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How The Real Estate Foreclosure Process Really Works

Regrettably, this is the day and age where a prevalence of foreclosures keeps creeping closer and closer to home. Many hopeful sellers are wondering what is involved in a foreclosure and what steps can be taken to thwart such an occurrence. Following is a timeline of events when a property becomes “delinquent” on payments. Breach Letter The Breach Letter is a formal letter sent to you in an attempt by the lender to avoid foreclosure action. The lender hopes this letter will encourage you to contact them to work out an agreement called a Foreclosure Workout. With the age of foreclosures, we have seen the case where a homeowner is delinquent by 3 months, or more, and still hasn’t received this letter. Foreclosure Workout (Reconveyance, Forbearance, loan modification) Foreclosure workout assistance is typically done during the initial phase of the pre-foreclosure stages. Lenders are more than willing to attempt a plausible scenario to stop the delinquency and bring the loan current. There have been occasions where the lender is willing to lower interest rates, change adjustable rate mortgages to fixed, forgive delinquent amount owed and even wipe out junior liens they may hold if the value of the property is less than what is owed. If a work out plan is not initiated within approximately 45 days of the Breach Letter your case is normally referred to an attorney to file foreclosure action, though many times, a loan modification or reconveyance can be accepted well into the foreclosure process. Attorney Referral The lender will refer your case (delinquent loan) to an attorney or trustee, usually with 90 to 120 days, who then files a petition in court to foreclose your mortgage and get the lender the right to sell the home to pay off the outstanding balance of your loan. The average time between attorney referral and the foreclosure sale varies by state. In California, an NOD (Notice of Default) can be filed 90 days after a mortgage payment was due. With current regulations in CA, the lender now needs to personally contact the homeowner to advise them of their rights, what steps can be worked out, etc, before a NOD can be filed. Junior Lien holders These are also know as secondary or other lien holders. It refers to lenders, people or the government who may have a recorded lien against the property. Your primary lender may contact junior lien holders to determine the status of your loan with them. Once contacted these other lien holders may initiate separate foreclosure action to protect their interest pursuant to the terms and conditions of the mortgage or deed of trust. In today’s market, we are seeing less and less junior lien holders filing for an NOD because the value of the property is less than what any junior lien would receive in a trustee sale. Any junior lien holder is still responsible for senior liens. Note: Separate action by junior lien holders does not usually prevent you from completing a Foreclosure Workout Agreement with your lender. Because it’s to their advantage, most lien holders readily agree to participate in the workout solution. Special Relief Provisions Fannie Mae provides Special Relief Provisions that attempt to span periods of financial hardship that cannot be resolved by delinquency counseling or with a simple workout plan. Most lenders follow Fannie Mae’s lead and do not object to any reasonable workout plan provided it does not compromise the lien position or come into conflict with any other policy or commitment. Relief Provisions are normally offered when a delinquency is the result of a temporary condition, such as illness, unexpected expenses, or military service, and there is a reasonable chance the borrower can bring the mortgage current. During the term of a Relief Provision the property will be subject to scheduled inspections. Temporary Indulgence A grace period, usually 30 to 60 days, may be granted to allow you to bring the mortgage current. If requested, you will have to demonstrate evidence that you can bring the loan current such as proof that you have one of the following conditions: 1. Have a contract for the sale of the property and a closing date. 2. Have an insurance settlement or one pending. 3. Have or are pending an approved funding from another source. 4. Have an approved “Relief Provision” completion date. Liquidating Plan This option allows additional proceeds to be added to the regular monthly payment after the hardship has passed and the borrower can resume regularly scheduled payments. Fannie Mae, HUD and VA policy allows most any creative solution agreed to under a Liquidating Plan that will remove the delinquency in the shortest amount of time. Special Forbearance The suspension of payments for a specified period of time, usually no more than 18 months, from the date of the first payment. At the end of the suspended period the borrower may be expected to resume payment under a Liquidating Plan. This plan is used to assist borrowers experiencing a temporary loss, or reduction, in income that is expected to be restored at a later date. Most lenders provide Special Forbearance in any situation for which there is documentation and relief is warranted. Long Term Special Forbearance In certain situations Special Forbearance can be extended up to 24 months. Military Indulgence If you had a mortgage as a civilian and then later entered the military, you may be entitled to Military Indulgence granted under the terms of the Soldiers’ and Sailors’ Civil Relief Act. There are two components of this provision: 1. Interest Rate Reduction This requires the lender to reduce the interest rate to 6% from the time the borrower begins active duty to the date of release. However, just entering the military is not enough; you must show that your income was significantly reduced as a result of entering active duty and that this has caused your financial hardship. If you qualify, this benefit is retroactive to your date of enlistment. 