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2010-04-01 20:05:51 GMT 2010-04-05 20:00:00 (GMT -05:00) Eastern Time (US & Canada) Yes (click here to learn more about ) Closed 0 0 0 direct invitation(s) have been sent by the voice seeker resulting in 0 audition(s) and/or proposal(s) so far. Voice123 SmartCast is seeking 50 auditions and/or proposals for this project (approx.) Invitations sent by SmartCast have resulted in 0 audition(s) and/or proposal(s) so far.
Foreclosure. The mere word conjures up a variety of emotions, but what exactly is it? Why do some borrowers who are behind on payments get foreclosed on while others get to rework their loan?
Let’s start from the beginning. When a lender gives money to someone to purchase real estate, the lender secures the loan with the real estate. The property is in essence collateral for the loan. If the borrower defaults, the theory was that the lender should be able to take the property back and sell it to recoup their losses. Of course when lenders would let people borrow more than the property was worth and property values declined at the same time, it became obvious there would be a greater number of foreclosures and greater losses.
A “strategic foreclosure” is not really a “type” of foreclosure. It merely describes why someone might willingly allow their property to be taken by the lender. It’s strategic in the sense that the borrower is typically upside down, meaning (they owe more than it’s worth) and even though they can make the payments, they choose to give the property back anyway. The thinking is, by continuing to make payments they are throwing good money after bad. Their credit will be negatively affected, but they deem that less damaging than the alternative.
This has recently become commonplace as housing prices began to fall. It’s really very similar to a term bankers have used for years (A friendly foreclosure). This describes a borrower who didn’t force them to complete the foreclosure process thus saving time and money. A borrower who was in trouble could provide the bank a “deed in lieu” of a foreclosure which was a mutual agreement between the lender and borrower. (Yes, the bank has to agree to take a property back.)
An actual legal “foreclosure” process is preferred by most lenders today for a few reasons. The first is the loan may contain mortgage insurance which could pay the lender for losses, but the most significant reason is to clean up and eliminate any other liens. If a lender willingly accepted a property from a borrower in default they would not receive the property free and clear of any other liens so they may prefer to foreclose.
One method gaining popularity today (Assuming all lien holders agree) is for the borrower to attempt to sell the property for what it’s worth, even if that’s less than the mortgage amount. (This is commonly referred to as a “short sale”) The bank could forgive the difference, provide a personal loan, or try to collect later on in some type of deficiency judgment depending on what agreement was negotiated. Most people think a sale and/or foreclosure is the end of the journey but it could be just the beginning as a lender may attempt to collect the full amount of the loan. Lenders are not required to try to collect the difference, but many do particularly when it’s apparent the borrower has other money available and/or the borrower lied on their initial loan application.
Just like any legal procedure, foreclosures can be messy, lengthy, costly, and vary from state to state. How much so can depend on the types of foreclosure allowed in each state. The three basic types of foreclosure proceedings are judicial, non-judicial, and strict.
Judicial is exactly what is sound like. In most states the lender sues the borrower and after sufficient notice and procedures are followed, the property is sold on the courthouse steps or by a court appointed representative to the highest bidder.
In a few states a non-judicial procedure would be simpler, because court action may not be needed. Some states have a “trustee” hold partial legal title until the loan is paid in full so upon default, the lender can notify the trustee and after proper notices are provided, the “trustee” could sell the property at auction. This is commonly referred to as a “power of sale clause”. When signed by the borrower, it gives authority to the trustee to sell the property if they don’t fulfill the terms of the contract. In states that use this system, they normally use the word “deed of trust” to describe what most of us call a “mortgage” document.
The third type of foreclosure is seldom used because most states have banned it because it’s considered the most unfair. A “strict foreclosure” occurs without a sale taking place. Have you ever watched an old Western where someone gets behind on a single payment and the evil banker takes the property back? In this strict foreclosure, notice is given to pay by a certain date and if that doesn’t occur the court or legal representative would automatically grant title to the lender. It’s unfair because under most foreclosure procedures if there was equity in the property, the borrower would be entitled to any left over money. However with a strict foreclosure, the lender would reap the rewards.
Fairness is an important concept in most state laws and that would extend to allowing the borrower to make good on their debt before the actual courthouse sale of the property. This is referred to as an equitable right of redemption. Equitable means fair and redemption means making good so if a borrower shows up the day before the foreclosure sale with a certified check to pay off the mortgage in addition to any extra costs, it’s only fair and right they should get to keep the property and the sale should be cancelled.
There is one other type of redemption that is quite controversial in the states that allow. For example, in Kentucky it’s possible a borrower could make good on a debt after the courthouse sale. You may be thinking, “how could that be?" What happens to the person who bought the property? Well, the buyer does get compensated. This redemption is complicated and it rarely happens for the following reason. In order for the 1 year right of redemption to occur, the property has to bring less than 2/3rd of current appraised value. (Not mortgage amount buy what it’s worth now) The reason it seldom happens is there’s an opening bid on almost every property sold at foreclosure. Most people think that the opening bid reflects the lender’s costs, but in states that have a law/statutory right of redemption, the lender merely takes 2/3rds of the appraised value to determine what they’ll open the bidding at, which eliminates the redemption period.
You may be wondering why the rule is 2/3rds,which takes us back to the fairness argument. The position of the legislatures is that if something sells at less than 2/3rds of what it’s worth that’s not fair to the borrowers because remember, it’s conceivable the lender could come after them for the difference. Maybe there’s a huge natural disaster and only one bidder was able to make it to the courthouse, but whatever the reason, the theory is the property needs to bring close to what it’s worth because it’s already been a traumatic experience and there’s no need to make things worse.
As foreclosures rise, it’s likely the courts as well as the state and Federal government will continue to intervene more to try and reduce the damages caused by foreclosures. There will be arguments for decades about the appropriate roles the courts and government will play in handling foreclosures, but there’s one thing that’s certain. They’ll be enough blame and enough foreclosures to go around.
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