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How Foreclosures Really Work Peter G. Miller - Mortgage Lenders Plus.com Add to Delicious, diggit, reddit, technorati favs

Because of recent headlines, it's not surprising that there are a lot of questions about foreclosure and how to avoid losing a home. Misconceptions about foreclosure abound, so let's look at what's actually going on and what borrowers can do if they face mortgage problems.

Question: What is a foreclosure?

Answer: When you finance real estate you promise to repay the lender. The house you buy is security for the loan. If you don't pay the lender then has the right to sell the property to recover the value of its loan plus closing costs.

Question: Isn't it true that lenders want to foreclose?

Answer: No. Most mortgage lenders hate foreclosures. Wouldn't you? To put it mildly, foreclosures are bad for business, they raise red flags with regulators and they typically result in big losses.

Question: Don't lenders make money when the sell a property at foreclosure?

Answer: When a home is sold at foreclosure there's an effort to sell for the highest possible price. If there's a bid that exceeds the mortgage balance and all foreclosure costs then the excess is paid to the owner, not the lender.

In a strong real estate market it's possible to have foreclosure sales which result in full market value -- meaning that lenders recover the value of their loan plus all related foreclosure costs. However, when markets slow then foreclosures are likely to be sold at a loss, even when lenders have mortgage insurance. The difference between the market value of the property and it's foreclosure value is sometimes called the "foreclosure discount."

Question: Do lenders lose money on foreclosures?

Answer: The head of the Mortgage Bankers Association, John Robbins, has testified before Congress this year that his firm typically loses $40,000 each time a home it forecloses.

"Foreclosures are costly," says a 2007 study by the congressional Joint Economic Committee, "not only to homeowners, but also to a wide variety of stakeholders, including mortgage servicers, local governments and neighboring homeowners. The high costs of foreclosures -- up to $80,000 for all stakeholders combined -- present a strong incentive to prevent them."

The Joint Economic Committee also makes this point: Foreclosure prevention is a bargain, costing about $3,300 per household. If you're a lender, and if you have any brains, you want to work something out.

Predatory lenders are an exception. Many predatory lenders are in the "loan to own" business and concoct mortgages that effectively cannot be repaid unless the borrower wins the lottery. If you deal with a predatory lender the deck is stacked against you. As surely as the sun rises in the morning, you will lose if you borrow from a predatory lender.

Question: Are you saying that most lenders and most borrowers have a common interest in preventing foreclosures?

Answer: Yes.

Question: But wait a minute. Don't people who have been foreclosed always lose their homes?

Answer: No. You have to think of foreclosure as a process. Depending on your jurisdiction and whether the foreclosure will be a nonjudicial action (no court action required because foreclosure is authorized in the loan agreement) or a judicial action (the lender must go to court or elects to do so), there are a series of required steps before a house can be foreclosed.

In virtually all cases you can stop a foreclosure before a home reaches the auction block.

In general terms foreclosure steps might include:

• The borrower must be notified that the loan is in default. Don't ignore this notice. If you can work out something with a lender this is the time to do it, before a lender must go further.

   

• If the lender is going to court then the borrower must be given notice, something called a Lis Pendens. If the lender goes to court you need an attorney to defend your rights.

   

• If the property is to be sold there must be a public notice. Sometimes the notice must include several ads in a local newspaper over a period of weeks.

   

• If a court rules in favor of a lender, then the court can issue an order to publish a sale notice and schedule a foreclosure.

   

• If there is an actual auction it can literally take place on the courthouse steps. Before the auction, there must be public notice.

   

• At the auction, the lender will make a bid, usually enough to assure the repayment of its loan. In a stronger market the lender's bid may be higher, enough to cover both the loan balance and all foreclosure costs.

   

• If the property is sold there will be a new owner. If the property is not sold, the lender becomes the owner (because of the bid it made to protect its interests). A property held by the lender after a foreclosure is called a REO, meaning "real estate owned".

You MUST take any foreclosure notice from a lender seriously. In some jurisdictions a foreclosure is a quick process, in others it might take months. The further you go into the foreclosure process the more costs you face, even if you ultimately save your home.

Protect your interests! The moment you get a foreclosure notice contact an attorney or a HUD-approved housing counselor. A current list of HUD-approved counselors can be found by clicking here.

Do not hesitate, do not wait, do not think the problem will go away. You may be able to save your home by responding quickly. Because any foreclosure action may result in substantial administrative and legal costs, it's best to stop a foreclosure as early in the process as possible. (As an example, a homeowner was charged $800 for getting a letter from a lawyer threatening foreclosure. The property was saved but the homeowner was still out $800.)

