It Sounded Like a Creative Foreclosure Bailout Idea

One thing that people often request in order to avoid foreclosure is to add another family member who has good credit to the title, and refinance in that person’s name to pay off the existing mortgage. But lenders don’t like this idea. So much so that a recent memo is circulating specifically forbidding it. No one will be allowed to refinance a property unless they’re obligated on the current loan. These cases are going to have to be treated as a purchase. The issue with that is that generally if a person is going to help someone out of the danger of losing their home, they’re most likely a friend or family member, creating what’s known as a non-arms-length transaction, which causes problems on all purchase transactions in any market.

We have one client who will be affected by this. His brother is several months behind on his mortgage. The client wanted to add himself to title and then refinance the house as an investment property, deeding his brother off title at closing, and then charge his brother “rent.” But no lender will let him do that anymore. And he can’t “purchase” the property from his brother without a slew of issues, because – well, he’s his brother.

These kinds of rules are created to prevent fraudulent transactions (a lot of loan defaults occurred during the 80s as a result of these types of “sales”), but they end up having a negative effect on people whose hearts are in the right place too. Unfortunately, someone wanting to help out a friend in need often doesn’t translate into a good quality loan risk for the mortgage company.

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