What is the Foreclosure Process?
More often than not, whenever you turn on your TV or open a newspaper these days you are inundated with stories about foreclosures. You think that you know what foreclosures are, but do you? The term foreclosure is a term used to describe the process in which legal action is taken by a lender or mortgage holder when the terms of the mortgage or trust deed are not met and the borrower is in default. A promissory note generally states that the borrower must keep their payments current or the lender can take possession of the home in order to recoup the loan. The mortgage or trust deed is a contract agreed upon by the lender and the borrower. By agreeing to a signing the mortgage or trust deed the borrower allows a lien to be placed on the property. A borrower is in default when the repayment terms stipulated in the contract are not fulfilled. When the borrower defaults the loan becomes a non-performing asset and is no longer earning interest for the lending or mortgage company. If the loan is no longer earning interest then it is not producing income for the lender. In order to recoup its losses the bank starts the foreclosure process. State foreclosure law dictates the path the foreclosure process takes but the basic process generally follows these basic phases:
Phase 1
Pre-Foreclosure: The actual foreclosure action has not yet occurred. The borrower misses a payment and is now considered to be delinquent on the loan.
- Day 15 the payment is usually considered "officially late". At this point the lender will generally send a late payment notice or call the borrower and ask when she will be able to pay.
- Continuing to be delinquent between day 45 and 60 the lender will send a "demand" letter by certified mail. The letter tells the borrower that they have officially breached the mortgage contract and is the first time that foreclosure is officially mentioned. The demand letter will inform the borrower of the steps that they need to take to stop the process.
- Around 90 days the lender's lawyers or foreclosure representatives may start filing court papers and recording a legal notice of the foreclosure status. The procedures at this point depend on State foreclosure laws.
- Judicial foreclosure process, the lender files a complaint that declares its intent to take legal action against the borrower. The court requires the lender to show evidence that the borrower has defaulted on their loan agreement. If the lender can show that the mortgage contract agreement terms were not met the foreclosure process can begin. This method of foreclosure is practiced in lien theory states, or those that use a mortgage to secure a lien against real property. The lien theory requires that a borrower pledge the title to the property to the lender that and that in the event of default the lender, through court seek compensation from the borrower. Judicial foreclosure process is used in those states recognizing mortgages as the primary legal instrument securing a lenders interest and a summary judgment is held.
- Non-judicial foreclosures do not occur in a courtroom in front of a judge. This foreclosure process occurs in the presence of a third-party trustee as set forth in the deed of trust. This method is practiced in title theory states, or those that use a deed of trust to secure a lien against real property rather than a mortgage. In title theory state the deed is placed in trust with a third party until all obligation contained in the promissory note have been satisfied. After the borrower has met all of their obligations the third party must return the title back to them. If the borrower becomes delinquent on the loan, the lender can instruct the trustee to file a notice of default in the county in which the property is located. The deed of trust contains the power-of sale provision that authorizes the lender to sell the borrower's property through a trustee rather than a judge.
In the pre-foreclosure phase the borrower still has the opportunity to save their home from foreclosure by paying their delinquent payments. Once they have done that the lender can reinstate the loan and terminate the official foreclosure proceedings.
Phase 2
This phase occurs at the auction sale and represents the ending of the pre-foreclosure phase. It is in this phase that the property is auctioned off at the county courthouse in a public sale to the highest bidder. With the exception of the redemption period, the auction sale terminates the rights of the homeowner's interest in the property.
Phase 3
Phase 3 is the redemption period and is determined by your States foreclosure laws. Here the ownership rights of the property have been transferred to the successful bidder at the auction sale. Although the winning bidder now technically owns the property, their ownership may be limited by a state-mandated redemption period that gives the defaulting borrowers the opportunity to redeem themselves. If the borrower can come up with the full amount of money owed to the lender, they have the legal right to redeem the property by purchasing it back from the lender. Whether or not your state has a redemption period depends on whether it is a title theory or lien theory state. Most title theory states do not have mandatory redemption periods, but most lien theory states do. Redemption period vary from state to state and can range from a few days up to over a year.
Phase 4
Post-Foreclosure is the last phase and is where the ownership rights of the property has been transferred to the lending institution that brought about the foreclosure action. The redemption period is past and the borrower no longer has any rights or claims to the property. When ownership is transferred to the lender it becomes a non-performing asset and is referred to as real estate owned, or REO. In the post-foreclosure stage properties are generally listed for sale through a network of real estate agents who help them dispose of the properties on the open market. Bank owned properties can easily be purchased through real estate agents. Purchasing a bank-owned home can be as simple as working through an agent who will write up an offer and present it to the lender.