Brief overview of the Foreclosure process

As I had mentioned in y previous post, The Term Foreclosure is one that we now hear everyday, but let’s explore what it means exactly and what are some of its implications.

Definition:  Foreclosure:  The legal proceedings initiated by a creditor to repossess the collateral for loan that is in default
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The causes for a Foreclosures can vary greatly,  some of the common ones are, Death, Divorce, unexpected tragedy or illness.  However, the most common one and the reason why we are hearing the term so much in recent years, is an economic downturn leading to a Real Estate Market downfall in prices. If the prices are not down, property owners going thru most situations, as difficult as they may be, have options, they can refinance or they can sell the house and if the market is on the rise they can still come out ahead. When people face hardships and on top of that they find that if they sell their home they are still on the hook and will owe a lot of money to the creditors, lenders, IRS, etc. well they feel trapped and Foreclosure might be the only option they see., not that the Foreclosure process is the end of the road for their hard times however they view it as the only option and in some cases it might be so.

 

To understand the process clearly we have to understand that there is more than one Type of Foreclosure. This is determined by the key characteristics of the loan. We can split them in two basic categories.

1)Judicial Foreclosure.- This is when the lender actually files a lawsuit in civil court against the borrower and as it is to be expected, this process will be handled by a court in its enirety. The court might  decide to do an a)Auction (Sheriff Sale) where the home is sold to the highest bidder.  b)Strict Foreclosure .The Court initially sets a date by when the borrower has to become current in its mortgage payments and if he fails to do so then they will award ownership to the Bank or lender without having to go thru a sale process.

The judicial foreclosure process begins when the lender files their lawsuit, at which time they also file a  document that is recorded at the County called a  “lis pendens (LIS)” on the property.This public information tha allows potential buyers, lenders, and others be aware of the pending foreclosure lawsuit. A second notice, the Notice of Foreclosure Sale (NFS), is typically filed once the court has set the auction time and bid amount.

2)The other option is a  non-judicial foreclosure- The core difference is that  this is a process that allows the lender to advertise and sell the property at a public auction, without court involvement,  As the process is laid out in state laws, or statutes, (also referred to as Statutory Foreclosure).The reason why this process is allowed, goes back to the loan itself it is a key requirement for this type of foreclosure that the borrower agreed to the process from the time of the origination of the loan.This is accomplished by adding a specific clause called Power of sale clause  which gives a third-party trustee the right to sell the property if and when the borrower is not making their payments. Non-judicial foreclosures are sometimes referred to as foreclosure by power of sale.

 

In most states, the foreclosure process begins at the moment the lender files a “Notice of Default” (NOD)  with the County Recorder’s office,Once again this is public information and it makes interested people aware that this propety might be foreclosed upon. The next step is a second notice, the Notice of Trustee Sale (NTS) typically filed 30 to 120 days later, varies acording to state law; this will set the auction date and time. But might be re-scheduled or changed

Two important factors to note are that both types of Foreclosure vary greatly according to state law and a Foreclosure Sale does not necessarily provide the buyer with a clean title, there are some liens and conditions that might not be wiped out at the time of the sale, this is the case for example with a Tax lien past due property taxes will be the responsibility of the new title owner.

Although I did not go into great detail here on the Foreclosure process itself, I would be happy to answer any questions regarding the details of this process, you can contact me thru this post or bo my web site www.my858realtor.com or following me on twitter www.twitter.com/rinapodolsky

I do want to go briefly into the implications of a foreclosure.

As with Short Sale, those going thru this process will see their credit being impacted, for how long will depend and vary I  advise you to contact a specialist,  but typically it is safe to estimate that it will be impacted for about seven years.

 

Another important concern and one that is not that widely known is the fact that when there is more than one loan involved  and only one of them forecloses, the borrower still remains liable for the other loans, even when the borrower does not own the property anymore. Because they did not foreclose, that loan remains in full force and effect against that borrower!!!

 

Finally, you will also be smart to get counsel from an accredited and l informed accountant because there are some Tax implications that it is very important to be aware of. You might be taxed for the difference between the price the property sell for at the auction and the amount of money you owed as capital gains and that in itself might even put you in a different tax bracket.

