• professional or owner-operated business opportunities, called trade orbusiness income• rental and non-owner operated business opportunities called passiveincome• investment, or portfolio income

These categories are mutually exclusive and observe different accounting

rules

Trade, Or Business Income

• earnings from the owners occupation of real estate[IRC 469(c)(6)(A)]• income and losses from the owner's trade or business opportunity andthe real estate owned and used in the trade of business if the owner is amaterial participant in management [IRC 469(c)(1)]• income and losses from owner-operated hotel, motel or inn operationswith an average occupancy of 30 days , or less, and the owner is a material

participant in the management of the business operations.

Rental Income

• rents, expenses, interest and depreciation form annual operations, andprofit and losses from sales, of residential and nonresidential rental realestate which have an average occupancy of more than 30 days

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• income or losses from business opportunities not managed by theproperty owner

Investment or Portfolio Income

• interest earned on savings accounts and secured or unsecured notes• annuities, dividends and royalties from personal propertyinvestments(bonds and securities)• income, profits, and losses from ownership of ground leases, andtriple net leases of real estate held for income [IRC 469(f)(1)(A)] it isimportant that you determine the proper tax category before building yourbusiness plan and investment strategy.

Only accrued mortgage interest may be deducted, or expenses. The only

exception is points paid on purchase and improvement loans secured by apersonal residence.

What Are Points? Points are prepaid interest paid to the lender at the timeof loan origination evidenced by payment, or a discounted loan amount forthe purpose of enhancing the lender's yield, or return on investment. Theseadded fees collected by the lender at the time or origination must beamortized over the life of the loan except for owner occupied purchase andhome improvement.

Investment Deduction Categories All properties are classified into threecategories. Each property is a type which requires all of the property'sincome, profits or losses to be reported in one of three ways:

• trade or business income from real estate held, or used, in thetaxpayer's business• rental income received from owner operated passive activities• portfolio income received from property held for profit

Rental Property Deductions Interest paid on loans for the purpose of

purchase, improvement or to carry the cost of rental property, to theexclusion of business property, and to refinance balances is deductible fromthe property's income.

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Operating losses:

• may qualify to reduce the property owner's adjusted gross income(AGI)• may qualify to be deducted from AGI under the $25,000 rentaloperating loss deduction, reducing both standard and minimum taxableincome [IRC 1.163-8T(a)(4)]

Unused deductions, or suspended losses, may be carried forward as anoffset to future rental income from that property or the profit of any otherproperty at the time of sale.

Investment Property (Portfolio) Deductions Interest paid on loans topurchase, improve or to carry the cost of portfolio properties is deductible

against income or profits from all sources within the category. Portfolioincome includes earnings from savings, notes, bonds, securities and carryback notes. Unused losses may be carried forward to future years.

Trade & Business Deductions Interest paid on loans to purchase, improveor to carry the cost of the properties owner's trade or business is an expenseagainst the NOI

Depreciation is defined as a loss of property value caused by wear orobsolescence. Since the IRS allows real property, which is generally

considered to be an appreciating asset, to be depreciated [IRC 167(a)] , thedepreciation schedule becomes a valuable business planning tool.

Basis The basis in real property is the cost of acquisition, or the purchaseprice. The basis of the property must be known before any allowance fordepreciation can be taken.

A property basis includes:

• All loan proceeds, new and assumed, used for the purchase or

improvement of the property• cash added• the value of any property added, or traded, toward the purchase orimprovement

Land vs. Improvement Since the IRS does not recognize land as adepreciable asset, the depreciable portion is limited to the physical

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improvements which may be depreciated based on the IRS schedule for theapplicable property which is currently:

• 27.5 years (40 AMT - check with your tax professional) for residentialproperty• 39 years (40 AMT) for nonresidential property

Basis is established at the time the property is placed in service, usually atthe close of escrow or transfer of leasehold.

Operating losses are generally allocated for tax purposes as:

• an adjustment to the AGI without limitation• a deduction up to $25,000 pursuant to the passive loss rule

The adjustment, or deduction, depends on the nature of the owners business,material participation in the management of the property and actual timespent. These rules are a bit complicated, therefore it is very important thatyou confer with your tax professional to determine the manner in which youroperating losses, if any, should be reported.

