Foreclosure Process

What is Foreclosure?

When someone takes out a single-family mortgage to purchase a home, refinances an existing loan, or borrows against home equity, he or she is entering into a contract. That contract stipulates that the borrower will make payments under very precise terms. If the borrower does not pay as scheduled, he or she is in violation of the mortgage contract.

Typically, a lender begins efforts to collect missed payments shortly after the due date in order to bring the homeowner current on the loan. After 90 days, or three missed payments, lenders generally step up efforts to recoup past-due payments, and they lay the groundwork to foreclose on the home. Depending on the state and the borrower’s circumstances, the home may then be sold at a foreclosure auction. 

How the Foreclosure Process Works

The foreclosure process involves several steps that differ from state to state.  The following attempts to provide general guidance on how the foreclosure process and is based on information presented in the RealtyTrac Foreclosure Center.

A foreclosure is a legal action taken by a mortgage company or lender to recouperate invested assets.  There are two types of foreclosures: judicial and non-judicial.

  • A judicial foreclosure results from a court action in which the lender takes the borrower to court. The court action is initiated by a lender filing a complaint and serving notice to the homeowner, and recording a notice of Lis Pendens.  If the court determines that the debt is verfiably in default, a judgement will be issued for the total amount owed, including the cost for the foreclosure process. A sherif's sale, or public auction, follows the judgement, and the court will confirm the sale and issue a sherif's deed to the highest bidder.
  • In a non-judicial foreclosure, the process can be completed outside the court system. Requirements for this type of foreclosure are determined by state statutes. In many non-judicial foreclosures a homeowner may be issued a Notice of Default (NOD), which may be recorded (again depending on the state). If the homeowner does not cure the default in the allotted time, a Notice of Sale is issued, as well as published, recorded and posted publicly, and a public auction will be held for the sale of the home.
  • The type of foreclosure process employed, as well as the number of months to foreclosure, varies state by state; some states use either a judicial or a non-judicial process, while some states use both.  
Alternatives to Foreclosure

            Judicial and non-judicial foreclosures may be avoided in one of the following five ways:

  1. Negotiated repayment terms: Sometimes the borrower can negotiate a special forebearance or repayment plan< to temporarily lower or suspend payments, if the buyer is able to verify that s/he will be able to handle the new payment arrangement.
  2. Mortgage Modification: The borrower may be able to negotiate refinancing the debt, converting to a fixed-rate loan, or extending the loan term, in order to reduce and meet monthly payments.
  3. Pre-foreclosure sale: The borrower may be allowed to sell the property and pay off the default amount during a grace period determined by state law.  This allows the borrower to pay off the loan and avoid having a foreclosure on his or her credit history. A short sale is a type of pre-foreclosure sale.
  4. Deed in Lieu of Foreclosure: The borrower to sign over the deed to the property to the mortgage company through a deed in lieu of foreclosure, thus avoiding a straight foreclosure and increasing the chances of qualifying for another mortgage in the future.
  5. Cash for Keys:  Similar to deed in lieu of foreclosure, the borrower gives back the home to the lender. The lender may offer a small stipend of cash in exchange for the borrower leaving the property promptly, free of liens, and in good condition.
What Is a Short Sale?

The lender can take ownership either through an agreement with the borrower during pre-foreclosure, often via a short sale or deed-in-lieu of foreclosure.  A short sale is an agreement between the lender and the borrower in which the lender agrees to take less than the total amount due on the mortgage when the homeowner sells the home. Short sales occur when a lender would rather recoup some of their investment while avoiding the expensive foreclosure process. 

Lenders might agree to a short sale because they do not want to have too much real estate on their books, and the foreclosure process is costly. So in some instances, agreeing to a short sale is in the lender’s best interest.  Borrowers negotiate short sales to avoid foreclosure and the negative effect it has on credit ratings. However, the homeowner must convince the lender that a short sale will benefit them more financially than foreclosing on the home.

What To Be Aware of in a Short Sale

Lenders may agree to short sales in order to get a properties that are in default off the books, but they are also motivated to recuperate the money they invested. Sometimes a lender will agree to a short sale only if the homeowner signs a promissory note to make up all or part of the difference between the proceeds from the short sale and the amount owed on the original debt. 

In some cases the lender will forgive the balance of the debt owed above the short sale price that is negotiated.  Any amount of debt that the lender forgives is considered taxable income to the borrower by the Internal Revenue Service; therefore, a borrower should determine in advance what effect a short sale will have on the amount of taxes they pay.

Public Auctions

After a property is scheduled for auction, the owner has a window of time to stop the auction by paying the amount owed to the foreclosing lender.  In some states it is not required to notify borrowers directly about an impending auction, so it is important for borrowers to seek up-to-date information on their default and property status. Auctions are usually held at a public place in the same county as the property, and they are generally listed online and published in local news sources.

