During the Great Recession, between 2009 and 2010, the housing market hit its peak foreclosure rate. More than five million homes went into foreclosure, and homebuyers could find homes at more than half off the original price in many areas of the country.
The economic conditions created by the recent coronavirus pandemic appear to have put the nation on track for another slew of foreclosures.
If you must foreclose on a loan, or if you are the recipient of a foreclosure notice, what documents are involved before the action is complete?
What Is Foreclosure?
Foreclosure is a legal process initiated by the lender or mortgage investor to take back unpaid property. A property in the process of being taken back is called a home in foreclosure. Once the foreclosure is complete, the property is considered a foreclosed home, also known as a real estate owned property (REO). You may hear it called a bank-owned house.
Foreclosure occurs as the result of the borrower missing one or more mortgage payments. Typically, a lender will send a missed payment notice for the first missed month, which is known as payment default. After the second missed payment, the lender sends a demand letter.
A demand letter is a little more serious than a missed payment notice, but the lender is probably willing to continue working with the borrower. In truth, lenders prefer to avoid foreclosure whenever possible because of the expense and resources required to pursue it.
After 90 days of missed payments, a Notice of Default (NOD) is sent. In some states, the county places the notice prominently upon the house. Some lenders have a foreclosure department in the county where the property is located; the NOD is sent there.
Once a NOD is sent, a borrower-informed notice is recorded. Then the lender may allow an additional 90 days for the borrower to settle the payments and get the loan reinstated (reinstatement period).
In judicial foreclosures, the lender demands payment. If it isn’t forthcoming, the lender goes to court to file action for a court order to sell the property.
If the borrower is unable or refuses to catch up with the payments, a Notice of Trustee's Sale is recorded in the county. Depending on state law, a public notice must be published in the local newspaper for three weeks or more, indicating the property will be available for public auction. At this time, the house is considered to be in pre-foreclosure.
In the newspaper notice, the names of all owners are printed along with a legal description of the property, the property address, and where the sale will take place.
A trustee’s sale is held in which the property is placed on public auction. The highest bidder who meets all requirements is awarded the deed. If the house does not sell at auction, it becomes a real estate owned (REO) or bank-owned property.
Once sold or changed to an REO, the former borrowers and occupants face eviction.
Types of Foreclosure
There are two types of foreclosure.
- Judicial foreclosure is used in some states. It requires the lender to take legal action against a borrower.
- Non-judicial foreclosure does not require a trial. The lender issues a “Notice of Intent to Foreclose” to the borrower to announce the beginning of foreclosure.
For judicial foreclosure, some states require the lender to prove it offered the borrower a loss-mitigation option before filing suit. Also, a borrower can contest the foreclosure at the court proceedings. If the court rules in favor of the lender, the property can then be scheduled for sale.
Documents Used in Foreclosure
Before foreclosure can be initiated and finalized on a property, there is a list of documents to be gathered or generated.
- The original loan documents - the promissory note and the mortgage or deed of trust.
- A complaint for foreclosure from the court for judicial foreclosures. This document contains an outline of the lender’s claims, the promissory note, the property to be foreclosed, how much the borrower has defaulted, the amount due, and a list of defendants with a description of their interest in the property.
- A notice of default from the lender in states with non-judicial
- Lender documentation with a signature or stamp showing the total delinquency.
- A notice of lis pendens is sent to the county courthouse to be appended to the property deed, showing the property is under foreclosure proceedings.
- A property appraisal to show the value of the house.
- The summons to court. In non-judicial foreclosure states, the borrower must open a court case to stop or delay foreclosure.
Once the foreclosure case is complete, including when the borrower loses the suit in non-judicial foreclosure states, two more documents result: a Judgment of Foreclosure and a Sheriff’s deed to use in a foreclosure auction.
The Sheriff’s deed will be signed over to whoever purchases the house at auction. It allows the purchase to take ownership of the property immediately.
Foreclosure and the CARES Act
The Coronavirus Aid, Relief, and Economic Security or CARES Act was signed into law on March 27, 2020. The act restricts foreclosure activity by servicers of federally backed mortgage loans. Called a moratorium, all federally backed mortgage loans securing residential real property may not be foreclosed for 60 days after May 18, 2020.
The loan servicer may not:
- Initiate a judicial or non-judicial foreclosure.
- Serve notice and conduct a foreclosure hearing.
- Conduct a foreclosure sale or execute foreclosure-related eviction.
A federally backed mortgage includes mortgages and deeds of trust purchased by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). HUB, USDA, FHA, and the National Housing Act insure federally backed mortgages. Some federal mortgages are guaranteed under the Housing and Development Act or the USDA.
Along with the moratorium, CARES legislates forbearance rights. Forbearance is a process by which the borrower can request the lender to suspend payments for a specific time if the problem is due to the COVID-19 emergency.
Forbearance may be due to hardship, direct or indirect. It can be requested regardless of the borrower’s delinquency status. Proof of hardship is based on attestation from the borrower only, and the servicer cannot require additional documentation.
CARES provides up to 180 days of forbearance and can be extended for another 180 days at the request of the borrower. No additional fees, penalties, or interest can be charged. Borrowers can request forbearance of loans for the next 12 months.
Foreclosure properties are those where the borrower was unable to keep up payments, and the house was, for want of a better word, repossessed by the lender. Foreclosure may be judicial or non-judicial, depending on state law. The CARES Act helps some borrowers. Many lenders are providing similar services.
CourthouseDirect.com can provide access to the various documents you need, including deeds, properties under lis pendans as well as mortgage and property tax reports. Real estate is a bit rough right now, but you can safely access any public record you need at CourthouseDirect.com.