Foreclosure

foreclosureForeclosure is a situation in which a homeowner is unable to make full principal and interest payments on his/her mortgage, which allows the lender to seize the property, evict the homeowner and sell the home, as stipulated in the mortgage contract.

Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that they can repossess the property.

Therefore, through the process of foreclosure, the lender seeks to immediately terminate the equitable right of redemption and take both legal and equitable title to the property in fee simple. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowners’ association dues or assessments.

Each state has its own laws covering the notices the lender must post publicly and/or with the homeowner, the homeowner’s options for bringing the real estate finance loan current and avoiding foreclosure, and the process for selling the property. In 22 states, including Florida, Illinois, and New York, judicial foreclosure is the norm, meaning the lender must go through the courts to get permission to foreclose by proving the borrower is delinquent.

If approved, the local sheriff auctions the property to the highest bidder to try to recoup what the bank is owed, or the bank becomes the owner and sells the property through the traditional route to recoup its loss. The entire judicial foreclosure process, from the borrower’s first, missed payment through the lender’s sale of the home, usually takes 480 to 700 days, according to the Mortgage Bankers Association of America.

The other 28 states, including Arizona, California, Georgia and Texas , primarily use non-judicial foreclosure, also called the power of sale, which tends to be faster and does not go through the courts unless the homeowner sues the lender.

In some cases, to avoid foreclosing on a home, lenders will make adjustments to the borrower’s repayment schedule so that he/she can afford the payments and thus retain ownership. This situation is known as a special forbearance or mortgage modification.

Foreclosure Action

Foreclosure action is the legal proceedings initiated by a lender in the case of mortgage default. When a borrower fails to make mortgage payments or otherwise fails to fulfill any of the obligations set forth in the mortgage agreement, the lender can enforce its rights through a foreclosure. Foreclosure is the process of selling the mortgaged property and using the proceeds of the sale to repay debt.

The process can be rapid or lengthy and varies from state to state. Other options such as refinancing, a short sale, alternate financing, temporary arrangements with the lender, or even bankruptcy may present homeowners with ways to avoid foreclosure. Websites which can connect individual borrowers and homeowners to lenders are increasingly offered as mechanisms to bypass traditional lenders while meeting payment obligations for mortgage providers. Although there are slight differences between the states, the foreclosure process generally follows a timeline beginning with initial missed payments, moving to a sale being scheduled and finally a redemption period (if available).

A lender will typically initiate legal action when a borrower has defaulted on a loan after a certain amount of time, as specified in the mortgage documents. Very specific and detailed statutory procedural requirements apply to foreclosures and must be complied with to avoid any invalidation of a foreclosure sale. Proper notice of the foreclosure sale must be given to the debtor and to the general public, but exact procedures can vary state by state. All of the necessary steps in the process constitute the foreclosure action.

Foreclosure Buyout

Foreclosure buyouts are typically a refinancing loan which the homeowner obtains to cover the portion of the current mortgage that is in default. Of course, finding a lender that will lend to a borrower that is in the process of being foreclosed on can be difficult and if successful, the loan will usually be accompanied by a high interest rate.

Foreclosure buyouts skyrocketed in the wake of the 2008 subprime meltdown. Customers who use this service generally are required to have a minimum of 25% equity in the home before a loan is considered. This is to offset the risk to the lender should the borrower default on the foreclosure buyout loan. Foreclosure buyouts can also be referred to as foreclosure bailouts.

Foreclosure Crisis

The foreclosure crisis is a period of unusually high rates that caused high uncertainty in the housing market from 2008-2010. During the crisis, the number of foreclosures rose so high that banks were unable to process all of them properly. In many cases, banks were so overloaded that foreclosure proceedings would not be initiated for many months after the homeowner stopped making payments.

The process for recording the transfer of ownership for mortgage notes was overly lax during the housing boom, leading to difficulty in proving whether a bank even had ownership of the mortgage being foreclosed. Due to the widespread nature of these problems, banks halted all foreclosures in certain states for months until proper documentation could be assembled.

Foreclosure Impact

The impact of foreclosure goes beyond just homeowners but also expands to towns and neighborhoods as a whole. Cities with high foreclosure rates often experience more crime and thefts with abandoned houses being broken into, garbage collecting on lawns, and an increase in prostitution.

Foreclosures also impact neighboring housing sales on two levels, space and time. For any given time frame, foreclosures have a greater negative impact when they are closer to the property attempting to be sold. The conventional view suggested is that the increase in foreclosures will cause declines in the sales value of neighboring properties, which, in turn, will lead to an extension of the housing crisis.

Another significant impact from increased foreclosure rates is on school mobility of children. In general, research suggests that switching schools is damaging for children, although this does significantly depend on the quality of the origin and destination schools.

 


 

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