Loan Workouts and Forbearance Agreements
"DISCRETION IS OFTEN THE BETTER PART OF VALOR."
A workout agreement is an agreement between a lender and a delinquent borrower to renegotiate the terms of a loan that is currently in default. More often than not, work out agreements occur in the context of real estate loans where the borrower has fallen behind in making the requisite payments due under the promissory note. While the lender has the right to foreclose under the statutory power of sale contained in the mortgage, it may nevertheless not be advisable to do so, particularly if the distressed sale price that the property would yield at auction would result in the lender taking a significant loss that is unlikely to be recovered from the borrower personally. In this scenario, it may be in the best interest of both parties to see if an alternative to foreclosure can be negotiated and implemented. If a workout agreement is reached, it often includes waiving any existing defaults and restructuring the loan’s terms and covenants. Outside of a bankruptcy case, however, the loan's terms and covenants cannot be modified without the agreement of all parties to the underlying transaction.
A forbearance agreement is also an agreement made between a lender and a delinquent borrower. Similar to a workout agreement, a forbearance agreement typically occurs with respect to real estate transactions. The key difference between the two, however, is that unlike a workout agreement, a forbearance agreements does not generally modify the substantive provisions of the original loan; instead, the forbearance agreement temporarily puts a foreclosure on hold by providing the borrower with a short-term window within which to bring the loan current or refinance altogether with another lending institution. While a workout agreement is designed to be a permanent solution for a borrower who cannot otherwise afford the existing monthly loan payments, a forbearance agreement is more akin to putting a bandaid on a wound until it can heal. A forbearance agreement is best suited for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems. Borrowers with more serious financial problems – such as having chosen an adjustable-rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable or a substantial loss in income – must usually seek remedies other than a forbearance agreement.
D. Baker Law Group, P.C. is highly experienced in assisting lenders with the negotiation and drafting of workout agreements and forbearance agreements. The assistance of effective counsel is eminently necessary to ensure that the lender's rights are fully protected.