Section 11: Texas Defaults and Foreclosures
Poor Property Management
-Failing to fix a collapsing basement wall -No repairs to fix damage caused by a fire -Knowing there are termites and not having them eradicated
Lenders don't employ an inspection force to monitor all of the properties used as collateral for mortgages. Which of the following do you think would raise red flags for a lender in terms of property condition?
-A roof that's missing shingles -Boarded-up windows -Standing water in the basement from a flood a week ago
Which of these statements are true about Oscar's tax liability after losing his home to foreclosure?
-Because Oscar's mortgage had a non-recourse clause, the lender can't sue him for damages related to the foreclosure. -Oscar's tax liability is zero, since the adjusted basis for his house is greater than amount he still owed at foreclosure.
Chapter 11
-Primarily used by corporations or partnerships -Involves demonstrating how you will reorganize your finances
Non-Judicial Foreclosure Facts
-They're an alternative to judicial foreclosure. -They may be used if the deed of trust includes a power-of-sale clause.
Which of the following best describes a non-recourse mortgage?
A mortgage with a clause that prohibits the lender from suing the borrower for unpaid amounts if foreclosure occurs
It's not often anymore that homeowners insurance is paid separately from the regular mortgage payment, but there are still some instances where this happens. Why would Brad's mortgage company send him a default warning letter just because he hadn't yet paid his annual homeowners insurance?
If the borrower's insurance coverage lapses, the lender's investment is at risk.
Two areas of vulnerability for the lender occur when homeowners insurance is allowed to lapse. What are they?
Property damage and judgment liens
Both Chapter 7 and 11
Temporarily stalls foreclosure actions
Moratorium (forbearance)
The lender agrees to temporarily suspend payments in an effort to help the borrower avoid default and foreclosure.
Foreclosure Sale
-The property is sold at a public auction to the highest bidder. -Foreclosure occurs when the property owner defaults on a debt or lien that's owed. -The foreclosed on property is conveyed using a judicial deed.
Right of Redemption
-The right ceases when the foreclosure sale is held. -The defaulting homeowner must repay the principal amount of the debt owed. -The defaulting homeowner must repay any accrued interest. -The defaulting homeowner must repay the lender's costs associated with the foreclosure.
Foreclosure by Writ of Entry
-This is an additional action used almost exclusively in Maine, Massachusetts, and New Hampshire. -With this method of foreclosure, the mortgagor is given a final deadline when delinquencies must be paid. -If the mortgagor misses the final deadline, the mortgagee becomes full legal owner of the property.
Which of the following is a potential ramification to the seller if a short sale is completed?
A short sale can negatively impact the seller's credit, and the lender may seek a deficiency judgment for the amount not repaid.
One alternative to foreclosure is a voluntary conveyance of ______.
Deed
Why Property Condition Matters
If the property is poorly managed and requires repairs before it can be sold, the value of the collateral used as a loan decreases.
Repayment plan
If this can be arranged with the lender, it can help the borrower get caught up and avoid foreclosure.
Fairwell Lending must seek the court's permission to foreclose on a property used as collateral for a loan that is in default. What type of foreclosure process is likely being used?
Judicial foreclosure
When borrowers fail to pay property taxes, allow their property to go into disrepair, or _________, they could face loan default.
Miss scheduled mortgage payments
By writ of entry
Petition for legal ownership, opportunity to redeem property, notice of eviction if property is not redeemed
By entry and possession
Petition to enter, repossession, notice of eviction
____________ is when the outstanding loan balance is reconfigured. It is a form of loan modification.
Recasting
With this alternative to foreclosure, borrowers receive permission from their lender to sell the property for less than the amount owed on the borrower's mortgage.
Short sale
Which of the following statements best describes the judicial foreclosure and sale process?
The lender must seek the court's permission to foreclose on the property used as collateral for the loan.
Delinquency
-Falling behind on mortgage payments -Failing to pay property taxes -Falling behind on homeowners insurance payments
Foreclosure by Advertisement
-The borrower who has defaulted on the mortgage is notified by the lender of the impending foreclosure, and that the property will be sold at public auction. -It's not a replacement for the legal foreclosure process. -After auction, the new owner has to petition the court for a notice of eviction to legally remove the previous owner from the property.
