“For Sale – Bank Owned.” This type of For Sale sign has become an all too common site, particularly in Las Vegas, Nevada, which has had one of the nation’s highest home foreclosure rates in the country for the past four years. Finding a solution to this crisis has been the subject of many news headlines and became one of the main focuses of the 2008 presidential election. This article will discuss the foreclosure procedures used in the United States, the different legal options that a homeowner may have when faced with foreclosure as well as the changes to real estate law that have taken place over the past two decades in order to alleviate some of the difficulties caused by home foreclosure.
Types of Foreclosure
Foreclosure by judicial sale is available in every state and is required by many states. When using this type of foreclosure, the lender must go through the court system to initiate the foreclosure proceedings. Once a borrower has defaulted on the mortgage obligation, the lender will typically send a notice of intent to foreclose, giving the borrower a specific amount of time in which to bring the loan current. If the loan remains in default, the lender can then file a lawsuit in court and serve the borrower with a summons and complaint. The borrower then has the right to respond to the complaint and can also raise any defenses to the foreclosure that they may have. If the borrower fails to respond or raise any defenses to the foreclosure, the Court will issue a judgment and the lender can proceed with the foreclosure sale. At the foreclosure sale, the property will be placed for auction and the public will be allowed to bid on it. If the property is not sold, ownership will go to the lender who can then initiate eviction proceedings to remove the borrowers from the property if it is still occupied.
The other widely used method of foreclosure is foreclosure by power of sale, which is allowed in 29 states This method may also be called a non-judicial foreclosure and it allows the lender to foreclose upon the real property without the necessity of going through the Court. Generally, in states that utilize this method of foreclosure, a borrower will sign a deed of trust and a promissory note when finalizing the loan. A deed of trust “conveys the property from the mortgage holder to the trustee, who holds the property in trust for the mortgage holder.”
It varies by state, but usually the first step in a non-judicial foreclosure involves sending the borrower a notice of breach (or default). Once this notice has been sent, the borrower has a short amount of time to cure the default along with any fees and costs that have accrued. Next, a notice of sale is sent to the borrower which sets the time and place for a public auction. As with a judicial foreclosure, if there are no bids on the property at the auction, ownership goes to the lender. If the foreclosure occurs in a state where redemption is allowed, the borrower is given a specific amount of time after the sale to redeem the property by paying off the lender or successful bidder.
The major disadvantage to a non-judicial foreclosure is that there is no way for a borrower to raise a defense or respond to the foreclosure without filing a new lawsuit against the lender. If a borrower wishes to do so, they must seek relief from the Court in the form of a temporary restraining order or a preliminary or permanent injunction. This will often require the services of an attorney, along with additional fees and costs to initiate the action. However, this may be the best opportunity for a borrower to avoid foreclosure, as courts have recently become more receptive to the defenses presented by borrowers challenging foreclosure actions.
Defenses and Alternatives to Foreclosure
With the rate of foreclosures increasing throughout the country, some homeowners and their attorneys have started fighting back. In the past, defenses to foreclosures were often weak and few people contested them. However, with assistance from an increasing number of real estate attorneys and new legislation governing the mortgage industry, “courts dealing with growing foreclosure caseloads have become more receptive to challenges to foreclosure actions. Timeworn defenses have gained new teeth while new tactics for resisting foreclosures are winning acceptance from the courts.” (Seidenberg, 2008, ¶ 15).
Borrowers facing a foreclosure must first make the determination of whether or not they can afford to stay in their home before deciding on what course of action they want to take. Even those who come to the conclusion that they cannot afford their home have options other than foreclosure. One of these options is called a short sale, which is described as getting “permission from the lender to sell your house for an amount that will not cover your loan.” The main advantage to this type of sale is that it releases the borrower from any liability that may result from a deficiency. A deficiency occurs when “the amount you owe on the home loan is more than the proceeds from the sale (or auction) – the difference between these two amounts is the amount of the deficiency.” With a short sale, the borrower is released from any obligation to the lender, including any deficiency that may remain after the sale. The one major disadvantage to this type of sale, especially in today’s housing market, is that the borrower must have an actual offer from a purchaser before the lender can decide whether or not to agree to the sale. When the housing market is slow, this may take more time than a borrower has to avoid foreclosure.
