The Foreclosure Process - An In-Depth Breakdown

Foreclosure - a word with intangible meanings to someone who has never had the need to deal with this concept before. But now, you, or someone you know is all of a sudden launched into a hazy, new arena where the results are directly dictated by you experiences, or those you work with. We are here to help dispel some myths and shine some light on the world of foreclosures and dealing with banks and their attorneys.

There are many resources out there that tell you about what a foreclosure really is, but as we get more experience dealing with these types of situations, it is clear that a concise breakdown of the process and some of the solutions might be welcome. Many of the solutions that follow are unknown to sellers, because banks don’t want you to know about them, and neither do real estate agents. Luckily, we like full disclosure.

A side note: some of these solutions can also be applied to other types of distress, such as estate sales among siblings, divorce, or other issues that arise – we will get into that in future posts. I might also mention that we are not attorneys, so advice here should be researched. However, we do know this process well, and are happy to give you our take on your situation.

Foreclosures - In the Numbers

Whenever the discussion turns to distressed property owners, the 2007/2008 financial crisis becomes the center of the conversation. When real estate prices tanked after the discovery of the faulty mortgages that caused the Great Recession, many homeowners simultaneously lost their jobs – further inflaming these issues. So, not only do we have millions of homeowners realizing their loans were bogus, but we have large, institutional businesses going under, and smaller business trying to make ends meet – it was the perfect storm.

Though the amount of foreclosures is steadily declining, we are far from out of this. According to CoreLogic, there were 2,488 foreclosures completed in the 12 months through June of 2016 in Connecticut, and about 1.6% of the inventory is in foreclosure, down 20.6% from last year. Very few states are seeing an increase in foreclosure inventory. Overall, 1% of all homes with a mortgage are in foreclosure, and 2.8% of all mortgages are in serious delinquency*. This data does not even speak of short sales. *CoreLogic, Inc; National Foreclosure Report, June 2016

For more local context, in the towns and cities that comprise what we call ‘Lower Fairfield County’ (Greenwich, Stamford, Darien, New Canaan, Norwalk, Wilton, Westport, Fairfield, Trumbull, Weston, Easton), let’s discuss the past year of foreclosure activity. Of the 5,490 properties (single family and condominiums) that sold in the past 365 days, 279 were bank owned, and 104 were short sales (or about 7% of SOLD inventory).  

Bank owned = foreclosed by a financial institution and then sold.

Short sales = owner couldn’t pay their mortgage, so they sold the home, at a loss to the bank.

 As you can see, this area accounts for about 11% of the total foreclosures in CT (but about 13.5% of the total population), but once we add in other parts of Fairfield County, (such a Bridgeport, which had 866 sold homes, 222 of which were foreclosures and 71 short sales, a staggering 34% of total sales) we see that the ratio increases*.    *CMLS 2016

So, what does this all mean?

Seeing downward trends in foreclosure numbers is positive, as it indicates that we are getting out of the mess we were in. With 1%, as compared to 3.4% in 2013, of all mortgages with foreclosures, we have come a long way (nationally). However, there are still a huge amount in serious delinquency, which really means that the bank hasn’t had time to take these homes, or does not want to.

Tell Me About the Foreclosure Process

1. Homeowner stops paying their mortgage;
   
2. Bank files a lis penden status on their home, essentially warning them to start paying or go through foreclosure;
   
3. Homeowner tries to fight and stall the process (or doesn’t) by appearing at court, with or without an attorney representing them;
   
4. The attorneys that represent the bank tend to work with all homeowners to see some solution, though this depends HIGHLY on the bank, and the number of liens held (bear with me, this is where it starts to get murky);
   
5. There might be some mediation, they might request information about your hardships, i.e. proof you cannot afford the mortgage, among other items to help your case (and you might prepare these in advance, but again, probably a whole other topic); so, some banks will work with you, others will not;
   
6. Ultimately, if mediation is unsuccessful, a judgement of law date will pass, which is a date at which the bank actually takes your property (many ways to stall this, but we can get into that with your situation).
   

Here are some interesting tips (don’t ever take what we say and put into action unless you consult with attorney first):

• We had a seller have his home foreclosed upon, though the bank went after the deceased father, instead of his estate. Since there was no estate, it hugely complicated matters, but with homeowner trying to keep the property, he might have had a case to fight the bank since they should have opened an estate for them and then foreclosed in the name of the estate. So, if foreclosure + probate, ask questions first;
  
• If you no-show to court, it diminishes your chances of mediation. Judges and attorneys will be more reasonable if you are present for your case;
• There are many more options available besides letting the bank take your property on the Law Date (just don’t wait until the last minute); see below;
• Also worth mentioning, many banks use what are called ‘foreclosure mills’, or attorney offices that get  every case in a set location; these attorneys might have 1000 files, so it is important you take steps to make your case effectively.

