The Foreclosure Process
The foreclosure process isn't as mysterious as it may seem. Due to federal and state laws, lenders must follow a specific process in order to foreclose on a property. Understanding the process will help you find investment opportunities.
First, you'll need to understand when a lender is allowed to foreclose. The process starts with the mortgage itself. A mortgage creates five covenants:
The homeowner promises to pay the principal mortgage debt
The homeowner will insure the building against fire or damage to help protect the bank's interest in the property
The building or dwelling cannot be demolished or removed without the consent of the bank
The entire principal will become due in the event of default of payment of principal, interest, taxes, or assessments
The bank will consent to the appointment of a receiver in the event of foreclosure
The first three items are agreements the homeowner must adhere to. If those covenants are breached, the bank must pursue numbers 4 and 5. (Why the word "must"? Because banks are really "trust officers": they aren't loaning their own money, they're loaning money that belongs to depositors. They don't have the right to take risks with other people's money, so they have to follow these covenants.)
The last two covenants give the bank the means to foreclose. One provides for the appointment of a receiver - typically a lawyer - who conducts the sale of the property. The other allows the bank to accelerate payments and ask for the entire balance. If the bank's lawyers take a homeowner to court they want all of the money, and if it can't be paid they want a judgment against the homeowner. Simply put: they want out of the deal because the homeowner has not lived up to his or her obligations.
It's important to note that until a judgment has been obtained the homeowner is not truly under threat of foreclosure. Once the judgment is obtained the homeowner can be put out of the property immediately.
After a judgment has been handed down against the homeowner, a time is set for the public sale of the property at auction. If the homeowner can't come up with the entire amount of the judgment award before the sale... that's it: no more delays, no more compromises - the sale will be held. Often these sales are held at the courthouse, and in many cases are actually held on the courthouse steps.
The court then appoints a receiver - again, typically a lawyer - to conduct the sale of the homeowner's property. Ordinarily, real property can't be transferred without both parties in the purchase agreement signing the transfer deed. Since the homeowner is unlikely to voluntarily sign away his or her home, the receiver has the legal authority to sign a valid deed transferring the ownership to a new purchaser.
Let's look briefly at the stages of foreclosure. To make it simple, we'll pretend you're a homeowner facing financial difficulties.
If you've missed a payment, you're normally sent a letter documenting the missed payment and requesting immediate payment of the past-due amount. Once you've missed several payments, you'll be sent a letter from the bank's lawyer. Receiving a letter from the lawyer means you're in trouble; you haven't just committed an oversight the bank wants corrected but are now considered a serious "problem debtor." When you hear from the lawyer, it means the bank has committed resources (time and money) to getting you to pay on time - so they're serious.
If you can't reach an agreement with the lawyer you'll be served with a summons. (The lawyer has very little reason to negotiate, so normally the only "agreement" you'll be able to reach is that you'll make your loan payments on time... starting immediately.) After "service," which is the process by which you're physically presented with the summons, the attorney will also file papers with the county courthouse. All other individuals with claims against the property - they're called "junior" obligations - like second mortgages, judgments, or other liens, are served with papers so they have the right to try to protect their interests as well. (It's important to note that if the foreclosing party is negligent in notifying junior lien holders, those creditors have a valid claim for repayment against the eventual new owner of the property. That's why purchasing title insurance when buying foreclosure properties is absolutely essential: you protect yourself against subsequent claims you didn't know about. After all, you don't want to have to be responsible for a lack of attention to detail by the foreclosing party.)
To enforce money judgments you have to be served personally. That's one reason foreclosure actions can take so long - the homeowner(s) must be tracked down and physically handed the summons. Often the homeowners won't want to be served and will do their best to avoid the server. Each jurisdiction has different laws and rules, but generally speaking if a person can't be located and all reasonable efforts have been made to find them, a procedure for publication is put into place. This typically consists of a public notice printed in the classified section of the local newspaper.
Most jurisdictions also require public notice whether or not the homeowner has been served. This allows parties with a legitimate claim to come forward to protect their interests.
After the publication process is complete the foreclosure action will proceed. If you can't come to an agreement with the bank's lawyer, and can't come up with the funds to pay off the loan, your property will be sold at a foreclosure auction, and you'll be evicted from the property - if you haven't already left.
The foreclosure process is extremely painful for the homeowner. The legal proceedings can take months to complete. The homeowners are subjected to pressure from banks and lawyers, public notice that their home is in the foreclosure process, and the realization that they will soon lose their home.
Comments(3)