Please feel free to contact me should you have any questions or comments.

 

You can find me by leaving a comment here or at www.my858realtor.com as well as www.twitter/rinapodolsky.com

 

This is not intended to be taken as advise and as with any other postings I strongly encourage you to seek the proper counsel with your CPA and attorney. Also cases vary in circumstances.

Short Sales and Foreclosures

In today’s Real estate market, this are two terms that have come to be part of the every day Jargon, however many people get them confused or used them as interchangeable. They are not. They are very different  from each other.

 

At this time I will try to give a very brief overview of what is a Short Sale and will leave the Foreclosure process for a later post. I will only mention it as to make a clear distinction between the two.

Short Sale:

When the market value of a property is less than the outstanding balance on the mortgage. The lender(s) come to an “agreement” with the property owner to accept less than what is owed on the property in order to avoid a possible foreclosure situation.

Let’s be very clear, it is NOT a short sale just because the sale of the home will be less that what the owners originally paid for this property, If the sale covers any and all loans it is not a Short Sale.

Now Short Sales are Not for everyone and are definitely not free of possible implications and consequences, be very clear on this right from the start. Not all short sales will be approved by the lenders, and the ones that are vary greatly from one another in their terms and arrangement.

One of the first questions I get when talking about Short Sales is, Do I have to be behind in payments for the bank to approve the sale? Sadly, there is not one correct answer, it depends on the bank(s), your personal situation, and well frankly…the day the person in charge of approving it is having. There have been some cases where the short sale is approved without the owner being behing=d in payments, however those are very few. We have to always be clear that what the lender is trying to do is recoup the most amount of money possible. At this time they are overwhelmed with the amount of cases they are having to process, so they will work on the ones with the greater urgency first, that means the ones that are already costing them money because the owner is not paying and therefore the ones closer to being foreclosed upon. So although this is not the “official” policy, it is the reality out there that your chances of getting the short sale approved will increase if you have already defaulted in a couple of payments. At this point I have to say that I am not advising anyone to stop paying their mortgages, actually the thing that will hurt your credit the most, is not the Short Sale itself but rather being behind on your payments is what hurts your credit the most.

So, let’s say you are behind on payments and have decided to go ahead and Short Sale your property…sounds like an easy way out, right? Well, not so fast, not so easy….again it will all depend. Part of the Short Sale negotiation will be cumbersome to say the least, they will ask for so many letters and papers that you will feel you are being audited completely, and you are, just be ready for it, get yourself prepared.

Then there is still the matter of the Deficiency.The deficiency will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay down the road.

Each lender has a different policy. The best you can hope for is to get one that actually “writes off” the deficiency. In other words, the seller has some minor derogatory credit reporting, but doesn’t actually owe the bank any more money.

In some other cases the lender will do a promissory note for the deficiency, the terms of this note will vary greatly.

In other cases you will be asked to bring some money to cover some of the closing costs.

Another important thing to take into account is that the deficiency can be reported by the lender through a 1099 as income for the seller. Which means that the seller has to pay taxes on that income. Depending on one’s situation, it could mean that people that are dependent on some form of aid because of “low income” will have some explaining to do come tax time.

Another way that the deficiency can be written off is in the form of a judgment.In conjunction with the 1099 reporting. It would look something like:”judgment filed against  Mr. XYZ in the amount of $xx,xxx by “Y”  lender.” This will appear in the “public record” section of the seller’s credit report . It can either show up as satisfied or unsatisfied. Satisfied is obviously better because it means that the worst thing that can happen is that the lender will report 1099 income.

When it appears Unsatisfied , beware, it means that the  court has filed judgement  in favor of the investor (lender) awarding them the right  to collect the deficiency. Lender might still decide to go just for the 1099 , or they might try to collect the deficiency after all. Until they get it. They can garnish your wages. Your only hope then is that you qualify for a chapter 7 bankruptcy. This is the worst case scenario and it is not the most common one by any means. But it is important to understand that you should get every detail of the settlement in writing! Always, no exceptions. And never just assume anything because you were told so at some point during the negotiation.

