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What Is Parallel Foreclosure?

A homeowner whose mortgage is in default has several options. If he wants to stay in his home, he can apply for a modification to make his loan more affordable. The typical homeowner expects foreclosure proceedings to stop while he works through his modification application and trial plan. In some cases, it does. In others, however, the homeowner learns that his lender participates in "parallel foreclosures" that allow foreclosures to proceed even while the lender considers the homeowner's modification application.

  1. Loan Modification

    • Mortgage loan modifications may take any one of several different forms. The lender may extend the term of the loan in order to reduce payments by stretching them out over a longer period. Alternately, the lender may reduce the interest rate to make the loan more affordable or reduce the principal balance so that the homeowner owes less. If the homeowner's lender is one that issues Federal Housing Authority, Veterans Administration and other federally backed mortgage loans and it originated the loan before Jan. 1, 2009, it must first attempt to manage modifications under the Home Affordable Modification Program. The modification program requires that lenders halt foreclosure proceedings until it determines that the homeowner is ineligible for modification. If the homeowner is, in fact, ineligible for a modification under Home Affordable Modification Program, the lender may consider a modification under one of its own, proprietary programs. It's these proprietary modifications that carry the risk of parallel foreclosure.

    Foreclosure

    • When a homeowner finances a home, she signs a promissory note that explains the terms of repayment. The mortgage acts as security, or collateral, for the loan. If the homeowner defaults on the loan by violating the promissory note's terms, the lender has the right to repossess the home. The repossession is a foreclosure. Each state has its own laws about the process lenders can use for foreclosures; but, generally speaking, the action starts after the homeowner misses her third or fourth mortgage payment. If she and the lender are unable to reach a modification or repayment agreement, the lender eventually takes possession of the home and sells it in order to recoup some of its loss.

    Parallel Foreclosure

    • Parallel foreclosure, known more formally as dual tracking, is the process by which lenders process modification applications for homeowners who are behind in their mortgages, presumably with the intent of helping the homeowners stay in their homes -- while at the same time proceeding with their foreclosure actions against the very same homeowners.

    Pros and Cons

    • In some cases, lenders have no choice but to engage in dual tracking. Mortgage investors like the government-backed Freddie Mac require that lenders move forward with foreclosures despite modification applications because, they say, the longer homeowners try to arrange modifications, the less likely they are to qualify and the more expensive foreclosure becomes. Freddie Mac and other proponents of parallel foreclosure warn that the federal government, and thus taxpayers, bears this additional expense. Opponents of parallel foreclosure worry that the process is unfair to homeowners, who lenders often catch off-guard with vacate notices because the homeowners assume their modification applications safeguard them from foreclosure. Some worry, too, that greed drives parallel foreclosure, as studies show that foreclosure is often less expensive to lenders than is modification.

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