What You Need to Know About Foreclosures

FINANCIAL LITERACY
What You Need to Know About Foreclosures
In today’s financial environment, foreclosures have risen
drastically. In fact, of the approximately 120 million homes in
America, more than 4 percent of them are facing foreclosure.
People do not plan to have their home foreclosed on, but it
is a viable option in certain situations.
All states allow Judicial Sale, while only approximately 2/3
of states allow Power of Sale. Power of Sale is usually faster
than a Judicial Sale.
What is a Foreclosure?
Judicial Sale
The definition of “foreclosure” is to “shut out, to bar, to
extinguish a mortgagor’s right of redeeming a mortgaged estate.”
In simpler terms, it is the termination of all rights of
the homeowner covered by a mortgage. It is the process when
the mortgage becomes the “absolute property” of the lender.
Foreclosure threatens any homeowner who is late or seriously
behind on their mortgage payments.
The first step in the Judicial Sale foreclosure process is the
mortgage lender will file suit with the court system. Then,
you will receive a letter from the court demanding payment,
or the NOD. Typically, you will have 30 days to respond with
payment to avoid foreclosure.
Let’s take a look at each type of foreclosure process.
At the end of the payment period, a judgment will be entered
and the lender can request the sale of the property by auction.
By and large, several months after the judgment the sheriff’s
office conducts the auction of the home. Once the property is
sold, you are then served with an “eviction notice” by the
sheriff’s office and must vacate your home immediately.
What is the Foreclosure Process?
The foreclosure process differs from state to state, but we will
provide you with general information about the foreclosure
process. Foreclosure typically begins when homeowners fail to
make payments on their mortgage on time. In most instances,
after three missed payments, you will receive a demand for
payment, which is usually a letter issued from the lender or the
court; this is referred to as a Notice of Default (NOD).
Power of Sale
As mentioned previously, this type of foreclosure process is
faster than that of the Judicial Sale process. Let’s take a look
at the steps required in this process:
Once the NOD is served, it really depends on the state you live
in as to what comes next. At this point, a lender will usually
begin the formal foreclosure process in one of two ways:
• You are served with the NOD by the mortgage lender
demanding payment of your loan.
1. Judicial Sale, which requires that the process go
through the court system, or
• After an established waiting period (documented in
the notice), a deed of trust is created that temporarily
conveys the property to a trustee.
2. Power of Sale, which can be carried out entirely
by the mortgage holder.
• The trustee will then sell the house at a public auction
for the lender.
1
What You Need to Know About Foreclosures (Continued)
Refinancing Your Home
It is important to note that in most instances, this type of
foreclosure is subject to judicial review to ensure all steps were
carried out legally. Additionally, there is usually a requirement
for the lender to post a public notice of sale for the auction.
If there is equity in your home and you are not too far behind
on your payments, you may be able to refinance your home
and lower your monthly payment. In most instances, your
lender will refinance the existing loan and wrap any late fees
into the new loan. The issue is that in most instances, there
isn’t enough equity in your home to do a refinance.
Notification
No matter what type of foreclosure process is used, it is critical
that the lender contact any other parties involved of the
proceedings. For example, if the homeowner has a home
equity loan attached to the property, the mortgage lender must
notify the third party (or lienholder of the home equity loan) of
the foreclosure. Additionally, the homeowner may be notified
and given deficiency judgments if the sale of the property
doesn’t satisfy the amount of the loan.
Participate in a Loan Modification Program
This program allows you to modify the terms of your loan to
make it more affordable. The lender will look at four critical
areas, in the following order:
1. Lower your interest rate.
What are the Options of Homeowners
in Foreclosure?
2. Extend the term of your loan.
3. Principal forbearance.
If you are in the unfortunate place of foreclosure on your home,
you still have some options to consider. Consider to the
following as viable options in your circumstance.
4. Principal forgiveness.
Use the FHA
Lump-Sum Payment
If you have an FHA-approved loan, you can get in touch with a
counselor to help you with some options you can take to avoid
foreclosure. In most instances, the counselor will negotiate with
the lender on your behalf.
You can call your lender and ask them to reinstate your loan;
remember, all lenders want to be paid. You may be allowed to
reinstate your loan or make the loan current with a lump-sum
payment. You may even be able to arrange for scheduled
payments over a period of time. In most instances, the lender
will try to work something out with you.