Reportable losses from the operation of each rental property are applied firstto other rental property , and then as a deduction, or adjustment, to the AGIsubject to qualification.

The $25,000 Loss Deduction Qualifying owners may take a deduction of up to $25,000 against the AGI.

To qualify:

• be an active owner-operator participant with at not less than 10%ownership interest.• have an AGI of less than $150,000 [IRC 469(i)]• the loss must occur in the rental real estate category

Active Participation The investor must be an owner-operator exercising anactive participation in the management of the property. The owner-operatormay delegate duties and responsibilities to third parties such as propertymanagers and leasing agents, but must remain as the final arbiter of themanagement function.

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To qualify:

• be an active owner-operator participant with at not less than 10%ownership interest.• have an AGI of less than $150,000 [IRC 469(i)]• the loss must occur in the rental real estate category

AGI Limitations The AGI deduction is reduced by 50% for each dollarover $100,000 of AGI. Unused losses may qualify to be carried forward, orsuspended in accordance with the rules.

Depreciation is defined as a loss of property value caused by wear orobsolescence. Since the IRS allows real property, which is generallyconsidered to be an appreciating asset, to be depreciated [IRC 167(a)], the

depreciation schedule becomes a valuable business planning tool since thedepreciation allowance is, in fact, a non cash expense that reduces the netoperating income of the property, or the AGI which in either case reducesthe overall tax liability.

Basis The basis in real property is the cost of acquisition, or the purchaseprice. The basis of the property must be known before any allowance fordepreciation can be taken.

A property basis includes:

• All loan proceeds, new and assumed, used for the purchase orimprovement of the property• cash added• the value of any property added, or traded, toward the purchase orimprovement

Land vs. Improvement Since the IRS does not recognize land as adepreciable asset, the depreciable portion is limited to the physicalimprovements which may be depreciated based on the IRS schedule for the

applicable property which is currently:

• 27.5 years (40 AMT - check with your tax professional) for residentialproperty• 39 years (40 AMT) for nonresidential property

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Basis is established at the time the property is placed in service, usually atthe close of escrow or transfer of leasehold.

Depreciation, however, is not a free lunch. All depreciation, straight lineand accelerated, is recovered at the time of sale. For each year of ownershipin which the owner takes a depreciation allowance it is also applied to thecost of the property, or recaptured, as a reduction in basis thereby increasingthe profit at the time of sale. Any profit recognized is then taxed at thecurrent capital gain rate.

The important element to understand about the recapture of depreciation isthat excess depreciation taken in excess of the straight-line schedule, istreated separately in the year of sale, and is not subject to the capital gainlimitation.

Since tax surprises can occur as the result of depreciation recapture at thetime of sale it is imperative the investor plans the use of depreciationschedules in order to maximize the desired tax benefit, both during theholding period and when the property is sold, or exchanged.

Low income earners may take a qualified five year gain as of January 1,2001 and high income earners beginning 2006. These rules are somewhat

complicated, but very meaningful for the investor engaging in a purchaseand sale strategy to be conducted within a known time frame. Sine incomedetermines the tax rate please confer with your tax professional to determinehow you qualify

High Income Profit taken on the sale of properties acquired after the yearJanuary 1, 2001, and held for more than five years are eligible for thequalified five-year gain treatment of 18%.

Low Income Property held for five years and sold on, or after, January 1,

2001, is eligible for an 8% and 18% tax rate depending on the amount of qualifying income.

The differences are:

• high-income wage earners become eligible for the qualified five-yeargain after January 1, 2006

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• low-income wage earners become eligible for the qualified five-yeargain after January 1, 2001

Tax Avoidance Profits from real property are reported in the year of thesale unless:

• excluded in accordance with Internal Revenue Code 121• exempt pursuant to an exchange of the proceeds in accordance withInternal Revenue Code 1031• deferred, such as a note carried back to secure proceeds pursuant to aninstallment sale in accordance with Internal Revenue Code 453

Electing Out A Seller who elects out of an Installment Sale by reporting allthe profit in the year of the sale may use the gain to:

• offset a trade or business loss• offset a rental operating income from a rental property• offset AGI• offset capital losses of rental or passive business investment• offset capital losses in the investment property category

Installment Sale Reporting The profit reported and taxed in the year of sale

and contract payments, or any preemptive payments includinghypothecation, in future years is based on the contract ratio expressed as thenet profit over the net equity where:

• net profit is the contract balance after down payment and closing costs• net equity is the contract price less costs minus the basis

The balance of the cash received in the first year, and all future payments isdeemed to be a return of capital.

