What is Foreclosure?

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

This foreclosure process allows for three opportunities for finding bargains onforeclosure homes.
 

Pre-Foreclosure (NOD, LIS):

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.

Wondering what happens after foreclosure? Then please read on. Remember that understanding foreclosures is the first step for homeowners to stop foreclosure. It is also the first step for investors to buy foreclosure properties.
 

Auction (NTS, NFS):

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.

Bank-owned (REO):

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; however, the potential bargain for these REO homes is typically less 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 that case the government agency would be responsible for selling the property.

Before you buy

You'll need to make sure you're armed with the foreclosure data you'll need to find and buy foreclosed homes. You can start by searching free on RealtyTrac’s foreclosure listings database, which includes pre-foreclosure and auction properties across the country and a nationwide bank foreclosures list.

Find out more about buying resources

  

Timeline for Foreclosure

Home owners who are facing foreclosure often dread dealing with the facts that got them to that place. If they think back to when they first bought that home, losing the home was probably the furthest thing from their mind. Few home owners actually plan to go into foreclosure.

Reasons For Pending Foreclosure

Apart from those who knowingly participate in mortgage fraud -- with the intention of never making a single payment -- most homeowners face sudden extenuating circumstances that force them to stop making timely mortgage payments. Here are a few of those reasons:

• Job loss / unexpected unemployment
• Sudden illness or medical emergency
• Death in the family
• Divorce / loss of second income
• Excessive debt obligations
• Job demotion or promotion denials
• Inability to pay an adjustable interest rate that increases
• Unexpected major home maintenance expense

Ways to Avoid Foreclosure

The best way to avoid foreclosure is to prevent the filing of a Notice of Default. Lenders do not want to foreclose but will file a Notice of Default to protect their interests, if necessary. If you know you are unlikely to meet your mortgage obligation, the first thing you should do is call your lender.

Don't put it off, be embarrassed or ignore letters from your lender because those responses will make the situation worse, not better. Depending on your particular situation and hardship circumstances, here are some options your lender might propose to you:

• Time to make up your payments.
  Lenders might agree to wait before taking legal action against you and let you work out a repayment plan that is affordable for you. This is called forbearance.

   

• Forgiving a payment. 
  If you can agree on a way that you will be current after missing a payment or two (without the means to pay it back), the lender might give you a break and waive your obligation. This is called debt forgiveness, and it rarely happens.

   

• Spread out the missed payments over a longer term.
  For example, if your payment is, say, $1,200 a month, the lender might let you add $100 a month to each payment for a year until you are caught up. This is called a repayment plan.

   

• Changing the terms of your loan.
  If your mortgage is an adjustable loan, the lender might freeze the interest rate before it increases or change the interest rate to a more manageable rate for you. A lender might also extend the amortization period. This is called a note modification.

   

• Add the back payments to your loan balance.
  If you have sufficient equity and meet the lender's lending guidelines, the lender might increase your loan balance to include the back payments and re-amortize the loan. This is called a refinance.

   

• Make a separate loan to you.
  Certain government loans contain provisions that let borrowers who meet specific criteria apply for another loan, which will pay back the missed payments. This is called apartial claim.

Ways to Stop Foreclosure

When the lender files a Notice of Default, your options are limited. That is why it is better for you to call your lender before falling behind on your payments, because lenders are often reluctant to work out repayment schedules after foreclosure proceedings have been commenced.

You will be given a certain time period to bring the payments current, pay the costs of filing the foreclosure and stop the foreclosure. This is called reinstatement of your loan. If you cannot make up the missed payments and the lender will not work with you, here are a few other options to stop foreclosure:

• Sell Your Home.
  Interview real estate agents to get an opinion of market value and average DOM to sell your home. You might be tempted to hire a discount broker, but many sellers feel they need the exposure and marketing that full-service brokers offer. Compare both to determine which best meets your needs and time frame.

   

• Consider a Short Sale.
  If your home is worth less than the amount you owe, you might be a candidate for ashort sale. A short sale affects credit but it's not as bad as a foreclosure. You or your agent will need to negotiate with your lender to find out if the lender will cooperate on a short sale. This is called a pre-foreclosure redeemed.

   

• Sign a Deed-in-Lieu of Foreclosure
  This is called deeding the home back to the lender. The homeowner give the lender a properly prepared and notarized deed, and the lender forgives the mortgage, effectively canceling the foreclosure action. Lenders tell me that deeds-in-lieu of foreclosure affect credit the same as a foreclosure.