List Your Home with a Real Estate Broker
This option is really only a good option if you have equity in
your home. Why? Because you must pay Real Estate Broker
fees or commission if they list your home (typically 4%-6% of
the purchase price). If you do not have equity in your home,
you will have to increase the price of your home to make any
money, and that will make it practically impossible to sell.
Plus, it is difficult to qualify for a loan if the home is selling
for more than it is worth.
Let’s take a look at how this might work:
Janice falls behind three payments on her house. She pays
$2,000 a month for a mortgage payment, and now must add
$500 in late fees to the payment, therefore, she now owes
$6,500 to reinstate her loan. She sells some of her belongings
and earns $10,000 from the sale and pays the lender the owed
amount. She continues to make her payments, the NOD is
cancelled and the home is brought out of foreclosure. The only
remembrance of the issue is that Janice’s credit was hit with a
NOD, which will be there for a little while.
Sell Your Home Yourself
Anyone can sell their own home. All you need to do is put a
FOR SALE sign in your front yard and you are ready to go.
However, if you do not live in a “high traffic” area, this option
may be very difficult. You will need to network, place ads, and
other cost-based marketing options to sell your home. Also,
you may still not get the amount needed to pay your debt
to your lender.
2
What You Need to Know About Foreclosures (Continued)
Give Your Property to Your Lender
Let’s take a closer look at each type of bankruptcy.
Your lender may take your property back if there are no other
liens on the property, or if they are the party with another lien
on your property. Basically, you would need to transfer
ownership to the lender using what is called a “Deed in Lieu of
Foreclosure,” which is also sometimes referred to as a “friendly
foreclosure.” While this deed does not protect your credit, or
cut off the rights of any junior or secondary lien holder, if you
get an agreement with your lender it could avoid the possibility
of a deficiency judgment if the property fails to produce enough
to cover the outstanding debts after it goes to auction.
Chapter 7 Bankruptcy
When a person files for bankruptcy under Chapter 7, it is called
“liquidation.” This type of bankruptcy is the most common type
of bankruptcy proceeding. Liquidation involves the
appointment of a trustee who collects non-exempt property of
the debtor, sells it and distributes the proceeds to the creditors.
Chapter 13 Bankruptcy
When individuals file for bankruptcy under Chapter 13, they
use future earnings to pay off creditors. It is considered to be
more of “rehabilitation” than liquidation. In these proceedings,
a trustee is appointed to overlook the assets of the debtor, and
creditors are prohibited from seeking repayment of debts owed
to them. Chapter 13 is like a debt consolidation plan; however,
bankruptcy will be reflected on your credit report.
If you have any equity in your property, this is probably not a
good option because you will forfeit any right to surplus from
the sale of the property.
Short Sale
If you continue to make your mortgage payments with the new
debt consolidation plan, you will be protected from foreclosure;
however, if you don’t, the foreclosure process will begin again.
There are companies and Real Estate Brokers that will assist
with negotiating with your lender to sell your home at a
discounted rate and avoid foreclosure. Instead of buying from
a seller, you are purchasing the property directly from the
lender for a discount. Let’s take a look at an example of how
this may work:
Do Nothing and Foreclose on Your Property
This is without question with worst option of all the options
discussed. Basically, you leave with nothing in hand and a
foreclosure on your credit report. You should try something to
get out of your property; it could mean the difference between
a few thousand dollars in your property compared to nothing
and a foreclosure on your credit report.
Mark is a homeowner who is facing foreclosure and has an
existing first mortgage of $400,000. He writes an offer to his
lender for $325,000, which is accepted as full payment for
the loan.
Why will a lender accept a short sale? First of all, they do
not like to have excess inventory and bad loans on their books.
A discounted loan amount is much better for a lender than
a write off, and they can usually sell the property without a
huge loss.
Foreclosure Programs to Avoid
As with many things in our world today, if it sounds too good to
be true…it probably is. There are many people ready to take
advantage of desperate people trying to salvage their home and
their credit rating. The following are five common foreclosure
scams to avoid:
Second of all, lenders know they will most likely lose a lot
more money if the home goes to auction. Plus, there are
a lot of fees associated with an auction. It is best for a
homeowner to perform a short sale when the property is
in the pre-foreclosure state.