The interest income portion included in each payment to a carry back mortgage is reported as investment/portfolio category income. Unless theinterest income is offset by operating or sales losses, the earning will betaxed up to the maximum rates for ordinary income.

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A common carry back strategy by is to lower the note rate and increase theprincipal balance in order to capture increased profit which is taxed at alower rate, thereby reducing the overall tax liability. This is often suitablefor the Buyer of the property since the mortgage is often structured in a wayto reduce the monthly mortgage obligation even though the purchase price ismay be higher. The Internal Revenue Service regulates this practice byimputed interest reporting rules.

The AFR Imputed interest reporting requires an Applicable Federal Rate(AFR) of interest be set for every debt (extension of credit) carried bask by aseller. Any carry back note which states an interest rate lower than the AFRtriggers the reporting of a portion of the note's principal balance as interest.This reallocation of principal to interest is called imputing [IRC 1274(b)].

Applicable AFR AFR's are set monthly by the IRS, based on the rates of return paid on Treasury bills and other federal notes and control theminimum reportable carry back rate in accordance with:

• the date of the purchase agreement• the due date• the payment schedule

The application of AFR's are complicated and require careful tax planning if the Seller intends to construct tax favorable treatment through the receipt of

principal and/or interest payments. Be sure to confer with your taxprofessional before engaging in any form of Seller carry back financing.

Perception Tax and price consideration often motivate Sellers to use lease-options to generate a sale. The advantages often thought to be associatedwith lease-option transactions are:

• a higher price• option money, tax-deferred profit or income• an interest free transaction• rental income• tax benefits from depreciation coupled with operating losses

Conversion To A Sales Contract Failure to document a lease-optionproperly may, in fact, be determined to be a sales contract and the Seller willfind that the option will be recalculated as an installment sale by the IRSresulting in:

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• rental income recomputed as interest at the applicable federal rate• a reduction of the sale price• option proceeds converted to interest income, or• as payments applied to the purchase price distributed in accordancewith the contract ratio• adjustment to operating losses and depreciation allowance

The IRS will audit a number of factors when determining whether a lease=option is really a sale, such as:

• has the buyer established in the property• risk allocation• payment of property taxes• the relationship of rent to market value• the relationship of the price paid to the market value at the time of exercise

Remember: If the lease-option agreement appears in any way as though theSeller and Lessee have created a purchase agreement, it is probably a sale.

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BONUS INFO #3

PROVEN TECHNIQUES FOR PURCHASING REAL

ESTATE WITHOUT CASH

WASH AND WEAR

The "wash and wear" method forms the template for most all assumptions techniques.Think of it as the "expando" theory of financing and try to make it fit where ever you can.The most common variation on this theme is an assumption in which the buyer takes theproperty and any existing notes "subject to" and executes a subordinate note for theseller's equity. A very straight forward way of acquiring title without cash. A simple give'n take. The seller gives the property to the buyer and takes a note for the equity.

THE WRAP

An interesting way to acquire real estate without cash is to execute a note which assumesall existing debt as well as the seller's equity. This is commonly referred to as a wrap-around mortgage and in some states is accompanied by an all inclusive deed of trust. Thisprocedure uses a process of wrapping the existing mortgage and security instruments in anew mortgage usually with differing terms and conditions that favor the seller and wherethe payments by the buyer are made to the seller. The seller then makes all payments tothe underlying or pre-existing debt. This particular method generally requires a seller thatis in possession of a very low note rate. The attraction for the seller is the arbitrage, orinterest rate spread, created by the difference between the existing note rate and the rateapplied to mortgage which "wraps" that note. Find out if the wrap will work in you area.You are advised to find an attorney to write the contract and all instruments to berecorded. Not all title companies recognize this method of taking title if the primarylender has included a due on sale clause. This caveat applies to any assumption in whichthe underlying note is "taken subject to" the existing terms without the lenders approval.