Question: How long does it take to be foreclosed?

Answer: RealtyTrac -- the largest online foreclosure information and property site -- reports the time it takes to foreclose varies enormously by jurisdiction. For example, in New York state a foreclosure can take as long as 15 months (but maybe less). In Maryland, says RealtyTrac, "the typical foreclosure process in Maryland lasts 46 days."

The important point is that you must know how foreclosures work in your jurisdiction. Average, typical or extremely long times may NOT apply to your situation. Borrower beware! Get help at the first sign of mortgage trouble.

Question: Is there special assistance for VA borrowers?

Answer Yes. The VA has nine regional loan centers (RLCs). They can be reached toll-free by calling 800-827-l000. When you call, ask for a call-back from a loan service representative.

If a VA borrower is on active duty then the Soldiers' and Sailors' Civil Relief Act of 1940 comes into play.

"In view of the broad powers granted to courts to provide payment relief to military personnel," says the VA, "loan holders are encouraged to negotiate reasonable partial payment and repayment schedules with borrowers in order to minimize the need for costly and time-consuming litigation."

In addition, the VA points out:

Court permission is usually necessary to foreclose a loan that falls under the provisions of the Act. Foreclosure sales (or manufactured housing repossessions) during the veteran's period of military service, or within 3 months thereafter, will be invalid unless: (1) they take place pursuant to a written agreement between the parties involved, or (2) they are initiated "upon an order previously granted [the holder] by the court and a return thereto [is] made and approved by the court". In other words, approval before proceeding with a power of sale foreclosure and subsequent court confirmation of sale may be necessary. In reaching a decision, the court has broad discretion, but will primarily be guided by consideration as to whether military service has affected the obligor's ability to maintain the obligation or answer any legal proceeding, such as foreclosure, brought by the creditor. (50 U.S.C. App. 532).

Question: Are there special programs for FHA borrowers?

Answer: Yes. Like the VA, HUD has counseling for borrowers. For specifics, call 800 -569-4287 (or TDD 800-877-8339) for your nearest housing counseling agency. HUD says "these agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge."

Question: I have had an excellent credit history but just got laid off. I will be unable to make my current loan payment. What can I do?

Answer: If you're behind on your mortgage, or if you expect to be behind, call the lender immediately. The earlier you address the problem the better your chance to work out something.

Question: What options might a lender consider?

Answer: There are no hard and fast rules. Different lenders have different practices, a lender is not required to modify loan terms and sometimes because of the way a loan has been sold to investors lenders cannot modify loans.

Freddie Mac says there are several options to discuss:

Forbearance: An agreement to temporarily let you pay less than the full amount of your mortgage payment, or pay nothing at all. Forbearance may be an option when you can show your income will resume after a fixed-period -- say, after an injury heals -- or when funds from a bonus, tax refund, or other source will let you bring the mortgage current at a specific time in the future.

Reinstatement: A lump sum payment that brings your mortgage current after forbearance.

Repayment Plan: An agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period you have gradually paid back the amount of your mortgage that was delinquent.

Loan modification: a written agreement with your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable. Common loan modifications include adding missed payments to the existing loan balance or extending the number of years you have to repay.

Question: What about a short sale?

Answer: With a short sale a borrower returns title to the lender and there is no foreclosure. However, with a short sale a lender is typically being asked to take a loss. Would you do that if you were a lender? Moveover, lenders are not required to accept a short-sale proposal and -- if they do -- any unpaid loan balance may regarded as taxable income. (See a tax professional for specifics.)

Also, a short sale will likely show up on a credit report -- and not for the better. While likely not as bad as a foreclosure, a short sale can significantly reduce your credit score. One reason to have an attorney bargain with a lender is that sometimes the way a mortgage settlement is shown on a credit report can be negotiated.

Question: I hate this stuff. Who can I speak to besides the lender?

Answer: There are two options to consider.

First, contact a HUD-approved housing counselor. A current list can be found by pressing here.

Second, ask a local attorney to contact the lender on your behalf.

Question: What if I cannot work out a loan modification or other arrangement with my lender? Or, what if I simply need to change my situation?

Answer: If you have a history of good credit and need a loan with lower payments, a longer term or other changes then speak with lenders about refinancing. It's best to do this if you face:

• Payments that are too high.
• Payments that are about to be too high.
• Loans which cannot be modified.
• Loans where you may soon be late or actually miss a payment.

The last point is especially important. If you look down the road and see higher loan costs ahead -- impossible loan costs or loan costs that will reduce your lifestyle -- then the time to refinance is BEFORE you're late or miss a loan payment, the time when you have the best possible credit to present to lenders.