Foreclosure

 

Foreclosure and Deed-in-Lieu of Foreclosure:

 

Practical Definitions:

Foreclosure – Let the property go.

Deed-in-Lieu of Foreclosure – Do the bank a favor and ‘give it back’.

 

Foreclosure

 

The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable 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 judgement.

 

Non-judicial foreclosure procedures in which the mortgagee, or more commonly the mortgagee's servicer's attorney or designated agent, gives the debtor a notice of default and the mortgagee's intent to sell the immovable property. This type of foreclosure is commonly referred to as "statutory" or "non-judicial" foreclosure, as opposed to "judicial". With this "power-of-sale" type of foreclosure, if the debtor fails to cure the default, or use other lawful means (such as filing for bankruptcy which provides a temporary automatic stay to the foreclosure proceeding) to stop the sale, the mortgagee or its representative will conduct a public auction. Further legal action, such as an eviction may be necessary to obtain possession of the premises.

 

In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans; however, refinanced loans and home equity lines of credit aren't.

 

In California the basic foreclosure process timeline is:

 

- Typically after 2-4 months of missed payments, the lender files a Notice of Default.

- 90 days after the notice of default, the lender can file a Notice of Trustee Sale.

- 21 days after the Notice of Trustee Sale, the bank can sell your property at ‘the courthouse steps’.

- Property is bid on at a ‘cash only’ - (actually cashiers checks) auction.

- If no buyers offer the minimum amount the lender is asking, property becomes ‘bank owned’ or an ‘REO’ (real estate owned).

 

The bank notifies any occupants of the property of the sale and their intent to remove the occupants per the current legal requirements. Banks typically offers the occupants a ‘cash for keys’ ($ 500 to $ 2,000) deal to avoid legal hassles and law enforcement involvement. Once property is vacant, the property is then assigned to a real estate agent appointed by the bank to sell the property on the open market through the local MLS (multiple listing service).

 

Credit: A foreclosure is a very large ‘hit’ on credit similar to a bankruptcy.

Homeowner cannot receive a new loan for 5 years under current government lending guidelines.

See overview of other foreclosure ramifications below.

 

Deed-in-Lieu of Foreclosure

 

Homeowner request that lender ‘take the property back’ without going through the foreclosure process.

Usually only happens when there is only one loan / lender and no other outstanding liens.

Usually only happens when it is financially beneficial to the lender.

 

Credit: A Deed-in-Lieu of Foreclosure is a very large ‘hit’ on credit similar to a foreclosure or bankruptcy.

Homeowner cannot receive a new loan for 4 years under current government lending guidelines.

 

 

As mentioned in the short sale section, a short sale is nearly always a better option than a Foreclosure or Deed-in-Lieu of Foreclosure.

 

 

The following calculations are for a luxury home but the fundamentals are the same for lower priced homes too. 

 

These numbers are courtesy of Luxury Home Short Sale Experts:

 

The high end ‘luxury’ home market is the most benefited from the United States Congressional legislation past over the last year. 

 

Example:  A 1,500,000 (current fair market value or FMV) home, purchased for 1,800,000 in 2005, appraised at 2.4M and refinanced with a 1,700,000 first and a 400,000 second loan.

 

Property Sells at:

 

Trustee Sale – lender starts bidding at 1.7M, no bids so reverts to lender.

First loan         $ 1,790,000 (90,000 in past due and legal fees)

Second loan    $ 430,000 (30,000 in past due and legal fees)

 

Result:  You have a foreclosure on your record and the second loan reverts into an unsecured debt.

 

Foreclosure - You owe: $ 430,000 + fees. (first lender may come after you for their loss also)

 

Total lender loss: $ 720,000 (2,220,000 total due – 1,500,000 ‘FMV ’)

1st loan: $ 1.79M loan - 1.5M FMV = $ 290,000 

2nd loan: $ 430,000 loan – 0 = $ 430,000 (total loss)

 

Short Sale – loan balances are reduced by bank to pay closing costs and give release of lien, satisfaction of debt and no deficiency judgment.  The first will usually always pay the second at least $ 1,000 and sometimes more.  The first will benefit from sale because it is expensive to hold, maintain and costs the same to sell home through their own REO broker.

 

Short Sale - You owe: $ 0

 

 

Bottom line is that a short sale does not cost you any money and can only help reduce the credit damage and opportunity costs associated with the foreclosure.

 

Before you commit to allowing your property to go to foreclosure please take a moment and fill out the following form for a fee evaluation to see if a short sale or possibly a loan modification is right for you.

 

Free Evaluation:

Find out if you are eligible for a short sale by filling out the following form.

We will contact you with a written recommendation based on your particular circumstances.

There is no obligation and the consultation is free.

The more information you can include, the more detailed the recommendation we can provide.

Evaluation Specialists are standing by.

 

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