PARTNERSHIP

This is an exceptional way for several people with limited resources to acquire real estate.You can create a "no cash" interest in the partnership by bringing the partners together,locating the property and negotiating for the purchase. The group should share somecommon elements such as similar income, business experience and education. If youintend to form a partnership be sure the each prospective partner is fully aware of the

manner in which you expect to participate. You will, of course, require a partnershipagreement. Perhaps the attorney would like an interest in exchange for the legal work.This is a time tested and respected way of acquiring an equity interest without cash .However, as the "point man" for the partnership you will probably be expected to assumesomething more than an equal division of the management responsibility. It just goeswith the territory.

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PURCHASE WITH CREDIT

"What credit? I don't have no stinkin' credit" In certain cases you do. And plenty of it.The use of closing credits has started many wide-eyed visionaries on they way to a realestate fortune. Standard prorations in any purchase agreement include property taxes andinsurance contracts to be assumed. Depending upon the time of year the buyer may bereceive large prorations which may be kept until the obligation, or payment, is due. If youare purchasing a commercial building standard prorations also include tenant rents anddeposits. And, there could exist a large deposit balance if local code mandates thattenants deposits be maintained in an interest bearing account. Other credits typicallyinclude money for deferred maintenance such as roof, pool, paint, floor and windowcoverings, landscape maintenance and pest control. If there is bond debt negotiate a pay-off and accept a credit. All this money can be applied to the purchase price. Don't besurprised if after prorations and credits your down payment is covered. Don't forget,however, that all this money has been received in consideration of deferred obligations.

Be particularly cautious with regard to tenant deposits, and plan to scramble a little.

PRINCIPAL REDUCTION AGREEMENT

While the local banker may respect your income potential nodding with approval fromacross his desk he isn't likely to approve this kind of agreement unless it happens to beyour brother or sister. But it might cause a seller who would otherwise be unwilling toaccept a more conventional assumption with small monthly payments to become veryvertical. A reduction agreement may take many forms but the purpose is to add anagreed upon amount above the note to reduce the principal at regular intervals. This couldtake the form of a monthly, quarterly or annual installment. This allows the buyer with

income, but no cash, to meet the sellers demand for a down payment over a specifiedperiod of time. Many sellers will agree to a long term note supported by a principalreduction. While others might agree only so long as it takes to qualify for a conventionalloan. Either way the buyer wins. This can work using any method of assumption.

USE THE BROKER'S COMMISSION

"You want my commission you dirty $&*%*#%!!!!$". Actually, why not. Most brokersearn between 3 and 6 percent for their services in a brokered transaction. It is notuncommon to find a broker that does not need the money who is willing to use thecommission as incentive, or leverage, to complete the transaction. Even if the broker

needs the money an investment in the transactions is better than no transaction at all.Advise the broker of your intent if you plan to use this approach. And if you do, and thebroker is willing to participate, be committed to both the plan and the broker. Remember,the broker has placed time and experience at risk with you. Determine as a part of theagreement if the broker is acting as a lender, or equity partner, and put it in writing.However, if you don't have any money will the broker's participation be enough. Keep inmind that real estate transactions have been closed on less. If you need added proceedsconsider prorations and credits. Close, but no cigar? Ask the owner to carry some light

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paper. Perhaps he wasn't willing at first. But it's surprising how things change when youadd a little cash. If the seller is still reluctant sweeten the note with a principal reductionclause. If the seller is still digging in add a another partner. (Getting the idea?) At thispoint you might have enough to apply for a conventional loan. If you do put thistransaction together subject to a new loan make sure you are working with an

experienced loan broker because you haven't crossed all the mortgage barriers yet. Theright loan professional will put you over the top.

Are we having fun yet?

