Disclosure: The information below is not deemed to be legal or financial advice. It is provided as a general information. The reader must seek legal and financial advice when dealing
Foreclosure A Disaster For One An Opportunity For Many
Disclosure: The information below is not deemed to be legal or financial advice. It is provided as a general information. The reader must seek legal and financial advice when dealing with legal and financial matters.
Remember, if you are facing a foreclosure, you are not alone. Unfortunately, many people deal with it every day. As I am writing this article, more than 7,000 homeowners, in only 3 Southern California counties are about to lose their home through foreclosures. Losing a house to foreclosure maybe a disaster, but is not a crime nor is it a shame. Life throws curve balls at us from time to time. Death, Divorce, Disease, Drugs and Denial are among the leading causes of foreclosure and are called the 5 D’s by propertyradar.com, a leading website on foreclosure reporting in the western U.S. While death is inescapable, divorce is inevitable (sometimes), diseases are uncontrollable, drugs are desirable (for many people), and denial is well within your control, no matter the cause, foreclosure can be avoided if people act quickly and smartly. If you are experiencing financial hardship or in the middle of a foreclosure, you must communicate with your lender, but before doing so, you must familiarize yourself with certain facts about foreclosure and how it plays out. Let’s start with clearly understanding what a foreclosure is:
What is a foreclosure?
According to usa.gov, foreclosure is a situation in which a homeowner is unable to make mortgage payments as required, which allows the lender to seize the property, evict the homeowner and sell their home, as stipulated in the mortgage contract. It is the process of taking possession of a mortgaged property as a result of the owner’s failure to keep up with the mortgage payments over an extended period of time. More specifically, it is a legal process by which the owner forfeits all rights to the property.
I think and I hope the above definition serves as a wakeup call to those who are in denial. If it has not helped and you are still in denial, here is another blunt way of warning you:
LENDERS WILL FORECLOSE ON YOUR PROPERTY, IF YOU CAN NOT PAY BACK THE LOAN ACCORDING TO THE TERMS OF YOUR NOTE AND YOU DO NOT COMMUNIATE WITH THEM IN A QUICK AND SMART MANNER.
Now that you know the significance of the problem, let’s learn more about it, the different foreclosure processes. The foreclosure process is different in different states.
What are the 2 main foreclosure processes?
Every state has its own foreclosure laws. Mainly though, there are 2 types of foreclosure states, Judicial States and Non-Judicial States. A Judicial State requires a court ruling before a lender can take over the property, versus in a Non-Judicial State, a court ruling is not required. Regardless, a lender must adhere to all the federal, state, and local laws to initiate and complete a foreclosure. A foreclosure process in a Non-Judicial State such as California is much quicker than the process in a Judicial State such as Connecticut. No matter in what state the property is, when a homeowner defaults on the mortgage, lenders face a decision on what to do, foreclose or not foreclose. They do not take this lightly. They know the harsh consequences of foreclosure on people, families, and communities. They also understand the negative impact it may have on themselves and their businesses. With all this in their mind, at the end of the day, lenders are not charities. They are in the business to make money, and the money factor plays a major role on their decision. With this knowledge, let’s see why some lenders avoid foreclosing and others foreclose more easily on homeowners. Let’s start with the latter.
Why would a lender foreclose on a homeowner?
The answer is simple: foreclosure helps the lender recoup all or part of its investment. Foreclosure is usually the last option for lenders to pursue, due to its legal, costly and time consuming process. A lender may consider other options besides foreclosure, such as forbearance, loan modification, short sale, deed in lieu or assignment of mortgage if and only if it makes financial sense and serves its other social and business objectives. If some of the terms I used here are not so clear to you, I can clarify them later in the article, but what is important to know here is that LENDERS ARE WILLING TO CONSIDER OTHER REMEDIES BESIDES FORECLOSURE. Some of these remedies are financially more beneficial to a homeowner who is losing his/her home to foreclosure than others, but all of them are much less damaging if you can work with your lender. To reach a solution with your lender and avoid foreclosure, you must understand how they think and learn much more about them.
