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Each state in the U.S. handles real estate foreclosures differently. It is important to understand those differences and know your specific state's procedures. The terms used and timeframes vary greatly from state to state, but the following information provides a general overview of the different processes and considerations. Once you determine what type of foreclosure is most probable in your state (either Judicial or Non-Judicial) you want to look at the type of loan(s) that you have which would be (Recourse or Non-Recourse) loans. Once you know these two key facts you can then narrow your options and choose a option that is favorable to you and your family.
Judicial Foreclosures Judicial foreclosures are processed through the courts, beginning with the lender filing a complaint and recording a notice of Lis Pendens. The complaint will state what the debt is, and why the default should allow the lender to foreclose and take the property given as security. The homeowner will be served notice of the complaint, either by mailing, direct service, or publication of the notice, and will have the opportunity to be heard before the court. If the court finds the debt valid, and in default, it will issue a judgment for the total amount owed, including the costs of the foreclosure process. After the judgment has been entered, a writ will be issued by the court authorizing a sheriff's sale. The sheriff's sale is an auction, open to anyone, and is held in a public place, which can range from in front of the courthouse steps, to in front of the property being auctioned. Sheriff's sales will require either cash to be paid at the time of sale, or a substantial deposit, with the balance paid from later that same day up to 30 days after the sale. Check your local procedures carefully. At the end of the auction, the highest bidder will be the owner of the property, subject to the court's confirmation of the sale. After the court has confirmed the sale, a sheriff's deed will be prepared and delivered to the highest bidder, when that deed is recorded, the highest bidder is the owner of the property. As for the previous homeowner a deficiency judgment may be awarded to the lender(s) who foreclosed on the property. A homeowner may want to check the Statute of limitations of this deficiency in their State. Non-Judicial Foreclosures Non-judicial foreclosures are processed without court intervention, with the requirements for the foreclosure established by state statutes. When a loan default occurs, the homeowner will be mailed a default letter, and in many states, a Notice of Default will be recorded at approximately the same time. If the homeowner does not cure the default, a Notice of Sale will be mailed to the homeowner, posted in public places, recorded at the county recorder's office, and published in area legal publications. After the legally required time period has expired, a public auction will be held, with the highest bidder becoming the owner of the property, subject to their receipt and recordation of the deed. Auctions of non-judicial foreclosures will generally require cash, or cash equivalent either at the sale, or very shortly thereafter.
It is important to note that each non-judicial foreclosure state has different procedures. Some do not require a Notice of Default, but start with a Notice of Sale. Others require only the publication of the Notice of Sale to announce the sale, with no direct owner notification required. You need to know the specific procedure for your state. Recourse Loans
Your State of residence will determine if you have a recourse loan. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Also, whether it was a purchase money loan or a refinance loan, and always, what it says on the Note.
Each State law is different and what you want to consider is how many loan(s) you have on the property and whether they were purchase or refinanced loans. If you do not have assets now you might in the future. Therefore, consider the Statute of limitations in your state to determine your best course of action moving forward.
Non-Recourse Loans In a non-recourse state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure. However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.
Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statues do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property).
Note however, that in some states (such as California) non-recourse laws apply only to “purchase money” loans (i.e. original home loans that are used to purchase property). Almost all refinanced loans, and home equity loans are considered recourse loans. If there is a recourse loan, a lender may sue borrowers to recoup loss.
What is a Short Sale?
In Real Estate, a short sale or 'short pay' is simply defined as the lender accepting less than the amount owed on a property as payment in full. A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed on the property. These are very cumbersome real estate transactions. A homeowner would want to work with a Short Sale Specialist which is sometimes called a Loss Mitigation Specialist, or a debt negotiator.
What is a loan modification?
A loan modification simply means to change the existing terms of the loan.
This is often a viable option for homeowners who will not qualify for a refinance and want to keep their home.
Are there different types of loan modifications?
Yes, there are currently seven (7) types of loan modifications and next week congress might introduce more.
One type of a loan modification may lower an interest rate temporarily allowing a homeowner to maintain their home with a lower monthly payment.
Another type of loan modification is where the loan is converted into a 30 year fixed amortized loan with a fixed monthly payment for the remainder of the loan.
There is a loan modification where a homeowner may be able to get a principle write down. The FHASecure program allows this type of a loan modification, however very few homeowners will qualify. The FHA Programs are changing quickly.
There is a loan modification program called Making Home Affordable.
Congress and their infinite wisdom have put forth this new program in effort to save up to 9 million American families an opportunity to refinance or modify their loans beginning in 2009 through 2012. Through the Home Affordable Refinance Program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they own or that they placed in mortgage backed securities.