The bottom line in all of this, is that these foreclosure situations are likely the most complicated of any of the situations you might deal with when your home gets into a distressed situation. The factors the make this vary widely include: the number of lien holders, the banks that hold the liens/mortgage, the attorney representing the bank (and their mood on that particular day), how much money you owe, and of course, how you handle the situation.

We advise talking to an attorney AND us while going through this process. To avoid tough losses, we can dampen the fall if the bank does decide to take the property, but well before that, our expertise might just come in handy.

I am in foreclosure, what can I do?

There are many options that come before accepting your Law Date and letting the bank take the home, is necessary. Forgive me for passing through these quickly, but it can get boring quickly if not applicable to you (remember, this is the abridged version); they are in order of most beneficial to the homeowner:

Pay Off the Debt:

This option is straightforward, pay what you owe including all the back taxes, back payments, and fees/interest applied to those payments. If you have the money, you should do this, unless your credit is not important to you (and the home).

Loan Modification:

There is a difference between a modification and a refinance. A refinance simply means that you get a lower interest rate by qualifying for the same loan you still have, with the same bank you are dealing with. A modification is different, it is the act of taking what you owe (including all bank payments and interest), and re-structuring the loan over another 30 years (or some loan term), in order to catch up without a huge payout all at once.

Forbearance Agreement:

Another word for this is payment plan. The main difference between this and a loan modification is that you are still in foreclosure for the duration of the payment plan, and you pay in a shorter period of time, on top of your regular mortgage payment. For example, if you owe $10,000 in back payments and interest, and your mortgage payment is $1500 per month, then you might pay $1916.67 for 24 months to pay back interest, and get out of debt. Banks are sometimes willing to negotiate an agreement like this if you can afford the payments. If you owe hundreds of thousands, this might be infeasible.

Subject To:

This option is the least useful to a homeowner, though sometimes it is better than the alternatives that follow. A ‘subject to’ [existing mortgage] deal would involve finding an investor with cash, to pay off your outstanding debt, the cost of which is the transfer of the deed in their name. The owner would still hold the mortgage, and the investor would then own the home. The bank is paid off, the seller moves out, and an agreement is made that the investor would refinance in a number of years (say 3-5) in order to get the loan into their name. It’s a great option if you don’t want to take any credit hit and if an investor is willing to do it.

Short Sale:

Short sale is typically the most common option by the time the seller goes to an investor/Realtor for help. A short sale is the sale of the home to a buyer where the bank agrees to forgive all the debt, and sell the home at a steep discount. This is a much simpler description than what it actually takes to convince the bank to do it, but the alternatives for the bank justify short sales in most cases. Short sales tend to be a harm to the seller’s credit for 2-7 years, a much better turnout than foreclosure.

Foreclosure:

The last option, and the most desperate option is the foreclosure, or forfeiture/acquisition of your home to/by the bank. In other words, the bank takes the home after a long and drawn out process. At some point, there is no shame in having your home taken by the bank, as it will enable you to move on with life (and hopefully you have been banking all the cash you are not paying into the mortgage). I say this is the last option, because it ruins your credit for 7-10 years. No bank or thorough landlord will want to touch your financial situation afterwards.

Bankruptcy:

This gets an honorable mention, because it is used as a last-ditch effort to attempt to save some time at the end of the process. If used effectively, it might save you when all else might be lost.

How Do I Know Which One to Use?

The answer to this question is not an easy one, so I will not attempt to do it here. Every homeowner is in a different situation, whether they have multiple mortgages, other liens on the property, a home in disrepair, and many other factors effecting your ability to use one or another of these options. You bank might also be unwilling to work with you.

The best thing you can do is find someone who can help figure it out (like us). An attorney, a Realtor with experience in these matters, an investor who has negotiated with the bank (also what we do), are all viable options. The point is that you find someone you can trust, and that is familiar with the bank practices in your state.

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No matter where you live, or what your situation might be, feel free to reach out with questions by commenting, or hitting the button on the right. Good luck, and hopefully this brief education will help you get options for a tough situation.

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