Why would a lender consider not foreclosing?
As mentioned earlier, so long as it makes financial sense and it meets the lender’s social and business objectives, a lender will offer a homeowner other solutions that circumvent foreclosure. In making such an evaluation, there are many factors a lender considers before initiating and moving forward with the foreclosure. In a nutshell, lenders consider the cost to foreclose, the time it takes, the risk involved and then weigh the pros and cons of every option before reaching a decision. This is all good to know, but how does one figure out whether they can work things out with the lender and avoid or stop the foreclosure? While no one can answer this with certainty, let’s see if we can shed light on it in the forthcoming paragraphs.
Are you a candidate to avoid or stop your foreclosure?
Yes, but only if you act quickly and smartly. Some can avoid foreclosure through the options offered by the lender, and some may avoid it through remedies available to them and in their control. Once the foreclosure is started, although the chance of avoiding it is not totally diminished, it only gets harder. Some may be able to stop it temporarily, a few may be able to stop it and avoid it for good, and unfortunately many will have to live with it. If you are dealing with this now, I am sure you are anxious to know which group you belong to. I must be careful in responding to this because it is a very delicate situation, there are no laws forcing the lenders to offer solution and therefore, no one can make such an assessment with one hundred percent accuracy. With that said though, we can look into it, study a few elements affecting the situation and come up with an intelligent answer with a high degree of accuracy.
There are two parties to a foreclosure, the lender and the homeowner. The lender has the upper hand for several reasons. A lender is prepared for foreclosure from day one when they lend the money. A homeowner is not. I can bet no homeowner, not one in a million thinks about foreclosure at the time he/she is buying a home. They only worry about it when they face it and, even then, they aren’t prepared for it. A lender is a professional and has lots of experience in it. A homeowner is not and has barely any experience with it, unless he/she works in the industry. The lender has the legal right to foreclose and has no legal obligation to offer help. The lender has access to all the information on the homeowner and the homeowner must provide every detailed information to the lender if asking for help. The homeowner, typically has no information on the lender.
Remember to study the two parties; yourself and the lender. Start with yourself first and your own financials. It is much easier.
My Financial Mirror
When you look at your own financials, you need to look at it from a few different angles. First, consider why you are experiencing financial difficulty. Is it temporary? Is it easy to fix? Can you fix it in the next few months or will it take a considerable amount of time to get back on your feet? Depending on what may have caused the problem, your answer to these questions could vary. Be realistic and truthful with yourself. Next thing to consider is what your current affordability is, you need to outline your monthly expenses and income. If your monthly outlay, all inclusive of your housing expenses (mortgage payment, homeowner’s insurance payment, property taxes, homeowner association dues), credit card payments, car payment, child support and alimony, student loan payments, other installment payments, and anything else you can think of except for your utilities and your grocery bills, exceeds 50% of your monthly gross income (before taxes), you are stretching yourself too thin and you will have a bumpy financial ride. Many conservative mortgage lenders, to approve you for a loan, do not want this ratio to exceed 40%. Of course, they consider other factors such as credit history, credit scores, employment history and stability, equity on the property and so on. They may show some tolerance when it comes to underwriting their loans. So, bottom line, if your total expenses exceed 50% of your monthly gross income, you need to get rid of some of the debts, by either paying them off or getting rid of the asset that is the cause of the debt; if it is your car, you may need a cheaper car, and if it is your house, you may need to consider a less expensive one. There is this business rule, whether you are selling, negotiating a contract, or applying for a job, no matter what the case is, the more you know about your counterpart, the better chances you have on getting whatever that is you’re pursuing. Now, with a realistic picture of your own financials, you need to shift your focus on your lender and gather as much information on it to determine its stance on foreclosure.
Lenders’ position and stance on foreclosures
This varies based on many facts;
Public Image: Big banks do care about their public image and how the media reports on them. They do try to keep their foreclosures at record lows. This is a subjective statement and no one can guess what low means. In general term, we know that big banks have the propensity to avoid foreclosure as much as possible.