There is another loan modification where a homeowner may be able to get a principle write down should the homeowner have a good loan modification advocate who is representing them. Sometimes lender who is in second position will accept a principle write down with a low interest rate.
A Bankruptcy Strategy may help a homeowner obtain a loan modification. There is the potential “cram down” which seems to be picking up momentum in congress we will see how this takes form. This “cram down” would assist homeowners if you meet the M.E.A.N.S. test.
The other type of loan modification is starting with a forensic loan audit. A homeowner would receive an itemized report of all the 'violations' from their original loan documents. Using a forensic loan audit report, approach the lender (with a Real Estate or Bankruptcy Attorney) to demand the lender modify your loan(s) including a principle write down with a favorable interest rate for the duration of the loan.
What is debt settlement?
Debt settlement (also known as debt relief, and debt forgiveness) a debt settlement company handles the negotiation with your unsecured creditors (credit card debts, collections, cell phone bills) to convince them to give up their demands for the full repayment of your debts and instead to accept a lesser amount, reliving you of all obligation for further repayment once you have paid the lesser amount agreed. This might be appropriate if you have a job and your debts are abundant yet you do not qualify for bankruptcy using the (M.E.A.N.S.) test or do not wish to use bankruptcy as a strategy.
What is Credit Repair?
Credit Repair is based on the Federal Fair Credit Reporting Act and its’ State Law equivalents. The Fair Credit Reporting Act (FCRA) was designed to promote accuracy and to ensure that the Credit Reporting Agencies maintain precise information regarding consumer credit.
The Federal Trade Commission (FTC) enforces the FCRA and is the watchdog over the three main Credit Reporting Agencies, (CRA). The FTC enforces fines and may shut down any business that does not operate in compliance with the FCRA.
The FTC stipulates the maximum length of time a negative item can stay on a consumer’s credit report. In some cases, that time frame is 7 years. If the item is a public record such as a Bankruptcy or other public record which may legally be allowed to remain on the credit report for 10 years.
Credit Repair is also based on the Fair Credit Billing Act (FCBA), which is designed to protect consumers for inaccurate information by their original creditors.
What is a Credit Restoration Expert?
A Credit Restoration Expert will assist clients with navigating them through the credit repair process quickly and efficiently. The credit repair process can take 4-9 months. After the credit repair process is complete and the credit report is free of negative errors, inaccuracies and obsolete information, the client will then be provided with strategies for boosting their credit score. This will provide clients with a favorable credit rating. Finally, a credit restoration expert will provide extensive credit education, financial tools and share strategies for clients in maintaining an excellent credit rating.
Loan Definitions
Alt-A Mortgages An Alt A Mortgage is a nonconforming mortgage where the borrower has a higher than subprime credit score. Alt-A is short for alternative A. Typically, these loans contain underwriting anomalies which might include high debt-to-income ratios, or irregular income.
Asset-Backed Security A bond backed by subprime, Alt-A or other types of nonconforming loans.
Collateralized Debt Obligation A bond created from trances of other bonds. A tranche represent cash flow from a pool of different mortgages. In an attempt to diversity risk, a CDO often contains different tranches from different asset-backed securities.
Collateralized Mortgage Obligation A type of mortgage-backed security where the cash flow from the underlying loans are paid into a trust that guarantees payments to the end investors. CMOs consist of various tranches that have different cash flows and maturities.
Credit Default Swap An instrument used to hedge against losses, or to speculate on the value of bonds (mortgage or otherwise). Credit default swaps act as an insurance policy of sorts where one party must pay another one in the event the bonds lose value.
Early Payment Default When an EPD loan goes delinquent within 60 to 90 days of being originated, the Wall Street firms require lenders or banks to buy back EPDs or compensate them for the potential loss.
80-10-10 Loans A loan transaction where a borrower puts 10 percent down on a home purchase, finances a first mortgage of 80% and a second mortgage of 10%.
80-20 Loans A loan transaction where the borrower takes out two mortgages simultaneously. A first mortgage representing 80% of the purchase price and a second mortgage that acts as a down payment which equals 20% of the purchase price. This strategy was used to avoid Private Mortgage Insurance (PMI).
FHA/VA Loan A mortgage insured by one of two government agencies, either the Federal Housing Administration (FHA) of the Department of Veterans Affairs (VA). These loans often are packaged into bonds issued by the Government National Mortgage Association (Ginnie Mae). The FHA and Ginnie Mae programs are administered by the Department of Housing and Urban Development, whose secretary is appointed by the president.
