ANATOMY OF A FORECLOSURE

Foreclosures are occurring daily at alarming rates across the country. With so many homeowners experiencing an increase in monthly mortgage payments due to interest rate adjustments on their adjustable rate mortgages (ARM), the foreclosure epidemic continues to spread. This unfortunate situation has resulted in an influx of below market value properties. We now see properties being sod for pennies on the dollar and real estate investors are clamoring at the opportunities. For those seeking to understand the foreclosure process, here we will explore and dissect the elements.

Notice of Default.
As a result of the borrower falling 90 days late on the mortgage payments, the lender files a notice of default (NOD). The NOD puts the borrower on notice that a default has occurred and legal action may be taken if it is not corrected. Once filed, the foreclosure process has officially begun. NOD’s are sometimes referred to as lis pendens, meaning “lawsuit pending”, because the foreclosure process is a legal lawsuit initiated by the lender due to the borrower not fulfilling the terms of the mortgage. NOD’s are a matter of public record and they are sometimes published in the local papers. In Chicago, many NOD’s are published in the Law Bulletin, found at the periodical stand in the lobby of Chicago City Hall, 121 N. LaSalle St. Chicago, IL.

Pre-Foreclosure.
Pre-foreclosure is the period of time between the beginning and end of the foreclosure process. Depending on the mortgage law for the state where the property is located, this period can vary from 30 days (Texas) to well over a year (New York). (See the Title/Lien Theory Map for states)  Mortgage law is based on whether the given state is a title theory or lien theory state.

In title theory states, the lender holds legal title to property and the borrower retains equitable title. Equitable title allows the borrower to retain the right to live in the property, improve it, rent it and enjoy it. Legal title transferred once the mortgage has been satisfied. The lender holds the property for security purposes and the borrower has right of possession. Title is transferred to the borrower once the loan has been satisfied. In the event the borrower defaults on the loan, the lender has immediate right to possession and any rents or income from the property. (See the Title/Lien Theory Map for states)  

In lien theory states, the borrower holds legal and equitable title to the property and the mortgage becomes a lien on the property. The lien is released once the mortgage has been paid in full. In the event the borrower defaults, the lender must go through the formal foreclosure process to obtain legal title. In some states, the process includes a statutory redemption period in which the borrower can redeem the property. The foreclosure process can be very lengthy and costly for lenders. (See the Title/Lien Theory Map for states)

Some states have adopted the intermediary theory, which is a hybrid of the lien and title theory. In intermediary theory states, the borrower retains legal and equitable title and the mortgage is a lien like the lien theory states. However in the event of default, the lender is allowed to take possession of the property like the title theory states (utilizing the foreclosure process governed by the state). For example, Illinois is a intermediary theory state and the foreclosure process takes about 12 months. In addition during the foreclosure process, the borrower has a redemption period which allows them to reclaim the property by satisfying the delinquent payments.

The pre-foreclosure process creates opportunities for investors to work a deal with the homeowner to satisfy the delinquent mortgage in exchange for deed to the property. There are a wide variety of ways to structure these deals that include (“subject to approval”) existing loan staying in place, cash payments, and short sales. (These strategies will be discussed in later posts.) Bottom line: Buying before the close of the foreclosure process presents opportunities for investors to profit.

Sheriff Sale.
If the borrower fails to pay during the redemption period, the property is sold at a sheriff sale. This is commonly known as the auction. The county sheriff executes the sale of the property during an oral auction. Mostly investors are in attendance, because full payment is due 24 to 48 hours following the auction. There are no sixty-day closings.

Real Estate Owned (REO).
Properties not sold at the auction or sheriff sale are collected by the lender. In most instances these properties are listed to be sold. Often times, banks have particular real estate brokers that sale their properties. On the multiple listing service (MLS), you will notice these properties labeled as bank owned or real estate owned properties. That wording signifies the property is a foreclosure that did not sale during the auction. These properties also create investment opportunities.

Homeowners
For homeowners, foreclosures can be a nightmare. There are many legitimate organizations that assist homeowners that are facing foreclosure. If you are a homeowner facing foreclosure, visit http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm to locate HUD approved counseling agencies in your area.  

Investors
For investors, foreclosures can be opportunity. It is no secret that investing in real estate is a viable mean for creating wealth. Tour our website at InvestWithPassion.com for practical and useful real investment information.


(See the Title/Lien Theory Map for states)