Foreclosure Timeline and Alternatives
Pre Foreclosure Period
A lender may initiate the foreclosure process when a borrower defaults on a loan, such as by missing a mortgage payment. However, a slight delay may not justify acceleration and foreclosure by the lender. Hence, in practice, lenders generally wait a few months after a missed payment before starting the foreclosure process. Generally the following process begins once a borrower is 2 3 months behind on their payments.
For owner-occupied loans from 2003 to 2007, a lender initiating the foreclosure process must generally contact the borrower by phone or in-person to assess the borrower´s financial situation and explore options for avoiding foreclosure. During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days. The lender must also give the borrower the toll-free number for finding a HUD-certified housing counseling agency.
For owner-occupied loans from 2003 to 2007, the lender may file a notice of default 30 days after contacting the borrower to explore options for avoiding foreclosure. The notice of default must be filed in the county where the property is located and a copy must be mailed within 10 business days after recordation to the borrower and all other persons who have requested such notice. The notice of default informs the borrower of the default. It must also include the lender´s declaration that it has contacted the borrower to explore options for avoiding foreclosure, tried with due diligence to contact the borrower, or the borrower has surrendered the property.
Three months after the filing of the notice of default, the lender may record a notice of trustee´s sale setting forth the date, time, and place of the upcoming trustee´s sale. Because of the gravity of a notice of trustee´s sale, it must be widely disseminated. The notice of trustee´s sale must be recorded, posted, mailed to the borrower and others, as well as published once a week for three consecutive weeks in a newspaper of general circulation.
Up to five business days before the trustee´s sale, the borrower may reinstate the loan by curing the default or paying the missed payments plus allowable costs. After the reinstatement period expires, the borrower still has the right to redeem the property by paying the entire debt, plus interest and costs (not just the arrearage), before the bidding begins at the trustee´s sale.
Although California law allows a trustee´s sale to take place 20 days after the posting of the notice of trustee´s sale, lenders customarily wait at least 31 days instead to help protect against federal tax liens. At the trustee´s sale, the property is sold through a public auction to the highest bidder. Title is transferred to the successful bidder by the trustee´s deed. The lender can also elect to take the property back as an REO (which stands for Real Estate Owned by the bank). They do this by purposely starting the bidding above market value. In this case, the property will eventually go on the market as a bank-owned foreclosure.
Source – California Association of Realtors
Finally, it is often possible to get a foreclosure sale date postponed as long as an offer has been submitted to the bank and the borrower is moving forward with the short sale process. If you have currently had a NOD or NOTS filed on your property, you still have time to do a short sale, but you need to move quickly. A realtor experienced in short sales can generate an offer quickly and get it submitted to your lender and postpone the sale date.
In some circumstances, you can get rid of your second mortgage or your Home Equity Line of Credit (HELOC) by filing bankruptcy, which will help you make smaller payments on the house in the future by only being responsible for making your first mortgage payment. Although the decline of your property value in today´s real estate market is a bad thing, it actually can be a good thing for purposes of wiping away your second and third mortgages in Bankruptcy. The time to act is now because once the property values begin to rise again, it will be too late. Thousands of homeowners are not just modifying their mortgages, but getting rid of them free and clear and you do not want to be the neighbor that is paying hundreds more on the same house per month. This is one of the benefits of the new bankruptcy law that a highly trained bankruptcy attorney can help you with. Not every state has this option so give us a call before the law and markets change and we can see if this is an option for you. Currently, this can only be done in Chapter 13.
Loan modifications are constantly in the news and some people are having success in restructuring their loans. However, please keep in mind that just because your mortgage lender calls it a modification, it does not necessarily mean it is your best option. While it is true that President Obama enacted certain programs to help homeowners afford their monthly mortgage payments, we understand that it is a frustrating process for everyone to go through.
Oftentimes, a repayment plan is better suited to a homeowner who has had a short-term financial hardship but is now getting back on their feet. Although a homeowner is recovering, they may be several months (and thus several thousand dollars) behind on their mortgage payments and they need time to bring this amount currently. Once a foreclosure has been initiated, a lender often will not accept any further payments less than the entire delinquent amount (this is so that they do not jeopardize their rights under the current foreclosure proceedings). A repayment plan requests that the lender stop the foreclosure process and structure a repayment schedule in a more lenient fashion to allow the recovering homeowner time to catch up on their loan and save their home.
Despite this, most times filing a chapter 13 bankruptcy is a much better option. The reason is that when the lender places what you were behind on to the back of your loan, the whole amount accrues interest and penalties over the life of your loan. Thus, a 10K balance many easily become a total of 40K when you finally pay it off. In a Chapter 13 Bankruptcy, you have up to five years to pay only the amount that you are behind on from the date of filing your case. This is often a much more economical option in the long run.
A forbearance is a request that the lender stops proceeding any further with the foreclosure for a short period of time. This is usually done in conjunction with other relief efforts. For example, a lender would issue a forbearance while the homeowner tried to sell their home to cure the debt via a short sale.
In 99% of client situations, we DO NOT recommend a “short sale” despite what every Realtor is telling you. This is because a short sale kills your credit more than any bankruptcy filing in most cases. The Realtors are using your dire financial situation to earn a commission for the sale of your house. Remember, only the Realtor has a vested interest in doing a short sale. THEY GET PAID A COMMISSION. However, what the Realtor is not going to tell you is that you will soon realize is whatever is left on the loans that were not paid off in the short sale you could be sued for in California. In addition, you may also be taxed on the difference. Therefore, not only will a short sale ruin your credit, but you may also find yourself in large amounts of debt because of the short sale. You just went through the frustrating process of finding a buyer for the lender and the only two parties who make out is the Realtor with their commission and the lender because you did the hard work and found them a buyer. Unfortunately, you get nothing in most cases. If you insist on doing a short sale demand from your Realtor that the lenders on all loans provide you in writing they will not collect the deficiency from you in the future. In most cases, they are unwilling to do this and that is why filing bankruptcy to get out of your loan obligations is usually a sounder financial decision.
Under a “deed in lieu” workout, a homeowner surrenders their property to the lender in exchange for the lender not to foreclosure on their mortgage. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he would in a formal foreclosure proceeding. However, please keep in mind that if there is a second mortgage on the home, you will be held liable and likely sued for the balance. Many people do not realize this and this is why surrendering the property through a bankruptcy proceeding in most cases is the best option.