A foreclosure is the legal process whereby a lender can cut off the ownership of a homeowner in default and sell the property to pay off the lender’s loan. The foreclosure process is governed by Statute and Court Rules. The foreclosure action begins with the filing of a complaint by the lender to cut off the ownership rights of the homeowner. The homeowner can file an answer to the complaint objecting to the foreclosure action. In the event no answer is filed by the homeowner, a lender can obtain a default judgement and eventually proceed to sell the property through the county sheriff. Notice of the sheriff’s sale is published in a newspaper advertising the public auction of the property to the highest bidder. The law allows the homeowner two adjournments of the sheriff’s sale. The lender may adjourn the sheriff’s sale more than two times.
In the event the property is auctioned at a sheriff’s sale, it will be sold to the highest bidder or sold to the lender. Upon the completion of the sheriff’s sale, the homeowner will have ten days in which to redeem the property and retain ownership. Redemption involves paying the full amount that is owed. If the property is not redeemed within the statutory time period, the sheriff will issue a Deed to the successful bidder. Once the Deed is issued, the homeowner’s right to the property ends.
The recent foreclosure crisis has been met with a variety of programs and tactics to help property owners facing foreclosure. One program to help resolve a mortgage delinquency involves a mediation between the lender, the homeowner, and a Court appointed mediator. Mediation is not binding on either party but may be useful in working out a settlement. Mediation is not available for investors or commercial property.
You may have recently heard reports in the news about a tactic some homeowners are using in foreclosure actions. The tactic involves making a demand to the lender to "Produce the Note." Court rules required the lender to prove that they have a mortgage on the property and that the homeowner has violated the terms of the mortgage and note. Years ago this was a fairly simple task because the lender who loaned the money also owned the loan for the full term and therefore retained all the paperwork. In recent years however, lenders have engaged in the practice of selling the loans after closing. This practice became even more complicated during the height of the housing boom when Wall Street firms combined loans with other loans from different parts of the country and sold them to investors around the world. The selling and reselling of loans often resulted in lost paperwork thereby making it difficult for lenders to "Produce the Note." Because of the tremendous volume of foreclosures, the attorneys handling the foreclosure actions on behalf of the lender may not have all the paperwork required when they file the foreclosure action. The theory of the "Produce the Note" tactic is that if the lender cannot produce the original note, it therefore cannot prove its case and the Court could dismiss the foreclosure action or at the very least slow down the case until the note can be produced. This tactic may not work in all cases and at best may only result in a delay of the foreclosure action.
There are other alternatives available to a homeowner to avoid foreclosure, such as a "Deed-in-Lieu of Foreclosure" or a "Short Sale" of the property. When faced with foreclosure, a homeowner should realistically assess his financial ability to stay in the home. If a work-out of the delinquency is not realistic, a homeowner should seek the advice of a lawyer to discuss appropriate alternatives.
A "short sale" is the sale of property for less than the amount of the existing mortgages and liens on the property. A "short sale" is not based on Statute or Court precedent. It is simply an agreement made between a defaulting homeowner and the lender based on the following concepts: • Lenders are generally in the business of making loans, earning interest and other fees in connection with the loan process. Lenders do not want to be property owners. • The dramatic decrease in the value of property in general and the financial situation of the homeowner make it clear that the homeowner cannot make mortgage payments and that the property cannot be sold for a price which will pay off the lender in full.
A "short sale" generally involves a homeowner missing several mortgage payments because of financial distress and the value of the home having dropped by a large amount causing the loan on the property to be higher than the value of the home. When the value of the home is less than the mortgage, it is known as "being under water" on your loan. Based upon financial conditions the homeowner will not be able to make up the short fall on the mortgage.
Under these conditions, if the homeowner puts the house up for sale, it is likely that offers being made to purchase the home are well below the amount necessary to pay the mortgage in full and the other closing costs of the seller. In such a situation the lender may consider accepting an amount less than the full amount they are owed. If the lender accepts it, the homeowner will then be relieved of the payment of the rest of the mortgage thereby limiting the damage to the homeowner’s credit. A "short sale" is complicated and time consuming. Obtaining approval of a "short sale" becomes more difficult when second mortgages, judgements or other liens must be paid in addition to the first mortgage. Short sales of non-owner occupied homes and investment properties may have significant income tax consequences to the property owner. Homeowners considering a "short sale" should seek the advice of a qualified lawyer. Legal fees associated with a "short sale" are often worked into the costs of the closing and therefore may not be an out of pocket expense for the homeowner.
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