Every time you pick up the newspaper you read about the rash of foreclosures in California. In January 2006, that figure was 916 forclosures in Napa County alone, ranking 13th of all the counties in the State. In January 2007, there were 2,856 foreclosures in Napa County with a state ranking of 34th.
The homeowners who had a down payment and did not opt for the high risk loans are still in decent shape. They still have equity in their homes and they are still making their payments.
The foreclosures we are seeing in American Canyon are usually homes purchased or refinanced in 2005 and 2006. Most of these purchases were originally 100% financing and sub-prime loans. These were buyers who had less than a stellar credit history and were only able to qualify for loans with the minimum payment option and negative amortization. Negative amortization occurs when the monthly payment does not cover the full interest due on the loan and that amount is added to the principal.
The 100% financing buyers purchased their homes with the belief that the value of the property would continue to rise to cover the negative amortization and their adjustable loan payments would remain low. They planned to refinance in a few years and pay off their high risk loans.
Unfortunately, neither scenario has occurred. With the upward adjustment of loan payments due to the increase in interest rates, the homeowners who were struggling already to make the minimum payment are now not able to meet their monthly obligations.
We are now seeing notices of default filed on these properties. Almost inevitably, the dates of the recording of the trust deeds were in mid-to late 2005, or early 2006. The homeowners have no equity buildup in the home as values have since declined. The interest rates on their adjustable loans have spiraled, in some cases to over 13% on second loans. They can no longer afford to make the monthly payments.
After several months without payment, the lender will file a Notice of Default with the County Recorder. According to Dataquick, "homeowners were a median five months behind on their payments when the lender started the default process." This filing of default starts the clock on the foreclosure process, which will result in the sale the property at a trustee sale if the borrower is unable to bring their loans current.
Once the Notice of Default has been filed, the homeowner has time to work out a deal with the lender until the trustee advertises the property for auction at a trustee sale. In California, this takes approximately 90 days. At the end of this period, if the borrower is still behind, the lender can file a Notice of Sale and set an auction date. They are required to advertise the sale for three consecutive weeks. The homeowner still has until five days prior to the trustee sale to bring their loan current and pay any additional expenses.
The trustee sale takes place at the Napa courthouse and is advertised in the local newspaper with the location, date, time and the minimum bid amount. The minimum bid amount is usually the amount owed on the property, plus any additional expenses. The property will then be sold to a third party, or go back to the foreclosing bank.
Having attended some trustee sales recently, I observed that the homes that are up for auction are not being purchased and consequently revert back to the lenders. Usually there is more owed on the property than the value of the home or very little equity, so there is no interest in purchase by a third party. The lenders will then take possession of the property and if necessary evict the past owners of the property.
Possession of the property creates a huge problem for the lender as they are required, by federal regulations, to have financial reserves for this nonperforming asset. These reserves are many times the value of the property. These are funds they cannot lend to another borrower. If the lender has a number of these properties, the reserves needed could possibly put them out of business, as they would eventually have no funds to lend.
Once the lender takes possession of the property, they will find a real estate agent to list the property and sell it as quickly as possible for the maximum possible price. Their desire is to cut their losses quickly. Other home sellers are impacted by having to compete with this usually lower than market value price that the lender offers for the property.
Often the foreclosure process can be prevented if the lender will agree to a "short sale". This situation occurs when the lender agrees to accept less than the total amount they are owed on the loan when the home is sold. The lender will not consider a short sale until they have an offer from a bona fide buyer. The house has to be priced aggressively to attract a buyer who is prepared to wait through the approval process with the lender. The house sometimes has to be priced under market value to attract offers. The lender then needs to decide if this is their best option, or wait for the house to go through the foreclosure process.
There are also implications for the seller, as the IRS may consider a foreclosure, short sale or deed in lieu to be forgiveness of debt, which could be subject to a capital gains tax. If the original loans on the house were not all purchase money loans, the lender may also have a right of recourse against the homeowner for failure to pay off their debt and try to seize other assets.
If an investor decides to buy a property that has a notice of default filed against it and is owner occupied, they cannot be represented by a real estate agent. This law was enacted to protect homeowners in default from predatory practices but has unforeseen implications in that it sometimes prevents people from getting necessary professional advice. It also does not protect a homeowner from an unlicensed individual, who may be specializing in foreclosures.
The foreclosure process is long and complex. Anyone seeking to buy a foreclosure property, or who is in default on their loan at this time, should consult a real estate professional. The most important aspect for anyone behind with their payments is to communicate with their lender to try and get forbearance, or the loan modified. If you are behind with your mortgage payments, it's important to take action. Talk to the lender; find a good nonprofit credit counselor or a bankruptcy attorney. Bankruptcy will not prevent the foreclosure but may delay it.
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