With all of the news about COVID-19 and the resulting economic impact, I’ve been having discussions with concerned homeowners about forbearance and foreclosures. I’ve also been having discussions with investors who are hoping to take advantage of foreclosures. So I’ve decided to share some facts about foreclosures that I hope will take some of the fear out of the unknown and provide some clarity for folks on either side of the issue.
To break it down to its bare bones, a mortgage foreclosure happens when a lender exercises its lien against a borrower’s home in order to sell the house to pay off the mortgage loan. This, of course, only happens after the borrower has failed to make mortgage payments for an extended period of time, has ignored notices that the payments are behind, hasn’t bothered to call the lender to see what can be worked out. So how did we get from popping the champagne cork on closing day to having our belongings set out on the lawn? It didn’t happen overnight:
Step 1 – Notice of default is recorded by the bank
This happens after you’ve missed a payment. Usually, especially in the old days, it happened after several payments were missed. Banks are tightening the reins, however, trying to move homeowners to action long before the point of no return. So you’ve missed one or several payments, and now the bank officially records the notice of default.
Step 2 – Opportunity to reinstate the loan
This sounds pretty hopeful, doesn’t it? You can reinstate your loan! You have the power to stop the foreclosure process anywhere along the way—until five days prior to the auction of your home…but we’re getting ahead of ourselves. How do you reinstate the loan? Bring your loan payments current plus the late fees and whatever penalties are assessed, and you have just reinstated your loan. You’ve stopped the foreclosure. You won’t lose your house.
Step 3 – Date of foreclosure is set by the bank
But what if you can’t beg or borrow the back payments and other fees? Is all hope lost? Not quite. We’ve come to the third step of the foreclosure process: the bank sets a date of foreclosure. Typically, the date is three months (about 90 days) after the bank sets the notice of default. You are allowed to live in the house until the actual date of foreclosure. You cannot be evicted or thrown out of the house until this date. You still have time to come up with that money.
Step 4 – Notice of trustee sale is prepared, published and posted
Now the bank prepares the notice of trustee sale. The bank will publish it (you’ve seen those notices in your local newspaper). The bank then mails you a copy of the notice and physically posts it on the outside of the house. You still have time to bring the payments current.
Step 5 – The house is sold at a foreclosure auction
We’ve come to the final step: the foreclosure auction sale. If you are still living in the house and it is sold to a bidder at the auction, the winning bidder can have you evicted by the sheriff within 24 hours. If the house doesn’t sell, the bank will show the house just like you would if you were selling the house yourself. The bank may also have you evicted within 24 hours, or the bank may decide to let you stay until the house sells.
Bottom line for concerned home owners – communicate with your lender or loan service company. Our elected leaders have gotten ahead of this issue a little bit and are providing some coverage with forbearance and restrictions on foreclosures. This is a different situation than the recession in 2008 where we saw a lot of foreclosures. If you are communicating with your lender or service provider, they are more than likely going to work with you on a plan to keep you in your home and make up the payments.
Bottom line for investors – We’re not yet seeing increases in foreclosures. As you can see from the information above, the foreclosure process takes time. In the current situation with restrictions on foreclosures, it is going to take even more time before we see an increase in foreclosures. Unfortunately, I suspect there will be home owners who will not be able to recover and the banks will foreclose. I don’t think we’ll see the number of foreclosures we did during the recession, and I don’t think banks are going to be willing to take the big price reductions they did with REO properties following the recession, especially if things get back to “normal”, whatever that looks like, fairly quickly.
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