Unit 10: Defaults and Foreclosures
In the event of foreclosure on a conventional mortgage with private mortgage insurance, the mortgagee has to notify the insurer of default within how many days?
The answer is 10. The insurer has to be notified so it can instruct the mortgagee to foreclose.
Foreclosures on FHA-insured mortgages start with the filing of Form 2068, Notice of Default, which must be given to the local FHA administrative office within how many days of default?
The answer is 60. This is the reasonable time determined by FHA for notification.
When a couple defaulted on their mortgage loan with a mortgage company, the lender foreclosed. The house was sold at auction, but the mortgage company did not receive enough money to cover the loan balance due and the costs of the foreclosure proceedings. The mortgage company may pursue the borrowers for recovery of these costs through
The answer is a deficiency judgment. If a lender receives less money than the entire loan balance, interest to date, and costs incurred as a consequence of a default after the delinquency, default, and foreclosure processes have been completed, the lender may pursue the borrower for these losses. The lender sues on the note and secures a deficiency judgment.
A couple has a conventional mortgage with private mortgage insurance. They are now six months in default on the loan. To collect the monies due, the lender will have to initiate
The answer is a judicial foreclosure. With a mortgage, judicial foreclosure is required; if the loan is backed by a deed of trust, the nonjudicial foreclosure is used (no court appearance).
A deed of trust is used to achieve
The answer is a nonjudicial foreclosure. A deed of trust allows the trustee to conduct the sale of the property without any court action involved, which is a nonjudicial form of foreclosure.
A homeowner's property was sold at a foreclosure sale in January. In June, the homeowner paid all monies past due and redeemed the property. In order to do this, the state in which the property is located must have
The answer is a statutory period of redemption. The statutory period of redemption gives a defaulted borrower another redemption period after the foreclosure sale to recover the property.
In the foreclosure process, a public sale is necessary in order to establish
The answer is actual market value of the property. An auction will not generate any bids in excess of the balance because the lender sues for foreclosure under the terms of the mortgage.
A couple has been notified that they are in default on their mortgage payments and that the entire amount of the loan is now due. Their loan contract likely included
The answer is an acceleration clause. The acceleration clause entitles the lender to the total balance due whenever a payment is missed.
The system that developed to allow distressed borrowers extra time to raise the funds necessary to protect their property from foreclosure is called
The answer is an equitable redemption period. It is better to allow borrowers time to recover their property instead of displacing a taxpayer.
A homeowner with a mortgage loan decided to have improvements made and hired several contractors to do the work. The contractors were not completing the work to the homeowner's satisfaction, so she stopped paying all of them. Several of the contractors filed mechanics' liens. The answer that BEST describes the borrower's status is
The answer is breach of loan agreement. In Texas, a mechanic's lien does not take priority over the preexisting mortgage lien (first lien), based on the rules of priority govern conflict resolutions based on "first in time, first in right." Under these circumstances, the lender may consider the loan in default.
In a foreclosure, a loan is retired without being paid in full. Which of the following statements regarding the tax impacts of foreclosure is NOT true?
The answer is concern over the continuance of the Mortgage Forgiveness Debt Relief Act has caused an upturn in the number of short sales. In fact, this concern actually led to a slight drop in the number of short sales.
Before a lender decides to foreclose, full consideration is given to all of the following EXCEPT
The answer is current interest rate. A final foreclosure action is avoided whenever possible, so the lender reviews relevant circumstances that caused the default.
If the lender has petitioned the courts for right of possession to protect the collateral, the lender is also interested in the
The answer is disposition of the income generated by the property. The lender must maintain accurate records of the distribution of income so that any balance left after deductions for the required payments and property maintenance can be credited to the reduction of the debt.
To recover the payments suspended during a moratorium, instead of charging higher payments, a lender may choose to offset any possible hardships for the borrower by
The answer is extending the term of the loan by a time interval equal to the moratorium period. Lenders typically do not forgive the payments, but want to eventually collect all of the funds due from the borrower. A moratorium is intended to allow the borrower to stabilize and then continue making payments to avoid foreclosure.
More than 20 states in the United States require a judicial foreclosure and sale. If all attempts to resolve the default with the mortgagor have failed, the first step the lender takes is to
The answer is file a complaint in the court of the county where property is located. The next step is to issue a summons to the mortgagor. Along with filing a lis pendens with the court, notice is sent to all parties that have an interest in the property.
When a lender waives a portion of the payment to help the borrower regain financial balance for a limited period, this is described as
The answer is forbearance. By temporarily reducing payments, borrowers can recover from their situation that is causing the risk of foreclosure.
