Q. What is a foreclosure?
A. When a secured creditor, usually a bank, attempts to recover
monies owed to them based on a promissory note by selling the
collateral. In more simple terms you have probably borrowed money
from a bank or mortgage company in order to purchase or refinance a
home. In exchange for lending you the money, you made a promise that
if you could not pay them back they could take the house. I will
refer to the events associated with these actions as the foreclosure
process.
Q.
Can the bank just come and kick me out of my house?
A. No. Only an order of the court can force you to leave your home.
Ultimately you may be evicted but there are procedures within the
court system that the mortgage holder must follow first for the
foreclosure and then another set for the eviction.
Q. Can you explain
some of these steps?
A. Most states have similar procedures but almost all states have a
fairly unique system of foreclosure. If you were already in the
foreclosure process you would be well advised to consult with an
attorney that is familiar with the laws in your state.)
Pre-Foreclosure
- Customer misses mortgage payment.
- Late notice send by bank.
- Customer misses additional payments.
- Bank attempts in writing and by phone to contact customer
and resolve situation.
- No arrangements are agreed upon and customer continues to
miss payments.
- Bank issues demand for payment under the note in full, based
on the acceleration clause. Most mortgage notes contain language
which basically says if you fail to pay the bank under the terms
of the note with monthly payments as promised they can
accelerate the note, meaning that the full amount is due on
demand. For example if your mortgage is $100,000 with payments
of $1000.00 per month you are only required to pay $1000.00 per
month unless you miss these payments and the bank subsequently
demands the balance based on this acceleration. Once this
happens you legally owe the full balance of $100,000.00 plus
back interest, plus late charges, plus legal fees all at once.
You will find from this stage on the bank will not accept
monthly payments. They will instead demand much more to
reinstate the loan. Although I consider this step in the pre
foreclosure category, once demand has been made and the note has
been accelerated you should already have contacted an attorney
who is an expert in dealing with these matters.
- No payments or arrangements acceptable to the bank are made.
Formal Legal Foreclosure Process
- Bank sends by sheriff or by certified mail Notice of Intent
to Foreclose.
- Bank begins action in the court system to foreclose.
- Legal notices (see soldiers and sailors notice below) as
required by law begin to be published in local papers.
- No payment or settlement arrangements are made with the
lender.
- Notice and waiting periods expire.
- Court holds hearing regarding banks claim.
- Court issues order allowing bank to foreclose. (Beware, one
foreclosure firm will begin 2 and 6 at the same time shortening
the process.)
- Legal notice of actual foreclosure sale and advertisements
published in local papers.
- No payment arrangements or settlements reached with the
bank.
- House sold at auction to highest bidder.
Q. How long
does this process usually take?
A. From the time you miss your first payment to the final
foreclosure sale its not uncommon for six months or more to pass. In
some state this could be more and in others considerably less. It
will also depend a great deal on your mortgage holder and how
aggressively they pursue your case.
Q. When in the foreclosure process do I have to move out of my
house?
A. YOU DON'T!!!!!!!!! The foreclosure process even when followed
through to completion only transfers ownership of the house from you
to the high bidder. This transfer of ownership becomes complete at a
closing following the foreclosure auction. After the auction you
automatically become a tenant in the house you formally owned. At
this point the new owner must follow the legal procedures in your
state for eviction.
Q. What is the eviction
process?
A. Again this will vary widely from state to state and you should be
consulting with an attorney with expertise in this field if your
case has gone this far. The process in Massachusetts is as follows:
- When someone has taken your house at foreclosure they can
send you a legal notice to leave the premises under a 72 hour
notice.
- If you fail to leave after the 72 hours has elapsed the new
owner must go to court to present his case before a judge that
you should be evicted.
- At a hearing the judge will decide if you are to be evicted
or not as well as how long you may stay in the house before you
must go. Your willingness to pay rent will play a large role in
granting more time.
- If the judge finds against you and you are unhappy with his
ruling you have 10 days to appeal his decision.