Property Damage
-The house catches fire. -The river that runs through town floods and eight inches of water flood the whole first floor. -A tornado blows through and tears off the house's roof.
Oscar's Non-Recourse Loan
Oscar remembered asking questions during his closing about some of the clauses in his mortgage documents. One thing that he remembered asking about was the statement that his was a non-recourse mortgage. He learned that this meant if he defaulted on the loan, his lender wouldn't be able to sue him for damages. He hated the foreclosure, but he was glad he'd asked about that clause during closing because it helped him understand what to expect.
Which of the following best describes foreclosure by entry and possession?
Petition to enter, repossession, notice of eviction
Recasting
The lender reconfigures the loan, including the term, to reduce the payment amount.
Foreclosure by entry and possession is not a common practice in every state. In those where this method of foreclosure is used, what may happen after court permission is obtained to physically take possession of the property?
The mortgagee can take the property peacefully, and in the presence of a witness.
______ is a legal action that liquidates or restructures debt. It can have a long-lasting negative impact on the borrower's ability to obtain financing.
Bankruptcy
As part of a deficiency judgment sought by a lender, a ______ may be placed on any current and future property the borrower owns until the lender recovers all losses.
Blanket lien
Jake's Decision
Jake lost his job nine months ago and although he's been living frugally, he's running out of funds and is concerned he could be in danger of defaulting on his mortgage loan. He knows if that happens, he could be facing foreclosure, which is something he wants to avoid if he can. After considering the options, Jake has decided to try to sell the property before it's too late. He talked with his lender, who approved a short sale for Jake. The proceeds from this sale won't be enough to cover what Jake still owes, and the lender informed Jake of the possibility it may still seek a deficiency judgment for the amount not repaid. Jake is not thrilled with this decision, but he knows in the long run it will be better than going through foreclosure.
By advertisement
Notification of pending auction, public auction, notice of eviction
Chapter 7
-Primarily used by individuals -Title conveyed to a trustee -Cancels all debt secured by the property
Lien
-The kid down the street cut through the yard to get to his friend's house, tripped over a rock, and cut his forehead. -A neighbor falls down the front porch stairs and breaks his arm.
Blanket Liens
Blanket liens allow the lender to pursue the borrower by placing liens on any current and future property to cover losses.
Which of the following statements best describes a foreclosure by advertisement?
Notification of pending auction, public auction, notice of eviction
Judicial foreclosures
With this method of foreclosure, the property is sold by the court after the lender has provided sufficient public notice.
General Statements about Default Types
-Default doesn't mean foreclosure is imminent. -Non-payment of property taxes places the borrower in default. -Most lenders have a grace period for late payments, which varies from lender to lender.
Which may result in borrower default?
-Not paying for homeowners insurance -Not paying personal income taxes, resulting in a lien on the property -Poor property management
Which of the following are forms of loan adjustments?
-Recasting -Moratorium (forbearance)
Alternatives to Foreclosure
-Short sale -Repayment plan -Voluntary conveyance of deed -Bankruptcy
Siobhan has a mortgage with a clause that prohibits her lender from suing her for unpaid amounts if foreclosure occurs. This is called a _______ mortgage.
Non-recourse
Johnston fell on hard times and couldn't keep up with his mortgage payments, so his bank ended up foreclosing on his property. Johnston owns another property, a farm across town that he bought for his elderly mother-in-law. What may happen to that property if the bank experienced losses in the process of foreclosing?
The lender may seek a deficiency judgment and blanket lien and put a lien against the farm until the debt on the foreclosed property is paid.
Voluntary conveyance of deed
This helps the borrower avoid the stigma of foreclosure, but can still have a serious impact on credit. It is initiated by the borrower.
Bankruptcy
This is an option for a borrower who is in serious financial distress and is not to be taken lightly.
Non-judicial foreclosures
This method may be used if a power of sale clause is included in the mortgage or deed of trust.
Short sale
This results in proceeds that aren't enough to cover what is owed and has to be negotiated with the lender.
How long does a homeowner have to pay off outstanding liens against his property?
Until the foreclosure sale is held
A lapse in property insurance coverage can result in borrower default because it leaves the lender ________ should something happen to damage the property.
Vulnerable