MULTIPLE NOTES

Whether done as a partnership, or individually, this technique can can render hugebenefits for both buyer and seller. Quite often the seller is willing to create financingsubject to the sale of the note. The problem arises with the discount rate demanded bythe note brokers and their clients. The larger the note, the larger the discount. This canbe resolved by creating multiple notes, and ordering each by size and recording positionso as to reduce the overall discount and thereby providing the net required by the seller.When the owner does not plan to sell the mortgage multiple notes offer added securityby providing attractive liquidity should the seller want the option of selling a note foradded cash and, in the event of a partnership, separate notes executed by the the partnersa creates a common bond of responsibility and risk.

FAMILY MEMBERS

Do I really want to do this? Probably not, but it is one of the most frequently usedmethods of obtaining cash. You can borrow from a family member, or take them aspartners. Try to avoid the latter if you can. If you can't, try to observe the partnership

recommendations. Keep in mind that partnerships are fragile, and while friends are notalways lost as the result of a bad experience the same can not be said of family members.You better stop now if you are considering a family loan, or partnership, without studyingthe Fundamentals.

SECOND PARTY - NO DOWN

This technique begins with the creation of a large first and small second with both notesexecuted in favor of the seller. This works much like Multiple Notes except you beginwith this strategy in mind, and it requires the property be free and clear. It is an excellenttechnique to sell a property for which conventional financing is not readily available. The

intent is to create a marketable first so that the owner can sell the note with minimaldiscount and maximum security for the buyer of the mortgage. The terms of the note saleare agreed to by the buyer and seller. However, if the buyer's credit conditionunfavorably mitigates the terms of the note sale then an off-set in favor of the seller canbe worked out through the terms of the second. It is a good technique when the sellerrequires cash at close, therefore it is generally set up so that the note is sold concurrentwith transfer of title.

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REFINANCE SUBJECT TO SALE

This is identical to Second Party-No Down except conventional financing is available andthe second party is the bank. Using this technique the seller puts a new loan on theproperty which is then taken "subject to" by the buyer who executes a second for theremaining equity. This most favorable application of this technique requires the sellersecure the new loan pursuant to terms acceptable to the buyer. However, if the seller'scredit or the property condition unfavorably mitigates the terms of the loan then an off-setin favor of the buyer can be worked out through the terms of the second. It works bothways. It's faster easier and less expensive than Second Party, but exposes the buyer to the"subject to" risk.

REFINANCE YOUR HOME

Home equity is a great source of cash using tax deferred dollars. It is also fast, easy and

dangerous. Often used with the assumption that market growth will shelter the risk,many unsuspecting investors have lost there home when both the resale market and theirinvestment turned against them. The recommendation here is never put your home at risk unless you can afford it. If you decide on this option without working through theFundamentals let us know and will refund your money. You will need it to pay thedivorce lawyers.

CO-SIGNER

Don't just stand there. Go find a sugar daddy, or a rich relative who adores you. If this isyour solution offer the co-signer a financial incentive. Give them more than your love

and be prepared to perform. Most often co-signers agree to help for no other reason thanaffection. They are vulnerable and poorly informed with very little understanding of therisk they are assuming.

UNSECURED LOAN

Don't forget your own good credit as a means of adding to the creative mix. People havea tendency to overlook the obvious when the adrenalin begins to flow. The minimumpayment on most credit cards is little more than interest only. If you have credit lineswith attractive interest rates the net cash flow from the property may be more than theminimum payment. Run the NOI against your credit lines. If it's positive you have an

arbitrage with capital growth potential. A smart use of money.

VALUE ADDED

When forming a partnership use value added incentives. The formation effort alone maynot be enough contribution in the minds of your prospective partners. Should this be thecase offer to provide the management, and, if necessary, agree to make neededimprovements using certain skills that you may have. If necessary make the profit you

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receive at sale contingent upon a value added formula which firsts provides for aminimum return to the partners. Lending institutions own property they have take inforeclosure, or that have been voluntarily given up by the borrower. These properties aremanaged by the institution's REO department (real estate owned), often at a loss. Contactthe various lenders in your area for a list of the properties available for purchase. If you

find one you like make a value added offer. Such offers are accepted every day.

PLEDGE RENTS

Pledge the NOI from the property until the agreed cash down has been funded. Thistechnique may be used with conventional or private financing. When asking that a sellercarry it may also be a test of the owner' faith in the continued income potential of theproperty. When working with an REO the offer may stand alone, or be included with a"value added" proposal as incentive for the loan.