Toxic Portfolio Pool Size: The bigger a lender’s pool of toxic assets (non-paying borrowers), the more they feel pressured to get rid of some of the assets, or to convert them to a performing portfolio. Big lenders such as major banks are regulated by the federal government (feds), they must maintain a certain ratio of their toxic assets to their total assets to be compliant with the feds and keep their business running. If that ratio exceeds a certain level, they are more inclined to either work with the homeowners and help them avoid foreclosure or sell (assign) their note to another investor at a discount. If a homeowner’s loan has been assigned to another investor, his/her chances of avoiding foreclosure is greatly increased.
Lien Position: Whether the foreclosing lender is in a first lien or second lien position makes a huge difference. Second mortgage lenders’ are more willing to work a deal with the homeowner than a first lien holder. This, of course depends on the total loan balances of the first and second, the value of the home, market trend and the financial strength of the lender. If a second mortgage lender forecloses on a home and takes the property back, he is responsible for the monthly payment of the first mortgage and property taxes. If that lender is not financially solid and able to afford all these payments, the lender will be more than willing to come to terms with the homeowner and help them avoid foreclosures.
Financial Strength of The Lender: I alluded to an example of how the financial strength of a second mortgage lender would come to play in a foreclosure situation. But this topic is much broader than that one example and it applies to both first and second mortgage holders. Foreclosing on a home is costly, it has legal fees, administrative fees, it takes time and time is money for everyone, especially lenders (as it should be for you too). Lenders who own a big pool of non-performing assets, sometimes can’t afford to absorb the cost, especially when the outcome is unknown.
Property Value, Unpaid Balance, Lender’s Investment: Finally, before a lender chooses to foreclose, looks at the property value, the unpaid principal balance of the loan, all the unpaid interest and fees, and their total investment, which includes legal and admin fees, each lender has its own formula and their way at looking at the numbers. As a homeowner, unless you also know what these numbers are, you will be at a huge disadvantage when you are talking to your lender and negotiating your foreclosure options.
What other options lenders have besides foreclosure?
As discussed above, a lender may not be able to afford or chooses not to foreclose on a property. In that case, what happens if the loan goes bad and the homeowner stops making the monthly payments? Can the homeowner live there for free? That would be wishful thinking. Besides foreclosure, lenders have the following options;
Forbearance: A lender may temporarily lower the monthly payments to a homeowner until they can get back on their feet financially and catch up with their regular monthly payment.
Loan Modification: A lender may waive past dues, penalties, lower the interest rate, reduce the principal amount, extend the loan term, or any combination of the above to make the loan affordable for the homeowner and avoid foreclosure.
Deed in Lieu: A lender may exercise an option to accept the property and settle the loan with the homeowner in lieu of a full payment of the mortgage.
Short Sale: If the property value is less than the unpaid balance of the loan, a lender may agree to take less than the full amount of the loan and agree to a sale of the property.
Short Refinance: If the property value is less than the unpaid balance of the loan, a lender may agree to take less than the full amount of the loan and allow the homeowner to refinance its loan with another lender (not often at all).
Assignment: A lender may sell and assign the loan to another lender (investor), and let the new assignee deal with the foreclosure and all the other options he wishes to offer the homeowner.
So, to figure out if you are a candidate for avoiding foreclosure, to figure out what lender options best meet your needs, and whether the lender is willing to offer it to you, take a good, honest, realistic look at yourself. Absorb as much of the information on your lender before you start talking to them. Until now, I left out the most crucial and important piece of information that you need to find out about your lender. This information is not readily available to homeowners, but with the help of local realtor, it can be obtained from a title company for free. That is WHETHER YOUR LOAN HAS BEEN SOLD (ASSIGNED), AND IF SO, WHEN. What this means is that if the loan has been sold or assigned to another lender when the loan has gone bad, there is a huge chance, almost 100%, that this loan has been sold at a discount. Although that discount is not public record, but people in the industry have a good idea on what that maybe. That discount represents ROOM FOR NEGOTIATION.