- If you have been ordered evicted and you have not moved out
on your own by the day designated by the court the new owner may
obtain an execution of the eviction judgment which will give a
sheriff the right to physically remove you from the premises.
- A sheriff gives you notice of the execution and as little as
48 hours to move.
- Anything left in the house is moved by the sheriff into
storage, where you will have to pay fees to get it back, locks
are changed, resistance at this point may subject you to arrest.
Q. How long
does the eviction process take?
A. From the day you are given you notice until a sheriff might pack
up and move your possessions out of your house you can expect a 6
week to 6 month time frame, with the average coming closer to 10
weeks.
Q. At what point will I have absolutely no options left?
A. Never. You have not lost until you have decided the fight is
over. Even after a foreclosure, even after an eviction you still
have as much right to buy your house back in the open market as
anyone else. Realistically if you have not been able to save the
house before a sheriff evicts you, chances are strong you will never
be able to structure a deal to buy the house back. This is largely
based on the assumption that you hired a capable attorney and had
the ability to strike a deal. If so, you would have done so long
before a sheriff removed you from the house. I actually handle many
cases that have been resolved after the foreclosure auction with the
result that the homeowner keeps their house. Although possible, I
have not yet seen anyone repurchase a home after a physical
eviction.
Q. I am receiving a lot of mail from people that claim they can help
me where are they getting my address?
A. Because of the legal nature of the foreclosure process your name
and address may be part of public information offered through the
court system and ultimately published in certain journals and
publications.
Q. What kind of people send these letters and can they really help
me?
A. Many groups of people try to contact homeowners in foreclosures:
- Mortgage Brokers. If there is enough equity in your home
they can help you to refinance and stop the foreclosure by
paying off your current mortgage in full. This solution often
works well, but you must be careful because the interest rate
and closing costs on these types of loans can be high. Due to
your credit situation you will pay much more than at a bank, but
some brokers may try to charge even more points or interest then
another just to gouge the debtor for more fees if they think
they can get it.
- Chapter 13 Attorneys. If you have the financial ability to
complete the chapter 13 plan and this also a valid way to save
the house, just beware that many of these attorneys will be more
than happy to file a chapter 13 for you whether it is the best
option or not. It is my personal feeling that this should be an
option of last resort unless your personal circumstances dictate
this as the best solution for you. Keep away from lawyers
running "bankruptcy mills" as I call them. These firms may offer
low fees but will let paralegal handle your entire case, never
really getting to know your situation or giving you the personal
attention you need.
- Private Financiers. Two very distinct groups fall into this
category. The most useful for people wanting to save their home
from foreclosure will be
private mortgage financiers who will help
arrange a new home loan, even when they have been
turned down by other high risk lenders. Other investors will
want to buy the house from you. Keep a sharp eye on what they
are doing for you and what they want for themselves. Sometimes
these people can help save your home, other times they don't
care about anyone else and depending on how they set things up
they can make your situation even worse. Remember there are
many ways to save a house from foreclosure.
You do not need to sell your house unless you do not want to
live there anymore or you can not afford the payments even if
you got a new mortgage or could catch up on the old mortgage.
- Your Mortgage Holder. Especially those involved with
government backed mortgages will offer ways for you to reinstate
your existing mortgage. While I have seen some of these letters
which can be down right misleading compared to what the banks
will realistically do, reinstating an existing mortgage is a
viable option and in many cases the best option.
Q.
How will I know which is the best option for me?
A. This is a tremendously complicated question. The answer will
depend upon your assets, liabilities, income, expenses and the
underlying reason why the house is in foreclosure. The best solution
will also depend upon the type of mortgage you have and where in the
foreclosure process you are when you make the decision to save the
house. Law firms that specialize in residential foreclosures from
the debtor's side should be familiar with all of these options. This
does not mean a bankruptcy firm who may only deal in bankruptcy but
a firm who in addition regularly reinstates mortgages for clients as
well as refinances clients through mortgage companies. Finding such
a group may be difficult.
Q. What
happens at the actual foreclosure sale?
