Foreclosure Demystified
Almost all distressed properties are in the process of or are headed for foreclosure. There is a common misconception that once a homeowner misses a payment he is immediately in danger of foreclosure. The reality is that foreclosure is a legal process that a lender must go through in order to take possession of a property for which it holds a mortgage. The foreclosure process for each state is different; however, the milestones that must be passed are typically the same.
Basic Foreclosure Process
1. Default: The homeowner must have missed at least one payment (depending on the state) if the property is to enter the foreclosure process. This can also be a missed payment to local taxing authority, a condo association or homeowners association.
2. Legal Notice: The lender or foreclosing party must notify the owner that they are entering into the foreclosure process. This can be done through either personal service or a document, or if the owner cannot be located, through publication in a legal journal. In Florida this is called a Notice of Lis Pendence (or a notice of lawsuit). In California, it is called a Notice of Default or NOD. In different states, it can also be referred to as a Complaint, Notice of Sale or Petition.
3. Bank Sale or Auction Date: The homeowner is informed that he has a bank sale or auction date; at that point the foreclosing mortgage company will gain control of the property.
4. Redemption Period: Not all states have a redemption period. In cases where there is, this is a period of time in which the homeowner may present payment to the bank and regain possession of his property.
Deficiency Judgment
(Does not apply in California, Minnesota, Mississippi, Montana, North Dakota and West Virginia)
In some states the lender can obtain a deficiency judgment against. a homeowner for any amount they are unable to recuperate through a foreclosure or short sale. This means that if your client has a mortgage for $200,000 and the bank forecloses and sells the property at auction for $125,000 they could obtain a deficiency judgment for $75,000.
This allows the bank to pursue collections against the homeowner for $75,000 and in some states garnish his wages. In most cases this does require an additional legal action against the homeowner to obtain a judgment. This is another reason that it is so important to exhaust every option a homeowner may have to avoid foreclosure. This does require a separate action to be filed in court causing the mortgage company to incur further expense. The mortgage company is also acutely aware of the borrower's inability to pay so they often see further collection as fruitless.
The Opportunity Window, Pre Foreclosure
The period of time between the first missed payment and the final bank sale date is called pre-foreclosure since they are in the process but have not lost control of the property. This time period is critical since the owner can list the property for sale, sign contracts, and do what they can do to avoid foreclosure.
REO Property Opportunity Lost
If a property goes through the foreclosure process, one of two things happen at the end: it is either sold to the highest bidder at auction, or very often it is taken over by the bank as an owned asset. REO stands for Real Estate Owned. As mentioned earlier, the bank does not want to take over a homeowner's property; however, when the foreclosure timeline runs out and the property does not sell at auction they have no other choice. At that point the property is handled by the banks REO or Owned Asset department. They will hire an agent (typically one they already have a relationship with) and there is not further opportunity with the homeowner.
The other major issue with an REO property is that once a lender takes over a property and puts it on the market; many times they will do so at highly discounted rates. In this case it will be the lender setting the market price for an area, not an agent. These properties will often be the lowest priced in a neighborhood.
Reasons to Avoid Foreclosure
1. The client will always have to disclose that they have had a foreclosure on any mortgage application and many job applications they submit in the future and this can have an adverse affect on your future mortgage rates. This is the only credit item that is asked specifically and does not rely on what is on an individual's credit report.
2. Credit scores will be lowered by 300+ points and a foreclosure is the most devastating credit issue you can have in relation to future credit availability.
3. A foreclosure is the one credit report item that is almost impossible to have "repaired".
4. Your lender can seek a deficiency judgment against you and collect for any amount they do not recuperate at bank sale.
5. Many employers run credit checks on prospective employees and foreclosure is one of the top items that will put a potential new hire in jeopardy.
6. Many current employers run credit checks and a foreclosure can put a current position in jeopardy.
7. Security clearances and government positions including but not limited to military and law enforcement can be jeopardized by a foreclosure.
8. The client may be responsible for any deficiencies after foreclosure for an indeterminate period of rime depending on the state you live in; this can land a homeowner in never- ending collections.