Entre Realty

The Foreclosure Process

When applied to residential mortgage loans is a bank or other secured creditor  selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a mortgage or deed of trust. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that the lender has foreclosed its mortgage or lien. If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment.

As you are probably aware in most jurisdictions it is customary for the foreclosing lender to obtain a title search of the immovable property and to notify all other persons who may have liens on the property, whether by judgment, by contract, or by statute or other law, so that they may appear and assert their interest in the foreclosure litigation.

Also in all U.S. jurisdictions a lender who conducts a foreclosure sale of immovable property which is the subject of a federal tax lien must give 25 days notice of the sale to the Internal Revenue Service: failure to give notice to the IRS results in the lien remaining attached to the immovable property after the sale. So in this instance, it is imperative the lender search local federal tax liens so if parties involved in the foreclosure have a federal tax lien filed against them, the proper notice to the IRS is given. A detailed explanation by the IRS of the federal tax lien process can be found.

Subprime Mortgage Crisis

In the wake of the United States housing bubble and the subsequent subprime mortgage crisis there has been increased interest in renegotiation or modification of the mortgage loans rather than foreclosure, and some commentators have speculated that the crisis was exacerbated by the unwillingness of lenders to renegotiate mortgages.  Several policies, including the U.S. Treasury sponsored HopeNow initiative and the 2009 Making Home Affordable plan have offered incentives to renegotiate mortgages. Renegotiations can include lowering the principal due or temporarily reducing the interest rate.

In the case of a 2009 study by Federal Reserve economists found that even using a broad definition of renegotiation, only 3% of seriously delinquent borrowers received a modification. The leading theory attributes the lack of renegotiation to securitization and a large number of claimants with security interest in the mortgage. There is some support behind this theory, but an analysis of the data found that renegotiation rates were similar among unsecuritized and securitized mortgages.

Right of redemption laws

The authors of the analysis argue that banks don’t typically renegotiate because they expect to make more money with a foreclosure, as renegotiation imposes self-cure and redefault risks. Simply because the right of redemption is an equitable right, foreclosure is an action in equity. To keep the right of redemption, the debtor may be able to petition the court for an injunction. If repossession is imminent the debtor must seek a temporary restraining order. However, the debtor may have to post a bond in the amount of the debt. This protects the creditor if the attempt to stop foreclosure is simply an attempt to escape the debt.

A debtor may also challenge the validity of the debt in a claim against the bank to stop the foreclosure and sue for damages. In a foreclosure proceeding, the lender also bears the burden of proving they have standing to foreclose.

One note-worthy but legally meaningless court case questions the legality of the foreclosure practice is sometimes cited as proof of various claims regarding lending. In the case First National Bank of Montgomery vs Jerome Daly Jerome Daly claimed that the bank didn’t offer a legal form of consideration because the money loaned to him was created upon signing of the loan contract. The myth reports that Daly won, and the result was that he didn’t have to repay the loan, and the bank couldn’t repossess his property. In fact, the ruling (widely referred to as the Credit River Decision was ruled a nullity by the courts.

The Short Sale Process

A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan.  It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers.

It is important to note that this agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency. So in a short sale, the bank or mortgage  lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender.

What I found is that neither side is doing the other a favor; a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Should you get a loss mitigation specialist?

Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner’s lender. Loss mitigation works to negotiate mortgage  terms for the homeowner that will prevent foreclosure. These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash for keys negotiation, or a partial claim loan or other loan work out. All of the options serve the same purpose, to stabilize the risk of loss the lender or investor is in danger of realizing.

The different options are available to homeowners to try getting the homeowner to perform or pay timely and cure the potential loss the lender or investor projects incurring through the foreclosure process and auction sale of the property. A Deed in lieu of foreclosure is a deed instrument in which a mortgagor as in the borrower conveys all interest in a real property to the mortgagee also known as a lender to satisfy a loan that is in default and avoid foreclosure  proceedings.

A Deed in Lieu of Foreclosure

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts their credit less than a foreclosure does.

Some of the advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge metal theft and vandalism of the property before sheriff eviction, and additional advantages if the borrower subsequently files for bankruptcy. Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors.

Bankruptcy and your credit

Creditors may file a bankruptcy petition against a business or corporate debtor  or involuntary bankruptcy in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor a voluntary bankruptcy that is filed by the insolvent  individual or organization. so if you are considering an involuntary bankruptcy petition it may not be filed against an individual consumer debtor who is not engaged in business.