This is Part One of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.
Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral. Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.
Most mortgage loans are not mortgages. Instead, lenders shifted to using a deed of trust type of document in many states. With a mortgage document, a lender would have to use the judicial system for foreclosure which was time consuming and expensive. With a deed of trust, the lender can take back the asset in a much shorter period of time although that’s arguable in today’s rising foreclosure climate. Each state will have their own Deed of Trust Act. Within each state’s Act, there will be a specific timeline that must be followed by the lender. Moe at LoanSafe provides a basic timeline here. First the homeowner misses a payment. Late charges are assessed and the lender may begin an effort to contact the homeowner to determine what’s going on. A “notice of default” letter is mailed informing the homeowners that if they do not catch up, the trustee sale will be scheduled. At this point, the lender hires an attorney to file the public records documents, publish the required notices in local newspapers, and prepares for the auction. Depending on state law, the homeowner will have a specific number of days before the sale date to bring the loan current and pay all late payments, including interest and penalties, attorneys fees, and trustee fees. After the date of the trustee sale, the homeowner will have a state-specified number of days to vacate the property. A sheriff is usually asked to help with eviction, if needed.
Washington State enacted the Distressed Property Law in June of 2008 which means, among other things, that the homebuyer of a home in foreclosure as well as the Realtors owe the the homeowner the highest duty of good faith and loyalty; fiduciary duties to the homeowner (one-to-four family residence, owner occupied.) Read more about the DPL here.
Securitized lending helped fuel the real estate and mortgage bubble because banks and lenders could package up loans and sell them as pools of Residential Mortgage Backed Securities (RMBS) thereby freeing up more mortgage money to loan. Before securitized lending, banks would hold the mortgage loans on their books as part of their assets. A mortgage payment arriving in the mail each month at a bank is considered an asset. A delinquent loan is considered a non-performing asset. A foreclosed home is considered owned-real estate or Real Estate Owned (REO.)
At trustee sales during the bubble run-up, there were many get-rich-quick believers with notebooks and cashiers checks bidding on homes that looked like a possible quick flip-for-profit on paper. The lender was able to score the principal amount of the remaining loan balance plus all the other expenses, the high bidder went away happy, and the homeowner re-entered the housing market as a renter. Today’s trustee sales are remarkably different. In most cases, there are no bidders and the home is deeded back to the bank. REO portfolios at banks are starting to hit the market. An institutional owner is far less emotional about the sales price and far more goal oriented about reducing the price in order to dispose of the asset. BEFORE the trustee sale, there are options that homeowners weigh. Repayment plans, forebearance, loan modifications, and short sales are some of the options we’ll discuss in part two.
Many homeowners have reported frustration in working with their loan servicing department towards a workable solution that will allow them to stay in their home. We will discuss options to avoid foreclosure in part two. Before we do that, we must first revisit Federal Accounting Standards Board Rule 140 from this article called “Predators are Still Safe”:
many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB rule #140, (2), which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it.
The industry asked for and got it. FASB Rule 140 will be delayed until after Nov 15, 2009, and the murky, opaque waters that make up credit crisis continue to pool around the banks that don’t want to tell us just how many bad loans they’re holding. Will the TARP plan help banks? Will the involuntary capital injections help banks and anyone seeking credit? Will homeowners get help? It’s hard to say because the only way we can see what banks are holding is when the regulators take over. What we do know is that homeowners are reporting that it’s becoming excruciatingly difficult to work with their loan servicing department.
When the industry jumped into subprime lending, we underpriced risk. We also underpriced the true cost of “servicing” a loan. I’m surprised we’re not reading about meltdowns in the servicing sector. I’m sure those folks are working 80-hour weeks and get yelled at all day long by Realtors. In the future, we should expect tougher state or federal laws governing mortgage loan servicing (Kary Krismer’s short sale requests must be responded to within 24 hours, phone messages must be returned, and so forth) which will translate into higher bank fees and higher interest rates in the future. Or perhaps now.
Author’s note: Part one of this series was designed to be incredibly basic. So basic as to prompt a reader looking for more detailed help to seek legal counsel. An attorney licensed in your state is the best person to help you understand the deed of trust act in your state, and all your possible options.
Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding