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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.

Tenants’ Rights When a Property is Sold or Goes into Foreclosure

I’m often asked by tenants what they can do if the house they’re renting is about to be sold by the landlord or is headed for foreclosure. Here’s information that should prove helpful to you in these situations:

In California, landlords wishing to sell their rental property are required to notify tenants in writing of their intention to sell. Many landlords ask tenants to vacate the property promptly, since having renters occupying the property generally limit the pool of potential buyers to investors or others willing to maintain the property as a rental.

Generally speaking, a rental lease will provide terms as to how much time a landlord must give the tenant to vacate the property. .If such written terms are not included in the lease, the legal time requirement is at least 90 days—and notice must be delivered to the tenant in writing.

When a new owner takes over

 If a prospective buyer wishes to purchase the property free and clear of occupants, the buyer can negotiate that the seller ensures the property is vacant by close of escrow. If the seller had not previously provided a Notice to Vacate to the tenant(s), the escrow period may end up being extended, since a Notice to Vacate provides tenants 30 to 60 (or even 90) days to relocate. Furthermore, if the tenant refuses to vacate after given proper notice, then the seller may be required to initiate legal anticonvulsant proceedings for eviction.

In the event you face a Notice to Vacate, you’re entitled to all the privileges afforded by the lease until the period expires (though you still have to pay rent). Whether it’s a foreclosure or sale situation, you can recover all or a portion of your security deposit, subject to any allowable deductions.

If the property is sold or foreclosed upon prior to the completion of a noticed period to vacate, the new owner takes the property subject to the tenant’s lease. I have found that, frequently, new owners offer current tenants “cash for keys”—meaning they will pay tenants to facilitate moving out so there’s no need to resort to legal proceedings (like eviction).

Stay aware of the situation

Tenants generally face a different problem when the property is in foreclosure.  In the vast majority of situations, a tenant’s lease will survive the foreclosure process and the new owner takes the property subject to the lease.  However, to stay in good standing under a lease, a tenant must make rental payments to the landlord/current owner of the property.  How do you know if a piece of property is about to go into foreclosure or seems headed that way? If the landlord isn’t keeping you updated, contact the County Recorder’s office and file a Request to Notice, asking that you be alerted to any foreclosure proceedings. By doing so, you will receive copies of a Notice of Default and Notice of Sale in a timely manner.

Tenants have substantial rights in the event of a property sale or foreclosure, but they must stay on top of the situation in order to maintain those rights. In a foreclosure, for example, chances are good your security deposit will be gone with the original landlord who lost the property—in which case, you can seek return of that security deposit from the new owner. But in order to do so, you must have documentation confirming that the original security deposit was paid (as noted in the original lease or through a cancelled check). So be sure to keep all documents relating to your rental (e.g. leases, canceled checks or other proof of payment, etc.). Don’t throw anything away.

If you learn that the rental property you’re living in is about to be sold or go into foreclosure, contact an attorney. They will help make sure you are able to preserve and assert all your rights as a tenant.

Are you in a situation affecting your rights as a tenant? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from family law, estate planning, bankruptcy, and DUIs and landlord/tenant disputes. 

Homeowners’ Rights During the Foreclosure Process

The foreclosure process usually starts after a homeowner defaults on a loan or mortgage payment. That’s because most loans are secured by a deed of trust, which generally includes a built-clause stating that, in case of default, the lender has the right to proceed with foreclosure.

It’s not always understood that a similar clause in most mortgage agreements stipulates that even a secondary lender with secured mortgage interest can initiate foreclosure proceedings. So, for example, if you have three loans against your property, any of the three mortgage holders has the right to foreclose on their loan if and when payments aren’t made.

But this doesn’t mean every lender starts foreclosure proceedings when a payment is missed.  I’ve seen lenders go for years without foreclosing on a defaulted loan. Also, missing a payment doesn’t mean you automatically give up the right to live on the property. There’s no obligation to leave until you receive legal notice to vacate the premises.

Notice of Default

 In general, the foreclosure process starts when the lender and County Recorder serve you with a “Notice of Default.” (While this can happen after the homeowner misses one payment, many lenders wait until after a couple of payments are missed.) Since this document sets out your rights and responsibilities during the foreclosure process, it’s important that you read it very carefully.

The Notice of Default officially notifies you that you have 90 days from receipt of the notice to “cure” (redeem or make yourself current on payments). This can include having to pay all the money in which you are arrears, as well as other allowable costs the lender may have incurred.

If you make yourself current, the Notice of Default is withdrawn and you’re back in good standing. If not, you face foreclosure of your property.