ASSIGN RENTS

This technique assigns the income from the property; therefore providing added securityfor the loan. This is not a pledge where the income is given to the seller along withthe note payment pursuant to fulfilling a down payment requirement. If an assignmentdoesn't work, try a pledge. But don't surrender the income stream unless you have to.This will not work if you are also assuming notes which contain an "assignment of rents"clause, or when applying for a conventional loan since these notes almost always containa rents clause.

SHARED EQUITY

Also know as an AB Partnership. This is a very simple agreement in which Partner A

supplies the purchase money, and Partner B manages (or lives in) the property and makesthe mortgage payments. The income and profit is distributed in accordance with thepartnership agreement which contains a termination date at which time the property issold, or refinanced to remove Partner A, and the profits are distributed.

PLEDGE PROFIT

A variation on shared equity. This technique proposes an interest in the future profit inexchange for cash down, or a lower note rate on the financing. When used as areplacement for the down it eliminates a note payment in exchange for an interest in theequity growth, thereby increasing the cash flow. This is another form of owner carry

except the seller agrees to accept profit instead of note payments. This kind of pledgewill increase the income stream whether used as a replacement for cash, note rate, orboth. This proposal almost always has a termination date requiring the sale of theproperty, or some other means by which the seller can foreclose on the settlement.Therefore, measure the cash flow and profit potential carefully in relation to thesettlement date when structuring this kind of agreement.

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sell or refer. You are likely to find that many of these property owners have becomedisenchanted with with real estate ownership and are candidates for a purchase. You cantake it from there.

CREATIVE PAPER

Opportunity doesn't always show up at the right time. Suppose you have a property thatyou would like to exchange. You have located the property you want but the propertyowner doesn't want yours and you have been unable to affect a sale. Consider thistechnique. Since all your cash is in the form equity offer the owner of the exchangeproperty a note for the purchase price to be secured by both his property and yours. If theowner wants more cash than would be received from the note pledge the income fromyour property. This provides the benefits of an exchange, but if you subsequently sellyour property it will not qualify for tax deferred treatment unless you arrange for areverse exchange through a facilitator. This not particularly difficult and may benecessary if the owner of the exchange property requires a cash settlement by a specifieddate.

1031 EXCHANGE

This is the ultimate in purchasing real estate without cash. It is often ignored because theproperty owner either fears the process, or has become attached to the property owned.The Exchange Model shown in "Real Estate Investment And Beyond" demonstratesconclusively that maximum wealth, and particularly maximum cash flow, is the result of an aggressive exchange strategy.

USE A SECURITY AGREEMENT

Use valuable personal property as security for the purchase. Collectables are morepopular and profitable than ever today. Many collectables have large markets and marketmakers which protect and sustain their value. If you have a collection for which thevalue can easily be determined, then you have real estate purchasing poser. This may bean especially appealing form of security for the owner willing to finance the property butwants protection against any possibility of foreclosure. The value of your collectables inthe form of a security agreement would replace the property as security for the note andpermit the property owner to seize the collection as collateral in the event of default.

LAND LEASE

Land is the long term component of a real estate investment. Eventually theimprovements will become functionally, or economically obsolete but the land willalways increase in value either as a function of inflation or higher and better future use. Atechnique used many time to raise acquisition capital has been to arrange for a sale of theland under the improvements and then lease back from the investor. The land sale has theadditional potential of creating more cash than is required for the down payment, therebygiving cash out to the buyer at close. The basic requirement for this technique is thatboth and land investor have long term ownership objectives. This works especially well

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for a buyer that intends to occupy or employ the property for commercial use, and a landinvestor that wants to create a management free annuity with the added benefit of capitalgrowth through appreciation. The buyer is also disposing cash the non-depreciablecomponent of the asset for cash. This exceptional technique is an often overlookedsolution for two investors with long term needs.

SPLIT LAND AND IMPROVEMENTS

This differs from the land lease in that the land and improvement are split pursuant to anappraisal for the benefit of the buyer and seller. The buyer executes a note for theimprovements and the seller takes the land in lieu of cash. Long term objectives are, onceagain, the motivation behind this technique. This is a better arrangement than the landlease for the buyer since there is no lease obligation. The seller's estate receives the longterm benefit of land appreciation.

