A smart commercial lender should arguably never foreclose on a commercial property without first entering into a forbearance agreement with his borrower. I'll explain why in a second.
I just returned from Las Vegas, where I spoke at Leonard Rosen's 26th National Hard Money Lending Conference. Leonard always brings in top attorneys to speak on how to become a hard money lender. Even though I have personally owned a hard money lending company, Blackburne & Sons, for more than three decades, I find that I always learn important new things at these conferences. The wise technique that I will now describe was suggested by one of Leonard's veteran attorney-speakers.
Suppose a commercial borrower falls behind in his payments. He has personally guaranteed the commercial real estate loan, and his wife is terrified that they may soon lose the family home. Husband and wife are losing sleep.
The borrower contacts his commercial lender and begs for help. The unwise lender brushes him off and files a lawsuit to foreclose. The borrower countersues! He claims that the bank's loan officer promised to increase the borrower's loan from $1 million to $1.2 million. The borrower, the lawsuit claims, detrimentally relied on the loan officer's promise, and he just spent $100,000 - the last of his cash reserves - ordering new raw materials for his widget-manufacturing business.
Now the bank has a problem. The countersuit will drag out the foreclosure for at least another 2.5 years, during which time the building is being neglected. After all, why should a borrower keep the building in good repair when he is poised to lose it in foreclosure? The roof starts to leak. The mold starts to grow ...
This was a huge mistake that could easily cost the bank hundreds of thousands of dollars, assuming the building does not have to be completely demolished after the bank completes the foreclosure.
Here is what the bank should have done: The bank should have executed a Forbearance Agreement with the borrower, offering the borrower lower payments for, say, six months, in return for ... a waiver of all prior claims against the bank!
This would almost certainly have cut off any effective countersuit by the borrower and allowed the bank to complete its foreclosure, if necessary, without opposition. What a terrific technique!
