Erica Christoffer is a multimedia journalist and contributing editor with REALTOR® Magazine. In addition to writing print and online articles, Erica oversees the magazine's Broker to Broker content, co-manages the 30 Under 30 program, and manages the YPN Lounge. Connect with her via email: email@example.com.
The Language of Distress
The world of distressed sales has its own terminology, as do the government programs for troubled borrowers. Here’s a guide to help you stay on track.
January 1, 2012
Bank-owned /real estate–owned (REO): Properties that have been taken back by the lender during the legal foreclosure proceeding to become an asset of the lender bank.
Broker price opinion (BPO): When the estimated value of a property is determined by a real estate broker or firm based on property characteristics, appropriate comparable properties, and market analysis.
Deed-in-lieu (DIL) of foreclosure: When borrowers can no longer make their mortgage payments, a DIL transfers ownership of a property to the lender, allowing the home owner to avoid foreclosure.
Distressed property: A property that is under a foreclosure order (pre-foreclosure), has undergone the foreclosure process, and is now an REO, or is being marketed as a short sale.(See lender-mediated properties.) Historically, this has also referred to properties in dilapidated condition.
Distressed sellers: Home owners in default on their mortgage or at risk of becoming late on their mortgage payments, due to financial hardship.
Forbearance: A reduction or suspension of loan payments as agreed upon by the lender for a predetermined period of time.
Foreclosure: The legal process in which a lender takes possession of a property as a result of a mortgage default by the owner-borrower.
Home Affordable Foreclosure Alternatives (HAFA): A federal program for home owners who can no longer afford their mortgage.HAFA provides two options for transitioning out of a mortgage: a short sale or a deed-in-lieu of foreclosure.
- You live in the home or have lived there within the last 12 months.
- You have a documented financial hardship.
- You have not purchased a new house within the last 12 months.
- Your first mortgage is less than $729,750.
- You obtained your mortgage on or before January 1, 2009.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud, forgery, money laundering, or tax evasion in connection with a mortgage or real estate transaction.
Home Affordable Modification Program (HAMP): A federal program that provides foreclosure-prevention initiatives to help borrowers in or at risk of default avoid foreclosure via loan modification or principal reduction to lower their monthly mortgage payments. The FHA and VA also offer HAMP programs for struggling home owners. See second-lien modification program.
• You obtained your mortgage on or before January 1, 2009.
• You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.
• You owe up to $729,750 on your home.
• You have a financial hardship and are either delinquent or in danger of falling behind.
• You have sufficient documented income to support the modified payment.
• You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
Home Affordable Refinance Program (HARP): A federal program for mortgage borrowers who are current on their payments but having trouble acquiring traditional refinancing because the value of their home has declined. These borrowers are usually underwater, meaning they own more on their mortgage than what their home is currently worth.
- The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
- The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
- The current loan-to-value (LTV) ratio must be greater than 80%.
- The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.
Insolvency: When a borrower does not have enough liquid assets to pay down a mortgage.
Lender-mediated properties: Homes that are in the pre-foreclosure process, are already bank-owned, or are subject to a lender-approved short sale.
Loan modification: Changes to the loan terms and conditions to reduce monthly payments for the borrower.
Portfolio loan:A loan or asset owned and controlled in-house by the lender itself.
Principal Reduction Alternative (PRA): A federal program forhome owners who owe significantly more on their mortgage than what their home is currently worth. The program encourages non-GSE mortgage servicers and investors to reduce the principal loan amount.
- Your mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
- You owe more than your home is worth.
- You occupy the house as your primary residence.
- You obtained your mortgage on or before January 1, 2009.
- Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income.
- You owe up to $729,750 on your 1st mortgage.
- You have a financial hardship and are either delinquent or in danger of falling behind.
- You have sufficient, documented income to support the modified payment.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering, or tax evasion, in connection with a mortgage or real estate transaction.
Refinance: The replacement of a loan (mortgage) with a new loan at a lower interest rate and under different terms and conditions, often reducing monthly payments, the term of the loan, or the loan risk.
Second Lien Modification Program (2MP): A federal program for borrowers who have two mortgages on the same property and the first mortgage was permanently modified under HAMP. 2MP provides a modification or principal reduction on the second mortgage as well.
- Your first mortgage was modified under HAMP.
- You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
- You have not missed three consecutive monthly payments on your HAMP modification.
Servicing agent: A lender or other entity that services a loan or asset on behalf of the investor that owns the loan. Often, the lender that originates the loan is neither the owner nor the servicer.
Shadow inventory:The cache of homes that have undergone the foreclosure process and are on the balance sheets of banks and GSEs but are not yet on the market for resale.
Short sale:A property transaction in which the lender or lenders agree to accept less than what is owed by the current home owner. Because the net proceeds from the sale are not enough to cover the sellers’ mortgage obligations, the difference is forgiven by the lender, or other arrangements are made with the lender to settle the remainder of the debt.
Workout sale: A situation in which the lender agrees not to move forward with foreclosure proceedings for a specific period of time, allowing the home owner to sell the property and pay off the loan.
Updated: September 25, 2020