The Basics of a Foreclosure Case

The Federal Deposit Insurance Corporation (FDIC) has compiled information from different sources on the rate of foreclosures in America and the outlook is not promising. According to the report, the Mortgage Bankers Association (MBA) reported that every three months 250,000 families enter into foreclosure in the U.S. That translates into one out of every 200 American homes. Mortgage default has reached epidemic proportions in our country and an ever-increasing number of families are facing homelessness or at least the loss of their homes and financial uncertainty.

HUD Suggestions to Avoid Foreclosure

U.S. Department of Housing and Urban Development (HUD) offers some tips to try to avoid foreclosure, they include:

  • Do not ignore the problem - The further behind a borrower gets in their mortgage payments, the harder it will be to reinstate the loan and the more likely the borrower will lose his/her home.
  • Contact the lender as soon as possible - When a borrower realizes he/she will have a problem making the mortgage payments he/she should let the lender know immediately. Lenders can offer options to help borrowers through difficult financial times. They do not want to repossess a home.
  • Open and respond to all correspondence from the lender – Lenders usually include information that may help a borrower keep his/her home in the first notices they send out. This information could help the borrower avoid foreclosure and it usually includes default prevention options.
  • Know the rights afforded to a borrower – A borrower should review the loan documents so he/she may have a clear understanding of the lender's options if he/she cannot make the mortgage payments. Learn the local foreclosure laws and action timeframes of the jurisdiction where the residence is located.
  • Understand the foreclosure prevention options – A borrower can contact his/her lender to find out what loss mitigation or foreclosure prevention options are available to help them avoid foreclosure.

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HUD suggests that a borrower prioritize his/her spending if they are having trouble keeping up with their mortgage payments. They recommend that the borrower's first order of priority should be healthcare and after that, it should be to keep his/her home. They should review their finances to see where they can cut spending in order to make the mortgage payments. The individual should make a budget and sacrifice nonessential spending until he/she can catch up with the mortgage payments. HUD also recommends sacrificing assets in order to keep the home. The liquidation of assets such as a second car, jewelry, or a whole life insurance policy can help reinstate the loan.

Steps to Foreclosure

If a borrower defaults on his/her mortgage, the mortgage holder can typically initiate foreclosure according to the timeframe specified in the mortgage agreement. That period of time can vary but it will be specified in the mortgage agreement. There are two basic types of foreclosures recognized across the country but there are also regional foreclosures that are used in some jurisdictions. Most foreclosures are conducted in state or local courts but a few are conducted in Federal courts. A foreclosure is a legal action and all parties involved must be notified, even though requirements for notification vary from one jurisdiction to another.

Any profits from the sale of the property are used first to satisfy any outstanding taxes then to pay the outstanding mortgage and any legal costs of the lender. After that any funds that are left are use to compensate other liens against the property. The borrower is allowed the remaining proceeds if there is any money left after all debts are satisfied.

Types of Foreclosures

The different types of foreclosures include:

  • Judicial Foreclosure – This type is available in all fifty states and it requires a court-supervised sale of the mortgaged property. A Judicial Foreclosure allows the borrower a one-year "right of redemption" where he/she can buy the property back from the bidder. This type of foreclosure allows the lender to file a deficiency judgment against the borrower for the balance of the money owed if the proceeds from the sale fail to cover the mortgage.
  • Foreclosure by power of sale – This type is allowed in twenty-nine states if a power of sale clause is included in the mortgage agreement. Foreclosure by power of sale involves the sale of the mortgaged property by the mortgage holder without court supervision. Typically, this is a more expedient way of foreclosing on a property. This type of foreclosure does not allow the mortgage holder to seek a deficiency judgment against the borrower.
  • Strict Foreclosure – This type is handed down through a decree and is only available in a few states. In this type foreclosure, the property is not sold but the borrower is ordered by the court to pay the amount owed within a specified period. If the conditions are not met, the lender has the right to take possession of the property. Once the lender has the title, the property can be sold to satisfy the loan. If the profits from the sale do not satisfy the amount owed, the lender can file a deficiency judgment against the former borrower.
  • A Trustee's Sale – This is an easy form of Foreclosure and a trustee under the stipulations of a Deed of Trust performs the sale. In this process, the borrower grants a trustee the power to sell the property through a trustee's sale if the borrower defaults on the mortgage. Any proceeds from the sale are dispersed according to the priorities outlined in the deed of trust. This is a quick and economical way of foreclosing on a property but it does not allow for a deficiency judgment against the borrower.

Reasons for Foreclosure

Hundreds of thousands of U.S. families are losing their homes to foreclosure every fiscal quarter making this a foreclosure and financial plague on our society that will be reeling for years to come. The FDIC published information from a study conducted by the Homeownership Preservation Foundation (HPF) on some of the reasons for the high rate of foreclosures in America. The study suggests that many U.S. households are at a financial tipping point and many families are on the verge of losing their homes.

The economic tipping points for American families in danger of losing their homes outlined by the HPF include:

  • Thirty-two percent are because of the loss of employment.
  • Twenty-five percent are because of a healthcare emergency in the family.
  • Eighty-five percent of households are behind one mortgage payment.
  • Fifty percent of households are behind two payments.
  • Most Americans households do not have any savings, do not have any credit available, and their extended families are in a similar situation.
  • Most U.S. homeowners are first-time mortgagors, and most home mortgages are less than three-years old.
  • Many American households have refinanced their homes two or three times.

The HPF estimates that forty-three percent of U.S. households live beyond their means and that almost half of all homeowners in this country spend more than they earn. The foundation calculates that approximately fifty-two percent of American employees live paycheck-to-paycheck and that roughly forty-two percent of Americans do not have enough liquid assets to support themselves for the recommended three months should they have a financial crisis.

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