2. Additional Forbearance In certain cases related to the financial hardship usually associated with the loss of greater civilian pay the veteran may request special consideration in the form of a reduction in the monthly mortgage obligation. The difference between the scheduled payment and the reduced payment is referred to as arrearage by Fannie Mae. Upon release from active duty the borrower is responsible for bringing the arrearage current. Note: Most lenders will not normally foreclose on a delinquent borrower that has been granted Military Indulgence. In fact, it is Fannie Mae’s policy to offer the borrower Additional Forbearance in this situation. If you cannot make payments you should seek a court order granting a stay of the mortgage obligation until you’re released from active duty. Assumption: An enforceable “due-on-sale” clause is waived to allow a qualified buyer to assume the mortgage of a delinquent borrower. Pre-Foreclosure Sale In order to avoid foreclosure, the lender and borrower agree to accept the proceeds of the sale to satisfy a defaulted mortgage even if the sale results in less than the mortgage balance. In order to be eligible for this option you must be experiencing financial hardship as a result of involuntary reduction in income and an unavoidable increase in expenses that exceed income. Unavoidable causes include: 1. Lay-off or loss of job 2. Disability, or prolonged illness 3. Death of a mortgage contributor 4. If self employed, a business set-back You will have to accept the following conditions: 1. Listing the property for sale will not delay initiating or continuing foreclosure action, but the terms of the agreement will be honored pursuant to a sale before the foreclosure date 2. You agree to maintain the property 3. You agree to off-set any of the lenders losses (usually negotiable) 4. You may have a tax liability if any of the debt is forgiven. There are specific laws in place (both Federal and State) which override this possibility. 5. The property is free of liens. If other liens exist, the lender must agree to the workout pursuant to the eligibility requirement for an assumption 6. The lender retains the right to negotiate and approve the transaction. Deed-In-Lieu of Foreclosure This method, offered to homeowners by the defaulted lenders, is established to avoid foreclosure by voluntarily surrendering the property by deeding it to the lender as satisfaction for the debt. It is appropriate when . . . 1. The property has been on the market as a Pre-foreclosure Sale for three or more. 2. There are legal obstructions to foreclosure action 3. Deed-in-lieu allows the lender to take possession of the property sooner than would be possible through foreclosure. You may be eligible for this option if you meet certain hardship requirements outlined in this document and all junior liens are removed. Many individuals who have gone this route later realize that their credit isn’t salvaged by doing a Deed in Lieu and shows up on their credit report just as derogatory as an actual foreclosure. Forbearance (repayment plan) This is a formal Repayment Plan and it is based on the Special Forbearance provision and is the preferred workout option because it is the least costly workout alternative. It is usually considered when delinquency is the result of; The death of a contributor to the monthly mortgage payment and this does not necessarily have to be a person on the mortgage; or Illness, catastrophe, or natural disaster for which the borrower is not insured; or Any similar or contributing factors. Repayment plans may be customized to fit most any need or solution, however they cannot exceed 24 months. Modification (replacement mortgage) This is a change to the terms of the mortgage in order to remove a delinquency and avoid foreclosure. Modification includes reducing the interest rate, extending the term of the mortgage, negative amortization, replacing an adjustable rate with a fixed rate and capitalizing the delinquent payments. Modification is appropriate when the potential for a Repayment Plan is needed due to a permanent or long term reduction in income. Other lien holders having a recorded interest in your property must agree to subordinate their interest to the new loan. Modification Eligibility You may qualify for loan modification if you are experiencing a permanent or severe financial hardship. Normally your obligation-to-income ratio should not exceed 36-38%. Divide your total debt by the remaining term of the loan (more than six months) by your total income. This will give you a close estimate however, if the ratio is greater than 50% your plan is not likely to be approved. We hope this helps explain the entire process of foreclosure and gives you the understanding needed for the situation you are in. Best of success…