Equity Skimming
Equity skimming is when you are approached by an individual
who offers to buy your home at the full asking price. The
“buyer” tells you that he/she will assume the loan and that you
can move out and he/she will take care of all the payments.
However, this buyer collects rent for the next six to eight
months and does not make any mortgage payments.
Unfortunately, you are still responsible for those payments and
so the home goes into foreclosure. Some investors will take
over a loan for you, as it is a great technique to assume a loan;
however, you must recognize that you are still obligated to that
File Bankruptcy
Bankruptcy should be considered as a last resort. In essence,
bankruptcy will prevent creditors from taking action to collect
their debts including foreclosure on your home until further
order of a bankruptcy judge; however, there are serious
ramifications with this option. There are two main types of
bankruptcy you can file: Chapter 7 and Chapter 13.
3
What You Need to Know About Foreclosures (Continued)
Avoiding Foreclosure Scams
loan and responsible for the payments. It is imperative,
therefore, that you are involved with the process. Don’t just
walk away and think everything will be fine.
So, how do you avoid these types of foreclosure scams?
Here are a few things to consider:
Bait and Switch
• Don’t sign anything you do not understand.
This is when a “buyer” tells you he/she will bring your mortgage
loan current and suggests you can stay in your home. The
“buyer” then asks you to sign a few documents so he/she can
protect his/her interests; a few weeks down the road you get an
eviction notice. Homeowners must protect themselves in the
case of any type of loan assumption.
• If you feel pressured into transacting any type of
business, back away.
• If it looks too good to be true, it probably is.
• Don’t sign over your deed to anyone without some
type of closure or agreement for your protection.
Bailout
This is where homeowners sign over the deed with the
assumption that they will remain in the home as a renter or
lease it from the buyer and eventually buy it back over time.
Then, when given the terms of the new agreement, there is no
way they can buy back the home. The homeowner is then left
with nothing and the “buyer” walks away with most or all of the
equity. The way to defeat this strategy? Make sure you sign a
contract with the potential “rescuer,” and if there are any terms
you are unsure about, talk to an attorney.
• Avoid paying anyone who claims they can stop
your foreclosure.
Effects of Foreclosure
How does foreclosure affect you? The most immediate effect
is that you no longer have a home. Some people are able to
get into an apartment or condo, or rent another home, but
others must rely on family to help them. Some may even
become homeless.
Phantom Assistance
In most instances, these are online companies who claim
to help you stop a foreclosure auction. Then, they charge
exorbitant fees that you cannot afford for services you could
actually do yourself for free. When all is said and done, you
have been charged more money and are in the same boat
as you were before you started.
The foreclosure will also affect your credit rating. While being
foreclosed has a negative impact on your credit rating, you will
be surprised to see that it is not as detrimental as more drastic
options. Unfortunately, it can also affect you both mentally and
physically (e.g., stress, depression, etc.).
Counseling Agencies
Foreclosures may also have a negative impact on a community.
Statistics show that one foreclosure can cost as much as
$34,000 in local government agency bills (e.g., trash removal,
unpaid utilities, etc.). Property values can also decrease when
too many homes are foreclosed.
Some groups claim to be able to help you out of a foreclosure
for certain fees. The problem here is that the services offered
can actually be obtained or done for free. There are some
organizations that will provide you with these services without
you having to pay a dime…find them or simply talk to your
lender.
The most important thing you must do after a foreclosure is to
repair your credit. Make sure all your other accounts are in
order and paid on time. You may be able to secure a smaller
loan; making payments on this loan will help you to repair your
credit. Furthermore, you may be able to secure another home
loan with a large down payment.
For a list of approved Credit Counseling Agencies
and Debtor Education Providers from the U.S.
Department of Justice website, please visit
http://www.justice.gov/ust/eo/bapcpa/ccde/index.htm.
MEMBER FDIC. EQUAL OPPORTUNITY LENDER.
Comerica Bank NMLS ID: 480990
The information provided in this article is not intended as legal advice and should not be relied on as such.
Contact your legal advisor and/or accountant for further information specific to your situation.
4
CBC-4236-10 11/14