PURCHASE LEASE BACK

The Sale lease back has long been a technique used by an owner/occupant of commercialproperty to raise needed business capital without vacating the business location. Theowner simply sold the property to an investor conditional upon executing a lease forcontinued occupancy. The purchase lease back technique recognizes the possibility thatan attractive long term lease could be substituted for the owner's need for cash. The buyeraccepts title to the property, assumes any liens and executes an attractive lease for theseller. This generally works only when the seller cannot locate an investor with cash, andneeds to be structured so that the lease payments cover debt to be assumed by theinvestor.

KEY EMPLOYEE

Are you a key employee? Particularly in today's economy many companies are lookingfor ways to provide added benefits for valuable employees and insure long term service.Perhaps you have been designated as such by your company and you don't know. It isnot unusual for a company to withhold this information from the employee until someaction by either party precipitates required action. If you suspect that you are, ask. If youhave been identified as a key employee consider negotiating real estate investmentbenefits instead of the more conventional housing, bonus, insurance contract or annuity.You may even be able to create an immediate income stream while the investmentremains within a corporate shell. Check with your attorney.

BORROW AGAINST FUTURE EARNINGS

Don't over look your earning potential. This is an extremely significant considerationwhen conventional lenders underwrite home loans for borrowers with less than 20%down. If they think it is important, you should consider it a valuable financial asset. If you are a key employee you should have no trouble borrowing against future earning.After all, this is another way the company can insure your long term presence. If you are

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a professional take it to the bank. Many lenders loan against future earnings expectationon a signature and secured with a life insurance contract.

SELLER GUARANTEE

There are times when the property's income cannot be established with certainty. This isparticularly true when the income is derived from a commercial lease with a percentageclause. You should always attempt to establish value based on performance minimums.If , however, the seller insists the property has income potential that justifies the askingbut cannot be demonstrated factually based on the property's past performance or currentmarket data, make him put is money where his mouth is. Agree to the price conditionalupon purchase money financing. There are many ways to structure the agreement whichinclude payments to the note dependent upon the property's actual income. Percentageoverrides can be verified based on the tenants actual payments to the lease and themortgage payments can be adjusted accordingly. If the lease income continues to fallshort of promised expectations a provision can be included which adjusts the purchaseprice to reflect historical income.

ASSIGN ASSETS WITH CASH VALUE

Do you have an annuity, personal injury settlement or a court ordered judgment thatprovides you with a long term income stream or guaranteed future payment? Assignthem as a down payment.

EXCHANGE PERSONAL PROPERTY

Many real estate transactions have been settled, all or in part, with the exchange of a boat,car or an airplane. A lot of vintage Corvettes and T-Birds have been offered and received

in a real estate transaction. Continue to keep in mind that all of these techniques can bemix and matched for the desired outcome.

SELL SECURITIES

This is more of a solution than a technique and applies to millions of people. Sellsecurities where the market value is below your basis to raise cash. Here's the technique.If the stock is beginning to go up in price offer the securities to the seller at below marketprice in exchange for the financing. The seller may like the idea of getting propertymanagement relief for stock having potential.

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MORTGAGE OVER BASIS

A mortgage is then placed on the completed project. If the mortgage value is greater than

the Total Cost then the developer has a completed project, the return of all investmentcapital and a profit.

This is a land development technique. If you have an idea for a real estate investmentthat requires development your take-out mortgage following the completion of theimprovements could well exceed all the development acquisition cost. It is not possible togo into all the ways in which this can be accomplished here. you need only understandthat the anatomy of a development looks like this:

Land cost + Development Cost = Total Cost

GET A REAL ESTATE LICENSE

With a real estate license you can immediately benefit from three to six percent in cashproceeds from the transaction which can be applied to the closing.

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Glossary of Terms

ADJUSTABLE R ATE M ORTGAGE A mortgage that has a rate change frequency determined by the prime rate, treasury rate, or other moneyexchange rate during different term intervals of the loan.

APPRAI SAL A report compiled by a certified appraiser that includes the probably market value of your home, includingsimilar sales of properties within your community during the last 6-12 months.