A. Although any given sale may be a bit different it will go like
this:
- The Auctioneer will read various legal notices and legal
descriptions of the property.
- He or she begins taking bids on the property.
- If the Auctioneer has not already pre-qualified bidders by
asking for their deposit checks, when a bid is made by a party
the Auctioneer will ask for their deposit check. For most
residential auctions this will be $5,000.00
- The Auctioneer will solicit bids for higher amounts.
Depending on the auction increments will be set by the
Auctioneer. Examples of increments maybe $100.00, $500.00 or
$1,000.00. This process will continue until it has become clear
to the Auctioneer that the high price has been reached.
- The Auctioneer will announce the standard "going once, going
twice, going three times, sold!" and the auction is concluded.
- Foreclosure deeds and purchase papers will be drawn up by
the new purchaser and the mortgage holder.
- A grace period will be given to allow the purchaser to line
up financing. In most cases this should be thirty days.
- A closing will take place and the new owner will formally
take title to the property.
Q.
What happens to the money paid by the new purchaser?
A. Monies will be distributed in order of priority. First priority
will be real estate taxes. If monies are available after taxes
monies will go to the first mortgage then the second mortgage, third
mortgage etc., etc. The next money will go to any lien holders or
attaching creditors. This process will continue until all liens and
encumbrances on the property are paid. If by some chance there is
still money left over it goes to the former home owner.
Q. May I bid at my own
auction?
A. Yes if you have the required deposit. Remember this is a
non-refundable deposit and if you are the successful bidder you must
be able to refinance the home within the specified period of time
required under the terms of the auction. Also beware that some of
the old debts may merge and become reinstated.
Q. What does this
mean when debts merge?
A. Let's say for example that the first mortgage is foreclosing and
forecloses out the second and third mortgage. The second and third
mortgage holder no longer has any right or title to your home. You
may still owe this money but they have no right to foreclose on the
home nor do they have any security interest in the home in any way.
If you had filed a chapter 7 bankruptcy prior to the sale and
received a discharge after the sale you would not only not owe them
any money and they would no longer have a security interest either.
Your debt for all intents and purposes will be extinguished
completely. If someone else buys your home at the auction the bank,
the second and third mortgage holders have lost all their right to
the property but on the other hand if you buy the property back the
debt may "merge" back to the property with you and reattach, as if
the auction never foreclosed them out.
Q. What happens when a property is auctioned subject to a first
mortgage?
A. This happens when the mortgage is being foreclosed by the second
mortgage holder. They can only foreclose from their position. Let us
say for example there are outstanding taxes of $10,000.00 and a
first mortgage of $90,000.00 on the property with the second
mortgage foreclosing. At the auction the second mortgage would
foreclose from their position subject to the first mortgage and the
taxes. You find at this type of auction at a bid of $1.00 is the
same as bidding $100,000.00. To own the house out right one would
have to satisfy the first mortgage and the taxes.
Q. What happens if no one at the auction bids an amount high enough
to cover my debt?
A. If the mortgage were $150,000.00 and the high bid at the auction
was $100,000.00 the $50,000.00 balance would be called a deficiency.
Under most loans in most states you would still be responsible for
the $50,000.00 as an unsecured debt and the bank would have legal
rights roughly the same as what would exist on a credit card debt to
pursue you.
Q. Is there any special redemption period after the foreclosure
during which I could buy the house back?
A. Many states have such a redemption period.
Q. What is the difference between a foreclosure and a sheriff's
sale?
A. Foreclosure auctions will be held by a mortgage holder after a
default. A sheriffs sale would be held by a lien holder or attaching
creditor after default.
Q. At the foreclosure sale will the attorney's and potential bidders
have to come inside the house?
A. No. More than likely they will come onto the front lawn. If you
would like to invite them inside the house you are welcome to but
you are under no obligation to and they can not make you let them
in. If you know you are going to lose the house and are hoping for a
high bid so you will have little or no deficiency you may invite
them in (assuming the house is nice inside) otherwise don't.