A woman has become delinquent on her Federal Housing Administration (FHA) mortgage since her job was terminated and she has had back surgery. The FHA has determined that the delinquency was caused by circumstances beyond her control. It is MOST likely that the lender will
The answer is forgo foreclosure for a one-year period. The FHA hopes that the borrower will regain a stable financial position within the year and be able to resume the loan under the original terms.
A borrower has been making payments by the 15th of the month on his mortgage for the past three years, but because of a recent layoff, he has not been able to make a payment for the past two months. The loan is considered to be
The answer is in default. The borrower was in breach of the loan agreement as soon as the payment was not made in 30 days.
A homeowner has been making payments on his homeowners insurance independently of the lender impounding for payments. The homeowner cancels his homeowners insurance to get a better price with a different company. Which answer BEST describes why the lender was notified?
The answer is lender is listed as coinsured along with the borrower/property owner. If any losses occur while the insurance has lapsed, the lender is notified so steps can be taken to protect the collateral.
During the judicial foreclosure and sale process for conventional mortgages, a title search is made to determine the identities of all parties that have an interest in the collateral property so they can be sent a
The answer is lis pendens. Lis pendens means "suit pending." Notice is sent to all parties having an interest in the property, requesting that they appear to defend their interests, or else they will be foreclosed from any future rights by judgment of the court.
An equitable redemption period gives the borrower the opportunity to
The answer is make up the outstanding balance before a foreclosure sale. Before foreclosure, the borrower may either bring the payments current or repay the total amount of the principal due in addition to interest owed and any court costs incurred under the right of equitable redemption.
The concept of full payment waivers originated during the Great Depression and are called
The answer is moratoriums. By waiving payments, the lender is hoping the borrower will be able to recover to avoid foreclosure.
If the lender and the borrower agree on a recasting arrangement to avoid foreclosure, the lender will require a
The answer is new title search. The lender will want to make sure that no new liens have been created, especially in the case of a borrower who might have sought assistance from other sources.
A default of one or more of the conditions or terms of a loan agreement activates the acceleration clause, allowing the lender to declare the full amount of debt due immediately. Which of the conditions causing default is the LEAST likely for a lender to pursue?
The answer is not maintaining the property, causing diminished value. This would be the most difficult condition to prove. Other conditions causing default have immediate consequences.
Which of the following BEST describes a borrower's diminishing the value of the collateral?
The answer is overgrown grass and debris in the yard. This could lower the value of the property and creates a technical breach to the covenants signed by the borrower to maintain the property.
Before a lender forecloses on a conventional mortgage loan, the mortgagor is notified of the default and the reasons for it. The mortgagor is required to
The answer is provide an immediate solution. Typically, there have already been notices to the mortgagor that have not received any response. The lender wants to take immediate action to protect the collateral.
What is the borrower allowed to do during the entire redemption period?
The answer is retain possession of the property. Lenders prefer that the property not be vacant, and allowing the borrower to retain possession provides more motivation to retain the property.
A man has six months after his property is sold at public auction to redeem the property according to his state's
The answer is statutory redemption period. Equitable redemption occurs before the sale of the property; the statutory redemption period occurs after the sale.
To provide relief to lenders when borrowers will not vacate their property after the equitable redemption period, a formal process was put in place that results in the decree of foreclosure. It is known as
The answer is strict forfeiture. This process provided guidelines for the appropriate conditions in which the lender could terminate the equitable period of redemption.
Fannie Mae and Freddie Mac have initiated a new program for distressed borrowers called
The answer is the Flex Modification Program. This new program was created to replace the government program of HAMP (Home Affordable Modification Program).
What does the lender get from the VA when a VA loan goes to foreclosure?
The answer is the VA pays the lender the difference between the present value and loan balance. This may also be referred to as the top portion of the loan.
The only time a foreclosure should be considered is when
The answer is the current market value of the property is less than the balance due on the loan. If there is still market value, the property could be sold and the loan paid off.
The additional time that the borrower is allowed to recover a property after a foreclosure sale is called
The answer is the statutory redemption period. Because of the enactment of state statutes, this additional time became known as the "statutory" redemption period.
The MOST critical player in a nonjudicial foreclosure is
The answer is the trustee. In case of default, the lender notifies the trustee, who has the right to sell the collateral property without becoming involved in a court action. The trustee gives notice of default at the county recorder's office and advertises in public newspapers. The property is then placed for sale at public auction.
All of these can cause a default on a mortgage EXCEPT
The answer is updating the appliances. The borrower makes a promise to make payments on time, as well as pay taxes and maintain insurance.