ASSET S EARCH A search requested by a lender through an investigative agency to uncover any hidden assets of the borrowernot previously revealed.

ASSUMPTI ON A transaction involving a buyer and seller (borrower), whereby the buyer purchases the property and assumesthe payments of the borrower.

AUTOMATI C S TA Y A legal term that prohibits any creditor from pursuing further debt collection from the party in bankruptcy untilfurther notice.

B ANKRUPTCY Insolvency. A proceeding in federal bankruptcy court allowing the borrower to eliminate some or all of his/herdebts in accordance with the bankruptcy laws. In most cases, the debtor’s liabilities exceed his/her assets.

B ANKRUPTCY C OURT A court of law that hears consumer and corporate pleadings involving cases where the borrowers are seekingrelief and a “fresh start” from excessive debts.

C API TALI ZE To incorporate the existing delinquent payments, taxes, insurance costs, etc. from the existing mortgage loan

into a new loan with lower payments.

C HAPTER 7 B ANKRUPTCY A court petition that involves the total liquidation of the borrower’s unsecured debts.

C HAPTER 1 1 B ANKRUPTCY Payment Plan – A court petition that allows the borrower to reorganize his debts and pay his creditors astipulated amount so that the business can continue.

C HAPTER 1 3 B ANKRUPTCY Payment Plan – A court petition that allows the borrower to enter into a payment plan with the court, usually 3to 5 years on the arrears of the loan(s) as well as continue with all future payments due the lender.

C REDI TOR Any individual, partnership or corporation that has advanced money to a borrower in return for payments overa certain period of time.

D EBTOR - I N - P OSSESSI ON Pertains to a Chapter 11 Bankruptcy filing where the borrower makes direct payments to the creditors insteadof a court appointed trustee.

D EED I N L I EU A voluntary conveyance of the homeowner’s property over to the lender to satisfy the delinquent debt andavoid foreclosure.

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D EFI CI ENCY J UDGMENT A legal means whereby a creditor pursues money damages through the courts from a borrower who lost his orher property through a foreclosure and did not satisfy the full obligation of the loan.

D EPRECI ATI ON A federal tax deduction taken by a consumer in conjunction with the life span of a house, automobile, orbusiness equipment.

D I SCHA RGED An order entered by the Bankruptcy Court discharging an individual debtor from claims and liabilities of creditors.

D I SMI SSED A borrower’s bankruptcy petition is dismissed when the court declares it null and void.

FH A M ORTGAGE A mortgage granted to a borrower that is insured through the Federal Housing Administration.

F AI R M ARKET V ALUE The value of a property as determined by a certified appraiser utilizing comparable sales of similar propertieswithin the last 6 months.

F I XED R ATE M ORTGAGE > A mortgage document that states the rate will stay the same over the life of the loan.

F EDERAL F UNDS R ATE The interest rate charged to borrowing banks by the Federal Reserve System.

F ORBEARANCE AGREEMENT An agreement between the borrower and the lender whereby the latter party agrees to reduce or postponepayments in a hardship case.

F ORECLOSURE The legal right a mortgage lender or other third party lien-holder uses to gain ownership of a property whenthe borrower defaults on their payments.

J UDGMENT A court approved order allowing a creditor to record a money claim against the debtor’s property.

J UDGMENT H OLDER With respect to a judgment, the part to whom money is owed to.

J UNI OR L I EN - HOLDER A lien-holder who holds a mortgage recorded with the county clerk’s office subsequent to the first mortgage.

L I EN - HOLDER A creditor or other third party who holds a mortgage or judgment against a borrower.

L I QUI DATE The process by which an asset (car, home, boat, etc.) can be sold and converted to cash to pay off a debt.

M ODI FI CATI ON

A form of refinancing a delinquent mortgage by changing one or more terms of the mortgage to help theborrower and avoid a foreclosure.

M AXED O UT Running up one’s credit cards to the maximum limit causing an insolvency leading to a potential bankruptcy.

M ORTGAGOR A borrower (debtor) who pledges his property as collateral in return for a loan.

M ORTGAGEE The creditor who holds the mortgage on the borrower’s property as security for a mortgage loan.

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