How Does Foreclosure Work?

In today’s economy, many people find themselves underwater with regard to their monthly expenses. When their total monthly debts amount to more than the money they’ve got coming in—and, as is usually the case, the monthly mortgage payment represents their larges expense—people sometimes opt to neglect this big debt and pay off their smaller, more manageable debts instead.

In my opinion, this is the wrong action to take. Mortgage lenders (such as banks) generally prefer partial payment to no payment at all. If they feel an effort is being made to meet the mortgage obligation, they’re less likely to initiate the dreaded foreclosure proceedings, and may even reach out to the homeowner with possible loan modification options.

Foreclosure is the process wherein a mortgage lender attempts to take possession of real property (house, condominium). When you sign your mortgage paperwork, you give your lender the ability to proceed with a foreclosure action when you fail to make your required mortgage payment. As with all contracts, it is important to read all documents you sign to ensure clarity and understanding. I recommend that every homeowner reading this article go back and read your mortgage paperwork, specifically your Deed of Trust, to educate yourself on the actual rights and responsibilities of both you and your lender.

Most mortgage agreements grant the mortgage lender the right of acceleration of the loan after one or more missed payments, causing the loan to be completely due and payable upon the lender’s demand. The mortgage lender will mail the homeowner a “Notice of Default” and record a copy of the Notice with the County Recorder. This Notice gives the homeowner a period of time (90 days in California) to exercise their “right of redemption”, i.e. the right to catch up on any or all missed or partial payments and make themselves current.

If the homeowner is unable to become current on their loan, the lender may opt to proceed one of two ways:

  1. Pursue a judicial foreclosure (rarely done in California) by initiating a foreclosure action with the local Court; or
  2. Pursue a non-judicial foreclosure, where the property is placed in the hands of a foreclosure trustee and eventually sold at a Trustee’s Sale.

All of this is typically spelled out in your mortgage paperwork, which is why, again, I encourage people to review their mortgage documents very carefully.

Soul-search time

The foreclosure process generally takes a good deal of time, anywhere from four to six months or more after a notice of default is served.

At this point, it’s time to do a soul-searching, reality check to determine whether or not you truly believe you can keep the property. Is what caused you to miss your mortgage payment(s) the result of a temporary hardship that can be quickly remedied or part of a larger, more critical situation where you’ll continue have problems making allergy payments no matter what you do?

If you’ve missed payments because you were temporarily out of work but are once again resuming employment, aggressive negotiations with the mortgage lender may ease the situation and avoid foreclosure. Mortgage lenders generally don’t want to go through with foreclosure if they don’t have to and have some assurances that future mortgage payments will be made. They’ll typically respond favorably to a plan that results in making payments current and agree to halt the foreclosure process.

Actions a borrower can take

Many lenders offer loan modification programs and I encourage people facing the possibility of a future foreclosure to look into them sooner than later. That’s the good news. But it’s important to note that such programs may not necessarily solve the issues that caused problems with mortgage payment in the first place. A mortgage lender’s idea of a modification may only apply to a reduction in the overall interest rate or adding missed payments to the back end of your loan —with no actual reduction in your required monthly payment — and there’s no guarantee that this will alter your ability to comply with the terms of the mortgage in the future.

Also, please take note that a mortgage lender’s foreclosure department is not required to delay the foreclosure process while the loan modification process is pending. These are usually two separate departments and they typically do not communicate with each other automatically. (It’s usually the homeowner who needs to make sure that both departments are aware of the situation to avoid a foreclosure during attempts of loan modification).

If a person feels they can’t keep up with house payments, there may be actions to take to avoid having a foreclosure on your credit report. These actions include proceeding with selling your property, even if it is in a short sale due to little to no equity in the property. While a short sale is still a negative mark on your credit, it usually is much better than having a foreclosure on your record.

Another last-ditch effort is looking into your bankruptcy relief options. In a Chapter 13 bankruptcy action, the Court will allow you to make up your arrears so long as you are able to make your current monthly payments as well. Pursuing Chapter 13 bankruptcy relief with a good-faith plan (whereby you make up the missed payments) will not only help to stop the foreclosure process, but should also help you regain control of your household finances to keep the mortgage lender from further pursuit of foreclosure.

Foreclosure is a complicated legal process that can take a homeowner on a roller-coaster of confusion and extreme emotions. If you find yourself facing foreclosure, seek legal advice or assistance. A skilled attorney can offer the best guidance for finding the solution that works best for you.