  The lender might also work an arrangement where a home owner can remain in the home until finding a place to move into. Owners in default should negotiate the right to retain occupancy, arguing that if the lender followed through on the foreclosure, an owner would still enjoy the right of possession during that procedure.

 Faster Sales Coming For Foreclosure Buyers
By Peter G. Miller   

Foreclosure buyers got a Christmas Eve goodie from Fannie Mae, a new strategy that's likely to make foreclosure purchasing very much quicker. The catch? A bunch of lenders are about to be very unhappy.

Until the recent real estate meltdown, foreclosures were a problem but not too much of a problem. It was not unusual to sell foreclosed properties for the outstanding principal balance, meaning no losses for loan owners, no damages for mortgage insurers and no deficiency claims against owners.

But with the growing number of distressed properties there's now a substantial “foreclosure discount” in most markets. What were once tolerable and controlled losses are today steep and sharp declines that leave lender red ink everywhere. The question for loan owners is this: Is there anyway to make such lender losses smaller?

The answer, as we shall see, turns out to be good news for foreclosure buyers.

Quality Assurance Reviews
When a home is foreclosed one of the first steps taken by lenders and servicers is to figure out what they've got, a process which Fannie Mae calls a quality assurance review. That means getting estimates of value from local real estate brokers and appraisers, listing the property for sale and in some cases fixing up the property to maximize value.

Such steps make a lot of sense, but as they say on late night television: wait, there's more. There's also the little matter of taking another look at the documents used to originate the loan.

In today's mortgage marketplace it typically happens that a loan is originated by a local mortgage broker or lender and then sold on Wall Street, packaged with other loans and used to create a mortgage-backed security (MBS). Loans that are sold must be properly underwritten, an expression which means that all standards established by mortgage buyers such as Fannie Mae and Freddie Mac have been met.

The standards for conventional loans can include such benchmarks as 20 percent down or coverage by a mortgage insurance company, the verification of income and employment, a property appraisal and other measures. This is why mortgage buyers want carefully prepared loan application files and also why borrowers must complete IRS Form 4506, a permission slip of sorts that allows lenders and loan owners to look at borrower tax returns and compare them with income claims — even after the loan has been originated.

This all seems fairly routine except that some loan applications — and maybe more than some — have been below par. As one example, the FHA dropped more than 270 lenders during the past year.

So what happens when a loan application was not properly completed? The originating lender must buy back the loan if the borrower defaults within 120 days.

It might seem as though originating lenders have no liability after four months but that's not quite the case because there's a second rule that can come into play: Lenders must also buy back any loans which are a byproduct of origination fraud, a liability which continues until the loan is completely repaid.

So what is fraud? In basic terms “fraud” is an intentional deception that causes harm to someone else, say a mortgage investor.

Christmas Eve
It wasn't exactly a delivery from Santa, but on Dec. 24 Fannie Mae issued new guidelines for loan originators. Among the new rules was this little gem:

“When Fannie Mae receives an offer to purchase a property that is also subject to an underwriting or servicing review, Fannie Mae may accept the purchase offer without first notifying the servicer, whether or not a final decision has been reached with respect to the review. If, after completion of the review, Fannie Mae determines that the mortgage loan did not meet its eligibility or underwriting requirements and Fannie Mae has incurred a loss by selling the property, the lender will be required to fully reimburse Fannie Mae for its loss.”

Translated into plain language, the Fannie Mae announcement does several things:

·      First, Fannie Mae is going to sell foreclosed properties as quickly as possible to cut inventory costs, even if that means not waiting for servicers to review sale offers. It should now be quicker and easier to complete a foreclosure sale because it will no longer be necessary to first run everything through clogged servicer review systems.

·      Second, Fannie Mae is reserving the right sell foreclosures first and review loan application files later. Maybe months later. If irregularities are found then Fannie Mae will expect the originating lender to make up any losses.

·      Third, you can quickly expect every other mortgage owner to adopt language similar to Fannie Mae's, thus speeding up foreclosure sales in general.

“Foreclosure sales are likely to move along at a faster clip because of the new Fannie Mae policy,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties and data. “But that very same policy also means loan applications are going to be far tougher. To avoid future liabilities mortgage originators will want to verify every dime and dollar claimed by borrowers. That will be irritating to some borrowers, but if the end result is a lending system with less risk then everyone will be ahead.”
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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