Regarding the time that a short sale will take…It will probably feel like it is taking Forever……The process will be lengthy and even though some lenders are trying to cut their response times, from the time you have a formal offer on the property it will take at least 45 -60 days just to get a response from the bank. Then add extra time if you need to renegotiate any terms that are not acceptable to you and assuming that the interested buyer that made the offer is still interested at that time, you will now open escrow and wait whatever escrow time is needed which is typically around 30-45 days.

There is a certain order to go about doing the short sale and there are some very specific steps and information you will need, this is why it is so important to work with a reputable agent that has a professional negotiator assigned to your case, even when the agent knows how the process works perfectly well, the negotiator is someone who knows not only the process but each lender and even has contacts  that help him make things go forward much more smoothly, that allows your agent to take care of what he does best which is service the listing and you the client.

One last word of caution when speaking on the subject of short sales that also applies to Loan Modifications. Please beware of any company or individual that promises to help but require you to pay any considerable amount of money upfront. Sadly there are many people who are simply taking advantage of others.

You might find some more information in any of the following links.

http://www.ftb.ca.gov/aboutftb/newsroom/mortgage_debt_relief_law.shtml

http://portal.hud.gov/portal/page/portal/FHA_Home/consumers/hope_for_homeowners

If you have any questions please feel free to contact me.

You can also find me on Facebook and in Twitter or simply go to our web site.

WWW.my858realtor.com

 

This information is not meant to be taken as advice to any particular case and you are highly encouraged to contact your Real Estate Lawyer and Tax advisor to ask about your personal circumstances.

What about the new wave of Foreclosures

This week I had at least five conversations with people who want to buy a property, either for personal use or as investment, the common thread with all five was…Should I Wait? I hear there is a huge Wave of Foreclosures that will be inundating the market this coming fall.

 

Although many of the reports coming out this past week all share the believe that we have already passed the bottom and there are clear signs of the market picking up, like in this report from CNN Money Blog http://money.cnn.com/2009/08/25/markets/markets_newyork/index.htm  I can personally attest to this from the trenches of the Real Estate Market in San Diego where I work. Let’s just look at inventories and closed sales in the past months inventories are noticeably shrinking, some of the hardest hit zip codes are the ones showing  a more impressive turnaround.

 

Yet we are still hearing a lot of voices raising concern over what is yet to come. What is happening is that we have seen a huge bursting of the bubble when many of the sub-prime mortgages started resetting and then leading to a wave of Short-Sales and foreclosures hitting the Real Estate Market.

 

The new type of mortgages scheduled to re-set are the ALTA and some ARM mortgages, this are mortgages that had a 5 year fixed rate and those five years are up. There are some key differences and I am not going to get deep into that but it is important to our point to understand that this loans were used for larger loan amounts, where the sub-prime were for the very low end mortgages this other two were for higher price points. We are yet to see how this market behaves when the loans start resetting.

 

One important thing to keep in mind is that when the first mortgages reset it took the whole country by storm, we did not have any systems in place, people did not know what hit them, the government had not been prepared, neither were the Lenders, banks, investors, etc.

 

Today, every agent I speak to has at least one if not several clients looking to buy this deals and foreclosures that are in the marketplace, many of them investors with access to big amounts of money looking to negotiate on them directly with the banks, thing is… Banks that had this properties were not interested, they were not negotiating in bulk selling at all. Now that is changing as well. Many people believe that the new wave of foreclosures will be coming into the market at a slower pace and there are people already waiting to start buying them in many cases even before they come into the marketplace.

 

Today, is still a great time to buy, mortgage rates are very low, Banks have started lending and they have even lowered the rate on the Jumbo loans in some cases to to around 5 We know that will not last forever, in fact it has been on the news that it can’t last for much longer. As far as inventory, it is much lower than in previous months but not lower than in previous years, and although at least in my area the properties with a price range of anything under the Jumbo are moving quickly if priced correctly, you can still get a very nice home for a very interesting price. Add to that all the tax incentives, special loans for bank owned properties etc. My answer to the original question of Is it the right time to buy or should I wait? is:

 

We can not predict the future specially with so much uncertainty and variables coming into play, however you can see what is here today, and Today is a very good time to buy If …you are ready and able.

 

For more detailed information you can contact me at www.my858realtor.com

or leave me a comment

 

You can also follow me on twitter @rinapodolsky