Texas Commercial Law Firm

I. Is Foreclosure Your Best Option?

It is not uncommon for default management personnel to be aggressive in collecting defaulted assets. In fact, a “Rambo” attitude is usually seen as a desirable attribute in those involved in collection work. A few experiences with protracted litigation, bankruptcy proceedings or foreclosures of property with no value, (or which are net liabilities) will usually result in a more circumspect attitude. The lesson learned is that before plunging headlong to liquidate collateral through foreclosure it is advisable to consider whether foreclosure is the most effective means for maximizing recovery. There are a number of reasons why foreclosure may not be the best option. A property with potential environmental problems may be more of a liability than an asset for example. Similarly, ad valorem tax liens, prior liens, usage restrictions or the property's deteriorated condition, among other problems may make foreclosure economically unattractive. Before rejecting what may seem to be an unreasonably low work-out or settlement offer from the borrower, one must have reliable information as to the property's current value.

If you have reasonably accurate information concerning the property's value, you will probably reconsider foreclosure if the borrower offers a discounted payoff of the note in an amount roughly equivalent to the property's value - especially if there is little prospect for collecting a deficiency judgement from the borrower. Foreclosure and R.E.O. (Real Estate owned by the Lender after foreclosure, sometimes referred to as O.R.E. ) for owned real estate management costs, the potential for litigation, and the time-value of money tied up until the property is sold should be weighed when considering whether a discounted payoff, work-out or forbearance agreement will yield a better recovery than foreclosure.

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