To reiterate the above, you need to look at your own financial state and challenges in life. Study the particulars of your loan and your property, and gather as much information on your lender. Study their behavior based on the information that has been presented to you in this article. The latter part is much easier said than done. To gather information on a lender, reading it, interpreting it, and understanding it is not a job of a typical homeowner, it is rather a job of an expert, someone who has extensive background on either dealing with lenders, or better yet, an insider in the industry. An insider may have experience working for the lenders and portfolio management. Some real estate agents may have the necessary credentials to help you out and give you sound advice, but not all of them. In the absence of an ideal person, an experienced and honest realtor is a good option. If at some point, you come to realize that your lender may have violated your rights or has broken the law, you may want to consider hiring an attorney to represent you.
Now you are a bit more educated on the whole process of foreclosure, lenders’ options, and how they arrive at their decisions. Let me summarize your task at hand when you are facing a foreclosure.
Do not panic.
Take a good, honest, and realistic look at yourself.
With the help of a good local realtor, get to know your lender and gather as much information on them and on your loan
Study your property value and the market trend.
Start communicating with your lender
Do not lose sleep
Get professional help
Choosing help on the internet
Before the internet, if you needed any help, you would go through the yellow pages, find the service you wanted, call them, talk to them for 10 to 15 minutes, get a feel for it and choose among a few that you called. Today, you type keywords on Google and 100s of services pop up. All the businesses have sophisticated websites and you can hardly get them on the phone. Many websites use words such as “government,” “organization,” and “consumer support” purposely to misrepresent themselves as government agencies or non-profit organizations. Everything they do is mostly within the limits of the laws and is not illegal, yet they make it difficult for consumers to find honest help. Here are some pointers:
If the website address does not end with “.gov,” it is not a government agency
If the website address ends with ”.org” does not necessarily make them a non-profit organization
If the website address ends with anything other than “.gov,” consider them as a business who will be charging you for their services, unless they state on their site that they are non-profit and you can verify it.
If you are browsing on a business site, as a rule of thumb, consider them biased more toward their own interest than yours.
How to deal with realtors and investors
Realtors and investors are in the business to make money and there is nothing wrong with that. However, many of them cross the line. Let’s talk about realtors first.
Some realtors claim to have the necessary experience in a specific task, function or area, but the reality is a bit different. Some over promise to get your business or the listing of the house. Some exaggerate on the price of the home and some low ball the expenses that go with the sale of the home to make net sales proceeds look better. Some walk a thin line on legal and ethical issues and that could get messy and cause unnecessary headache and grief for their clients. If you notice, I keep using the word “some”, and truly this some is a lower percentage of the realtor population. The majority of realtors are honest and hard working. You want to find the one that is honest and hard working with experience to handle your situation.
Let’s focus on investors for a minute. Investors are in the business of buying your home as cheap as possible, which is fine. With that said, keep the following in mind:
Some get you in a contract, but can’t complete it (for different reasons)
Some get you in a contract and renegotiate with you before they close, don’t give them your lowest price, leave room to come down on your price before closing
Some are not investors, they claim to be one, get you in a contract and try to up sell your property for a profit. This is a very common.
As with realtors, there are many good people in the real estate investment world and you need to make sure you are working with the right people.
In the end, keep in mind, losing a house to foreclosure maybe a disaster at the time, but it is not a crime nor is it a shame. This too shall pass and people will go on and be happy again. At any point you realize you do not have the means to keep the property or the lender refuses to cooperate with you, be sure to know that there are realtors who can sell the house in a short time and there are investors who can buy the house cash from you very quickly and smoothly. Depending on your situation, never sell yourself too cheap. When it’s time to say bye to the house, whether through foreclosure or sale, be respectful to all the parties, your lender or any buyer who may have purchased it. At the end of the day, everyone is doing a job and it is not personal.