In a public auction, the bidding procedure varies from state to state. The opening bid at an auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings.  If no one bids above that amount, the foreclosing lender will take possession of the property.  In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount and pay the remainder of the amount within a certain period of time.

Once a bid is accepted, some states transfer ownership immediately or within a few days. In other states, it may take a month or more for the sale to be confirmed by a court or accepted by the lender. Some states have redemption periods for the owner, in which case the owner can buy the property back from the bidder if they pay the full amount paid at the auction, plus applicable fees.

Foreclosed homes are sold in "as is" condition, without warrenty, and may carry outstanding liens.  If the trustee did not evict the current owners, the auction purchaser may be responsible for doing so, following local legal procedures.

REO Properties and Write-Offs

Properties repossessed by the lender and put in their portfolios are also known as bank-owned or real-estate owned (REO) properties. Lenders can also write-off a property or buy it back at the foreclosure auction. When a loan goes into default, there are two routes a failed loan can take: it can become real-estate owned (REO) – which usually means the property has been repossessed by a lender – or a lender can write it off as a loss.

Lenders take property into their REO portfolios if doing so will minimize investor losses. Typically this is done with higher-quality or higher valued homes that justify the cost of foreclosure. If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair before re-selling the property. Generally the sales price of the re-sold property will be higher than a pre-foreclosure or auction property. Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In government foreclosures the government agency is responsible for selling the property.

With lower-value homes or homes with liability issues, code violations, pending court cases or other problems, the lender may simply write off the loan. In this way lenders can avoid paying property taxes, insurance, and maintenance costs. In this case, title legally remains with the borrower (although the borrower is often unaware of this and has vacated the home), making it difficult for local authorities or community organizations to deal effectively with the vacant property.

Redemption Period

The redemption period is an extra period of time after a foreclosure auction during which homeowners are allowed to remain in their homes. The redemption period allows borrowers additional time to either stop the foreclosure process through paying off the redemption amount or securing a new loan, or to prepare for moving out of the house permanently. Each state has different length redemption periods, and the eviction process does not start until the allotted time period of time has passed.
 

Eviction Process

After the redemption period, the original homeowner is no longer entitle to occupy the unit, and the eviction process begins. The former homeowner will be notified of impending eviction and of any remaining debt on the property that s/he is responsible for paying.

The eviction process varies from state to state, but it usually takes about 2-4 weeks. The new owner or foreclosing bank provides evidence that they now own and are preparing to take possession of the property.  The bank or owner files a motion with the court requesting the sheriff to order an eviction of the former homeowners and their belongings, and the eviction generally proceeds within a few weeks. 

 

Library

  • CRA - The Community Reinvestment Act (A Brief Description)
    NeighborWorks America

    The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulation BB (12 CFR 228). The regulation was substantially revised in May 1995, and was most recently amended in August 2005
  • Don't Blame Subprime Mortgage Crisis or Financial Meltdown on CRA
    NeighborWorks America

    Several recent reports have attempted to link the Community Reinvestment Act as a cause of the subprime mortgage crisis.  This fact sheet provided by NeighborWorks America is an attempt to clear up the misconceptions regarding CRA's involvement in the subprime mortgage crisis.
  • FHA Cash-Out Refinance Loans
    U.S. Department of Housing and Urban Development

    FHA cash-out refinance loans provide a refinancing option for homeowners in owner-occupied units.  These loans can be utilized by borrowers who have had previous credit issues.
  • Foreclosure and Eviction Practices by State
    National Low Income Housing Coalition

    Prepared by the National Low Income Housing Coalition in summer 2008, this document provides a state-by-state listing of foreclosure and eviction practices.
  • Foreclosure Fallout: An Analysis of Foreclosure Auctions in the Chicago Region
    The Woodstock Institute

    This report begins with an explanation of possible outcomes for property that has been foreclosed.  Recently, the number of foreclosures going to auction has increased rapidly.  Report includes data on properties that become REO, auction values and property types that go to auction.
  • Model Practices in Tax Foreclosure and Property Disposition: Atlanta Case Study
    Local Initiatives Support Corporation (LISC)

    Atlanta, Georgia is attempting to restore tax delinquent properties to the tax roll in order to boost local government tax collection and improve neighborhoods.  This case study describes several legislative measures since 1990 that have streamlined property disposition in Atlanta..
  • National Foreclosure Mitigation Counseling Program
    NeighborWorks America

    Neighborworks America has developed The National Foreclosure Mitigation Counseling Program, offering scholarships to attend trainings, place based trainings and an online foreclosure basics course.
  • Responding To Foreclosures In Cuyahoga County: An Assessment Of Progress
    Alan Weinstein, Kathryn Hexter and Molly Schnoke, Cleveland State University

    In August, 2005, the Cuyahoga Board of County Commissioners released its "Commissioners' Report and Recommendations on Foreclosures" which greatly increased the scope of their efforts to address rising foreclosures and vacant and abandoned property.  This paper investigates the progress of these initiatives after 18 months.