Another option for borrowers who can no longer afford their homes is a deed in lieu of foreclosure. This option occurs when the borrower “gives the property to the lender (the ‘deed’) in exchange for the lender canceling the loan.” As is true with a short sale, a deed in lieu of foreclosure will eliminate any liability that the borrower may have from a deficiency. Another advantage to a deed in lieu of foreclosure is that it obviates the need of the borrower to try to sell the home, which is particularly advantageous when the housing market is soft. However, a slow housing market may also be a disadvantage to this option, as it could be difficult for a borrower to get a lender to accept a deed in lieu of foreclosure if the lender fears that they will be unable to sell the property quickly.
Another alternative may be a loan modification, which means the lender “agrees to alter the terms of the loan so that you can better afford payments.” Although this may allow the borrower to have lower monthly payments and a fixed rate rather than an adjustable rate, there are several drawbacks to loan modification. One of the biggest disadvantages is the cost to modify the loan. Although the homeowner may not see these costs upfront, they will usually be added to the end of the loan, increasing the amount of money that is owed. (Linnin, 2008). In addition, occasionally there are costs that must be paid to attorneys or a loan modification specialist before they begin the workout. These costs can be as much as $5,000.00 and the borrower will be responsible for them, not the lender.
If negotiating with the lender for a forbearance or loan modification is not successful or available to the borrower, another option to avoid foreclosure is to seek help from the U.S. government, which has recently become much more involved in assisting homeowners facing foreclosure. Beginning on October 1, 2008, the federal governing will begin utilizing a new program called “FHA – Hope for Homeowners Program.” This program will “assist homeowners who are currently in foreclosure, close to foreclosure or those who have high interest rate mortgage loans like those called sub-prime loans.” With this program, borrowers will be required to accept a 30-year fixed rate loan for up to 90% of the value of their home. There are usually no costs associated with this type of loan, although the borrower may be required to obtain a new appraisal of the property.
Finally, if negotiating with the lender or seeking governmental assistance is not successful, a borrower may wish to file for bankruptcy, which will automatically stay, or stop, any foreclosure proceeding. An individual can file a Chapter 13 bankruptcy, which allows a debtor to make payments, or a Chapter 7, which essentially cancels all of a debtor’s financial obligations. A Chapter 13 bankruptcy “allows you to pay off the ‘arrearage’ (late, unpaid payments) over the length of a repayment plan you propose – five years in some cases.” Since the borrower will need to have enough money to make the bankruptcy payments as well as their regular mortgage payment, this type of bankruptcy benefits a borrower who has temporarily fallen behind on their mortgage payments and may not be suitable for an individual who is unable to afford their home. A borrower who ultimately faces foreclosure should consider a filing a Chapter 7 bankruptcy. Under a Chapter 7 bankruptcy, “the mortgage holder will be allowed to foreclose if the bankrupt debtor has no equity in the property.” A Chapter 7 will also “cancel all the debt that that is secured by your home, including the mortgage, as well as any second mortgage and home equity loans.
In today’s economy, foreclosures are becoming a very common problem facing many Americans throughout the country. In the past, courts often favored lenders in foreclosure actions and the federal government offered little protection to those homeowners who were faced with foreclosure. However, in the past few years, the tables have started to turn in favor of distressed homeowners. Courts have begun to consider more closely the defenses raised by borrowers in foreclosure actions and lenders have started offering more in the way of workouts, including loan modifications, forbearance agreements, deeds in lieu of foreclosure and short sales. The federal government has also responded to the foreclosure crisis by offering assistance to qualified borrowers through programs that will make mortgage payments more affordable. Although some financial experts predict that foreclosure rates will continue to rise for the next two years, it has become a priority of both borrowers and lenders to continue to create ways for homeowners to avoid foreclosure.
Sources
Bray, I. (2008). How to avoid foreclosures.
Elias, S.R. (2008b). Defenses to foreclosure.
Elias, S.R. (2008c). Short sales and deeds in lieu of foreclosure.
Elias, S.R. (2008d). How bankruptcy can help with foreclosure.
Foreclosure. Encyclopedia of Everyday Law. Ed. Shirelle Phelps. Gale Cengage, 2003.
Liuzzo, A. L. & Bonnice, J.G. (2007). Essentials of business law. (6th ed.) Boston: McGraw-Hill/Irwins.
Seidenberg, S. (2008). Homing in on foreclosure. ABA Journal, 94(7), 54-59. Retrieved October 8, 2008, from Research Library database. (Document ID: 1529007091).
Linnin, S. (2008). Loan modification vs FHA – Hope for Homeowners Program – comparative analysis!
Alison Zeuschel - Alison Zeuschel is a Certified Paralegal, is a member of the National Association of Legal Assistants and has been working in the legal ...
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