CH 10: Defaults & Foreclosures

TYPES OF FORECLOSURES (3)

1. Judicial Foreclosure 2. Power of Sale 3. Strict Foreclosure

Strict Foreclosure:

A small number of states allow this type of foreclosure. In strict foreclosure proceedings, the lender files a lawsuit on the homeowner that has defaulted. If the borrower cannot pay the mortgage within a specific timeline ordered by the court, ownership of the property is transferred directly to the mortgage holder. Generally, strict foreclosures take place only when the debt amount is greater than the value of the property.

Judicial Foreclosure:

All states allow this type of foreclosure, and some require it. T he lender files suit with the judicial system, and the borrower will receive a note in the mail demanding payment. The borrower then has only 30 days to respond with a payment in order to avoid foreclosure. If a payment is not made after a certain time period, the mortgaged property is then sold through an auction to the highest bidder, carried out by a local court or sheriff's office.

Power of sale

Also known as a statutory foreclosure

Redemption

At any time up to the moment of the foreclosure, the borrower has the right to step in and pay what is owed and reclaim property forfeited due to mortgage default. This is his or her equity of redemption or equitable redemption. A lender would almost always prefer equity of redemption to deed in lieu of foreclosure. There is no right of redemption in Texas

Default

Breach or nonperformance of the terms of a note or covenants of a mortgage. is a breach or nonperformance of the terms of a note or the covenants of a mortgage. Defaulting on a mortgage is costly to the lender, who adds the cost of various fees to the amount already owed by the borrower. It also causes damage to the borrower's credit score and could lead to the loss of the property through foreclosure.

TEXAS FORECLOSURE

In Texas, lenders may foreclose on deeds of trust or mortgages in default using either a judicial or non-judicial foreclosure process.

Foreclosure

Legal procedure by which secured property may be sold to satisfy an unpaid note Not only will this add to the costs required to be paid to bring the account current, but the foreclosure filing will be a matter of public record. If the borrower is not able to bring the loan current or work out another solution, the property could be sold at a foreclosure auction. In many states, the borrower may also be responsible for paying a deficiency judgment, which is the difference between what is owed on the mortgage and the price the home sells for at the foreclosure auction.

RECASTING

Lenders may also offer the option of recasting, or re-amortizing, a mortgage. This process can reduce the borrower's monthly payment, thus making resolving a default situation more manageable. In a mortgage recast for a borrower in default, lenders may lower the interest rate or extend the term of the mortgage, and in some cases, may do both. Once the lender has implemented these modifications, the mortgage is re-amortized, which results in a reduced payment. While not advertised, most lenders will offer this option to not only borrowers in default or danger of foreclosure but also to borrowers with mortgages in good standing.

Default-Related Fees: (" " )

Mortgage servicers may charge for "default-related services," which can add hundreds or thousands of dollars to the cost of the loan over time.

NOTICE TO BORROWER

The Texas Constitution requires that before lenders commence foreclosure, they give notice to the borrower (Texas Constitution Article XVI, Section 50(k)(10)). The notice must be mailed to the borrower and state that a ground for foreclosure exists. The notice must give the borrower at least 30 days, or at least 20 days in the event of a default under Subdivision (6)(D)(iii) of the subsection, to: 1. Remedy the condition creating the ground for foreclosure; 2. Pay the debt secured by the homestead property from proceeds of the sale of the homestead property by the borrower or from any other sources; or 3. Convey the homestead property to the lender by a deed in lieu of foreclosure

DEED IN LIEU

The deed in lieu of foreclosure (DIL) is a mortgage modification option in which a borrower voluntarily deeds their collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from borrowers who can financially afford their mortgage payments.

FORBEARANCE

The most common way of resolving a loan default is to work out a plan which will let the borrower repay part of the delinquency each month, along with their regular monthly installment. If the borrower is temporarily unable to meet monthly mortgage obligations, the lienholder may extend forbearance by agreeing to suspend payments for a limited period until the borrower is able to begin a repayment schedule. Forbearance arrangements are typically worked out with individual lien holders on a case-by-case basis.

NON-JUDICIAL FORECLOSURE

The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below.

Recasting

The re-amortizing of a mortgage

Deficiency judgment

The unpaid balance of a foreclosed mortgage, payable by court order

Power of Sale:

This type of foreclosure, also known as statutory foreclosure, is allowed by many states if the mortgage includes a power of sale clause. After a homeowner has defaulted on mortgage payments, the lender sends out notices demanding payments. Once an established waiting period has passed, the mortgage company, rather than local courts or sheriff's office, carries out a public Copyright © 2021 Champions School of Real Estate® 266 Chapter 10 Defaults & Foreclosures auction. Non-judicial foreclosure auctions are often more expedient, though they may be subject to judicial review to ensure the legality of the proceedings.

DEFICIENCY JUDGMENTS

When a property is foreclosed, it is typically sold at auction, which can result in an unpaid balance or deficiency, on the original mortgage, as the amount the property sold for may not be sufficient to pay the balance in full. In these cases, lenders may seek a deficiency judgment on the foreclosure through a motion filed with the courts.

ADJUSTMENTS AND MODIFICATIONS Before deciding to foreclose on a property, a lender will typically

a lender will typically attempt to work with a borrower in default to avoid this action. There are many options for mortgage adjustment and modification available to commercial and government lenders, and these will usually be exhausted before a lender takes the final step of foreclosure.

The Home Affordable Foreclosure Alternatives® (HAFA) program is designed

for borrowers who cannot afford their current mortgage and have a pressing need to transition to more inexpensive housing. HAFA provides two options for transitioning out of a borrower's current mortgage: a short sale or a Deed-in-Lieu (DIL) of foreclosure.

STREAMLINED MODIFICATION PROGRAM (SMP) The FHFA Streamlined Modification Program (SMP), in cooperation with Fannie Mae and Freddie Mac

offers delinquent borrowers the opportunity to prevent foreclosure by working with lenders to refinance existing loans. These refinances may involve lowering interest rates, term extensions, or allowing forbearance on a part of the principal of the loan. An SMP refinance must give the borrower a new payment, which cannot be higher than 38% of gross monthly income (GMI).

Default-related services can include: (3)

• Property inspections to make sure the property is occupied and maintained properly. • Property preservation services, including lawn mowing, landscaping, and repairing or boarding up broken windows and doors. • Foreclosure costs, which may include fees for multiple attorneys, property title search fees, and charges for mailing and posting foreclosure notices. Damage to Credit Score: Mortgage servicers provide information about payment history to credit reporting companies, including late or missed payments. Even one late payment can lower a borrower's credit score, which affects the ability to obtain financing in the future