Coco and Delany borrow $110,000 from Employees Credit Union to buy a home. The loan is a fixed-rate mortgage at 3.38 percent with a thirty-year term, subject to an acceleration clause, and secured by the home. When the borrowers have paid off $10,000 of the mortgage-still owing $100,000, plus interest-they stop making payments. Meanwhile, the home's market value declines to $85,000. After six months, the lender decides to take steps to recover the unpaid amount of the loan. What are the lender's options? Which option seems most likely? Why? What steps are involved?

The lender's options include forbearance, a workout agreement, a short sale, and foreclosure.
Forbearance is the postponement of part or all of the payments of a loan in danger of foreclosure. This may be based on a borrower's securing a new job, selling the property, or some other factor. A workout agreement is a formal contract between the lender and the borrower to negotiate a payment plan for the amount due on the loan instead of going into foreclosure. A short sale is a sale of property for less than the balance due on a mortgage. A borrower-who typically must show some hardship-sells the property with the lender's consent, and the lender gets the proceeds. Foreclosure is a process that allows a lender to legally repossess and auction off the property that is securing a loan.
In this question, because the borrowers are uncooperative, the most likely option is foreclosure. To accomplish this, the lender must strictly comply with the applicable state statute.
For example, on a judicial foreclosure, a court supervises the process. The lender's first step is to file a notice of default with the appropriate state office. This puts the borrower on notice to pay the loan and cure the default. If this does not occur, the lender gives a notice of sale to the borrower, and usually also posts it on the property, files it with the county, and announces it in a newspaper. The property is then sold at auction on the courthouse steps. If the sale proceeds do not cover the amount of the loan, the lender can ask a court for a deficiency judgment.
The acceleration clause would allow the lender to call the entire loan due. But because the market value of the home has declined, it would be unlikely to bring enough on a foreclosure sale to recover the unpaid amount of the loan, plus the lender's fees and costs. This means that a deficiency judgment would be needed. To accomplish foreclosure, the lender must strictly comply with the applicable state statute.