First Lien (Mortgage) The first deed of trust recorded against a house. Government Sponsored Enterprise (GSE) An investment company chartered by the federal government to buy residential mortgages from savings and loans, banks and lenders. Fannie Mae and Freddie Mac are the two largest GSEs serving the residential mortgage market.
Home Equity Loan A second Deed of Trust (or lien) that is taken out by a consumer on the home. There are two types of seconds, a closed end loan for a fixed (set) amount and an open-end loan that has a cap but can be borrowed against in different increments.
Jumbo Mortgage A loan whose dollar amount is above the Fannie Mae-Freddie Mac loan limit, which was $417k up until 2008.
Loan Broker A mortgage professional who offers different loan products to the consumer. The loan or mortgage broker does not use his/her own money to originate the loan. The money comes from a wholesale lender and the broker receives a fee from the wholesale lender once the transaction closes.
Loan Officer A professional who sells and facilitates mortgages to a consumer. A loan officer usually works for a retail lender, through sometimes loan brokers or account executives are referred to as loan officers.
Loan to Value (LTV) When a mortgage is originated, the LTV is a calculation that shows how much cash or equity the home buyer is putting into the purchase. If a homeowner makes a $10K down payment on a $100k house and takes out a mortgage of $90k the LTV would be 90%.
Mortgage-Backed Security (MBS) A bond backed (collateralized) by residential loans. The term MBS usually refers to “A” paper bonds that are guaranteed by Fannie Mae or Freddie Mac, but not always. MBSs can range in size from several hundred million dollars into the billions.
Mortgage Banker A company that originates loans to borrowers using its own money. This might be a bank, savings and loan, credit union or nonbank lender. The nonbank lender would need to borrow from a warehouse provider to obtain the money to make mortgages.
Mortgage Conduit A legal structure (legal company) through which a Wall Street firm or mortgage banker buys already funded mortgages from another firm. Conduits are registered with the Securities and Exchange Commission to facilitate bond offerings.
Mortgage Insurance A policy issued by one of the nation’s seven mortgage insurance firms that generally covers up to 20% of a lender’s loss on a delinquent loan.
Payment Option ARM An adjustable-rate mortgage loan where the consumer is offered four different payment plans each month. (Pick a payment plan) This type of loan includes a negative amortization choice where a low monthly payment (if this option is used) will actually increase the debt owed to the holder of the loan.
Primary Market A term used to describe the actual origination of a loan, where the loan process begins. After a loan is originated and funded, it might be sold. When it is sold, that is considered a secondary market transaction.
Real Estate Investment Trust (REIT) An ownership structure where a company pays out 90% of its earnings from real estate in the form of dividends to its shareholders. REIT’s were created to lessen the federal corporate tax rate a company must pay.
Retail Origination A mortgage made directly from a lending institution to a consumer with no intermediary (broker) being involved in the transaction. A retail origination can be done through a branch or over the Internet or through some other direct-to-consumer channel.
Secondary Market After a loan has been originated to a consumer (in the primary market), it may then be sold to another company; this is considered a secondary market transaction. A loan, like a bond can change hands more than once.
Second Lien (second mortgage) This often is a home equity loan that is taken out after a first mortgage has already been recorded. On a new home purchase, sometimes both a first and second mortgage (lien) are recorded at the same time, but the first always has priority (must be paid off first).
Securitize To issue a bond backed by a pool of mortgages.
Servicer A company that services the loans, a monthly processing of a loan including collecting the payment from the consumer and passing on the principle, interest, taxes, and other charges to the property parties. Each month, the servicer receives a fee.
Stated Income Loan A mortgage where the consumer states his/her income without the lender asking for documentation of the salary stated. The lender accepts the income stated so long as the borrower has a high credit score. These loans are often called (liar loans).
Subprime Mortgage Loan A loan originated by a lender that is A to D in quality. Consumers who have the best credit ratings with the highest FICO scores are considered “A” credit quality. Subprime borrowers usually have several blemishes on their credit reports, including missed payments on mortgages and other types of installment credit or unsecured credit.
Warehouse line of Credit A loan extended from a large bank or Wall Street Firm to a nonbank, which uses that money (line of credit) to originate mortgages directly to the public or through loan brokers. Nonbank mortgage lenders use warehouse lines because, unlike government-insured depositories (banks, S&Ls, credit unions), they do not have any other source of funds. (S&Ls and banks use the deposits they hold to originate loans.)
Wholesale Lender A mortgage company that uses loan brokers to find customers. A wholesaler does not employ loan brokers, instead pays a commission to the broker once the mortgage closes escrow.
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