Most of us aren’t, “too big to fail” when outside factors put us upside down, underwater or simply, in plain English, owing more than the collateral is worth. When revenues can’t cover the debt service, reserves are insufficient and federal bailouts have dried up, alternatives become limited.
Relax. Honest debtors lose a lot more sleep than creditors do, when there are bumps in the road of finance and commerce. Credible lenders understand that such things are just the cost of doing business and have a vested interest in identifying solutions, alternatives and retaining a solid customer base. The math is simple: foreclosures or forced bankruptcies usually cost them money.
“Short pays” essentially occur when a secured mortgage holder agrees to accept a “discounted payoff” and usually forego future interest earnings as well. Obviously, this approach is not the mortgagor’s first preference, nor do internal policy or government regulations allow for an “all is forgiven” handshake and slap on the back. The Savings and Loans burned those bridges in the 80’s.
Banks, other traditional lending sources and private equity funds exist to make money. They do that by minimizing losses and risks, not by making it easy to pay them less than what is a legitimate, legal, debt.
For the mortgagee – owner, developer or contractor – there are advantages as well as drawbacks to “short pays”. First and foremost, proof of the inability to fulfill the original contract, sound and documented reasons for amending the terms are paramount. There can be tax ramifications on that amount of “bad debt” written off by the lender. Here’s where Capella Mortgage can begin to help.
In negotiating, accessing funds for, a lump sum settlement with the mortgage holder, legal and industry expertise is an absolute priority. If the circumstances are legitimate, if there is a reasonable and viable plan, then it’s time to consider the advantages and disadvantages of a ‘short pay”.
The intangible considerations are that, properly managed, the impact on credit ratings can be far less than an outright foreclosure, bankruptcy or other legal proceedings. Obviously the same holds true for adverse publicity or damage to reputation. In negotiating replacement financing of the “short pay”, professional fees can likewise be minimized or obviated altogether.
Tangible benefits, “living to fight another day”, of effective management and financing of “short pays” can represent the optimal solution among all parties in the long run.
Every situation is unique. Every business is routinely challenged by cash flow, balance sheets, debt service, market fluctuations or innumerable other outside factors. Relax. Face the challenge, “it’s just business”.
Whether a “short pay refinancing” or a “short pay sale”, is a viable solution, the options require experts to navigate those bumps in the road. Capella Mortgage is here to help.