Sometimes a lender will accept less than the amount stated in the notice (on the principle that some payment is better than none). So there is always the possibility that you can negotiate terms with the lender and have the default notice cancelled.

After foreclosure gets underway

 If you’re unable to make yourself current after the initial right-of-redemption period, the lender can post a Notice of Sale (as noted, not before 90 days have passed from the time the Notice of Default was issued). The Notice of Sale states that the lender (or “trustee”) can sell the home at auction within 21 days. According to the California Courts website, the Notice of Sale must, among other things:

  •  Be sent to you by certified mail.
  • Be published weekly by a newspaper in the county where your home is located (for three weeks before the sale date).
  • Be posted on your property, as well as in a public location (for example, the local courthouse).

During this time, you can try to make up payments, but the lender is not required to honor those payments after the right-of-redemption period has passed.

If the house is sold

 At the trustee sale, a buyer purchases the property and the deed is transferred to the new owner. This effectively makes you a “de facto” tenant. You can leave the property willingly or negotiate some other terms in order to stay. I’ve seen numerous examples of new owners entering into rental agreements with the prior owners that allows them to stay in the house. I’ve also seen situations where the new owner, wishing to avoid a lengthy eviction process, negotiates a payment to the prior owner so that he or she will depart in a timely and peaceful manner. (This is known as “cash for keys.”)

If you choose not to cooperate, the new owner can start the eviction process—which includes sending you a notice to vacate. Attempting to fight this in court can be difficult, time-consuming and expensive for both the new owner and the former owner.

Foreclosure is a complicated and occasionally highly emotional process. 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.

Tips on Avoiding Foreclosure Scams

It is clear that anyone facing the possibility of foreclosure on their home is in serious financial distress. People in these situations are susceptible to undue influence and can be easily misled into making bad decisions. It’s a sad but true fact—there are many unscrupulous third parties who won’t hesitate to take advantage of someone desperately seeking a way to save their house or at least some of their finances.  If you are facing foreclosure, here are some things to look out for when seeking professional assistance:

Scams come in many forms

Foreclosure scams, also known as “rescue scams,” come in many forms. The most common involve what companies call “mortgage relief services.” They say they’ll help you refinance your mortgage in a timely fashion, so that a foreclosure sale doesn’t take place out from under you. For this alleged service, they charge a huge fee (and sometimes additional fees for “operating costs”), with the promise that the homeowner will walk away still owning the property and with a refinanced mortgage and all of their missed payments cleared up.

Sound too good to be true?

In the vast majority of cases, it is. What generally happens in these cases is … nothing ever gets done. The company that made such lifesaving promises collects its fee and then basically does nothing, never returns calls, etc. This goes on until the house goes into a foreclosure sale, at which point the former homeowner is simply out of luck.  And just try to get a refund . . .

Another common scam involves a title transfer, where the foreclosure relief company requires you to turn over title (ownership) of your house either to them or to some other third party. You’re permitted to stay in the house as a tenant (renter) and, so the promise goes, with the plan to eventually buy back the property once the mortgage issue has been resolved.

The problem is, once you turn over the title, these companies routinely arthritis provide nothing in writing that validates this supposed agreement. Generally speaking, the title transfer process ends up with the third party claiming they were unable to save the house or that they now own the property outright, with no recollection of any alleged agreement with you. If they want, they can sell the house themselves (they’re now the title-holders, after all) or they can open a home equity line-of-credit or other loan against the property, and take out any equity from the property. The end result – you lose any anticipated equity and, if you’ve been staying in the house as tenant, you’ll likely be evicted as well.

How can you avoid falling prey to schemes like these?

The office of the California State Attorney General offers helpful tips, including these:

Never transfer title or sell your house to a “foreclosure rescuer.”

  • Do not make mortgage payments to anyone other than your approved lender or loan service.
  • Do not sign documents without carefully reading them first. Homeowners believe they’re signing a document for a new loan or a loan modification. They learn later that they’ve transferred ownership of their home to someone who is now trying to evict them.

This is great advice, but I want to add that you should always contact a lawyer before approaching any business promising foreclosure relief or responding to such a solicitation. Believe me—these companies have no accountability. They won’t think twice about taking your money and then disappearing.

If you’ve already become a victim of such a scam, it’s not necessarily too late to take action. A lawyer knowledgeable in this area can still take steps to help remedy the situation.

Are you in need of legal assistance regarding debt relief options or have any questions regarding the above topic? The Law Offices of Ian S. Topf offers a free consultation in a variety of issues, ranging from bankruptcy, debt collection defense, estate planning, family law, as well as DUIs and civil matters.