Foreclosure Terms Defined

Foreclosed, Foreclosure, In Foreclosure, Bank Owned, REO.....

WHAT DOES IT ALL MEAN? - A Quick Guide

As an active Real Estate agent with a myriad of listing types I field dozens and dozens of phone calls each day from buyers and sellers. The level of confusion out there is staggering! Starting in 2007 when we began to experience a record number of mortgage defaults and with that change came a whole new vocabulary to learn. As a buyer you need to understand what type of property you are looking at.

Know Your Terminology: to try and clarify this issue I submit the following guideline to terms for the buyer on the open market. These are the commonly used terms, at least in the Southern California Market. If you know of another term in your are best check it out with a local trusted resource.

Short Sale: Seller is still in control of the property. Often still living in it. They are looking for an offer so that they can try to get the bank to accept that and release them from the balance of the loan. At any point during your attempt to purchase the property in this way it could fall into foreclosure. Your agent should stay on top of the sellers situation and watch for the filing of any default notices.

In Foreclosure: This is the period after the bank has issued the notice of default and the owner may or may not still be in the property. In California this is a 120 day process from notice of default* to foreclosed. This is the biggest limbo period. Owners may work out something with the bank, have a relative rescue them, ignore everything and let the house go to foreclosure, do a deed in lieu (basically cooperate with handing the house back to the bank to avoid foreclosure) - essentially anything.  Different rules apply depending on what type of mortgage the homeowner had.  As a buyer this is a risky time to be dealing with the owner. They are under a great deal of stress and truthfully anything can happen. In California there are also laws about purchasing any equity the owner may have if you are an investor and not buying it as a primary residence. So caution is the rule of the day.

Foreclosed: This is a home that the bank or an investor now owns. They have completed the foreclosure and they are now the legal owner. The bank typically hires a realtor to list the home and get it sold. However, you may see the home go to another investor for sale or the house may be put in an auction.

Bank owned - REO: Two terms that mean essentially the same thing. The bank or some lender (sometimes a private party) owns the property.

The fastest way to purchase a property is in this stage:  once the bank has foreclosed and they are the owner of record. It may take a little while to get it on the open market but once it is you can typically proceed with a purchase pretty quickly.

Auctions: Many people ask about buying a foreclosure on the courthouse steps. This is still done. As the final step of the foreclosure the bank schedules the auction. Lists are available online or through title companies.  I can't imagine buying a property this way unless you are very certain that the value is there and have some idea of the condition of the property. Some properties receive no bids and the bank sends their representative to the sale and they buy the property back for the amount they foreclosed on - those properties typically come back on the market with a real estate agent.

There are also several large private companies working in a bunch of loose partnerships with the banks. They will get a block of properties and schedule an auction - either on line or at a hotel ballroom or convention center. Usually, they have a preview weekend to go look at the properties and then hold the auction. Be wary of these as often times there is a "Buyer Premium" that can be any amount but typically I see them around $5,000.  If you do not know values in the neighborhoods you are buying the chance of overpaying is very high. I have personally seen properties in my market go to auction and sell for more than they had been listed for the previous month when no savvy local buyer would pay that much.

* The notice of default is the official notice to the homeowner that foreclosure proceedings have begun

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To Read more on Short Sales please visit our Short Sale Page

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Non Judicial Foreclosure What Is It?

In California the main way that homes are foreclosed is called A Non-judicial Foreclosure.

This is the technical process that enables the bank to use the foreclosure process. The way to understand this process is to understand the basic framework used by lenders to secure loans to borrowers.

Two Kinds:
There are two (2) basic types of foreclosure in California. In a judicial foreclosure, a court action is commenced to foreclose the mortgage or deed of trust that secures the loan. This mode of foreclosure is really a lawsuit, and because of that is governed by the Rules of Civil Procedure and Rules of Evidence applicable to legal actions. The other type of foreclosure is the non-judicial foreclosure, sometimes called a trustee's sale under the procedures set forth in Civil Code. This mode of foreclosure is only available, however, if the deed of trust (or mortgage) contains what is called a power-of-sale clause.

You May Be Able To Sell Your Home as A Short Sale More Information.

HowThis Gets Set Up:
In a typical loan transaction, a promissory note, which spells out the dollar amount loaned, along with the interest rate and payment terms, is signed by the borrower to show the debt. The borrower then also executes a deed of trust in favor of the lender, this makes the property the security for the loan. It also spells out the specific duties of the borrower, and the lender's rights if the duties are not met. In addition to the borrower and the lender, the deed of trust will also name someone to act as trustee.

What Is A Trustee?:
This can get a little confusing for people not involved in real estate everyday because a trustee under a deed of trust is not a true trustee. At least not in the sense most people think of. The Job of a trustee under a deed of trust is either to do the foreclosure under the lender's direction, or to reconvey the trust deed once the obligation has been satisfied in full. So when you sell the house or finally pay off the mortgage the deed is "reconveyed" The beneficiary is allowed to substitute in another trustee should it want to do so.

What Triggers Foreclosure:
In most cases there are just two of things that will entitle a beneficiary or as most people say the bank to start foreclosure: Nonpayment of the principal, interest and impounds (if any), or non payment of a Balloon Payment. Much less well known and seldom used is the Nonmonetary Default: Failure to preserve the property physically and/or financially, by maintaining insurance, taxes and the non voluntary lien-free status established at the time of the loan. Note: The lender must advance funds to cure a non-monetary default and/or may demand proof of cure as a condition of reinstatement. When a default occurs and an institutional lender is involved, the lender will ordinarily complete any preforeclosure servicing prescribed by various loan guidelines in order to attempt a resolution of the default. Should the borrower either fail to respond, however, or fail to perform under an agreement to resolve the default, the lender may refer the loan to the trustee for foreclosure.

Documents Required to Foreclose:
The lender will provide the trustee with the Note, Deed of Trust, Assignments, Modification Agreements, Subordinations, etc., plus a Declaration of Default and Demand for Sale detailing the breach information. The lender would also execute a Substitution of Trustee, naming the new trustee, at this time if they choose to do so. The trustee is who will formally institute the foreclosure process by preparing, executing and recording the Notice of Default. A Trustee's Sale Guaranty (TSG) will be ordered to assure that the lender and trustee are made aware of necessary information regarding the present condition of title and proper addresses for notices to all parties of interest.

Once the Notice of Default is recorded, the title company will confirm the recording, in writing, to the trustee. Receipt of confirmation will signal the trustee to mail the Notice to all parties entitled to a ten (10) day notice under C.C. Sec. 2924b. Depending on specifics of the loan or local rules the trustee may also be required to post or publish the notice.

How Much Time Do I Have:
The Notice of Default is for three (3) calendar months. This time is often referred to as the redemption period, during which the borrower or junior lienholder and beneficiary may explore ways to cure the default. If the default has not been resolved during this period, however, the trustee will continue the process by requesting a title update in order to secure information which may affect the ability to grant clear title after the sale. A Notice of Sale or Notice of Trustees Sale will be drawn, posted and published, mailings prepared and the Notice sent for recordation. Each of these activities must be performed as prescribed under Sec. 2924 et. seq. to assure validity of the Trustee's Deed upon sale, the insurability of the property upon conclusion of the foreclosure process, and subsequent liquidation by either the beneficiary or a third party.

Can I Pay Off The Debt And Keep My Property?:
The right of the borrower or junior lienholder (except in cases where the balloon payment is due) to reinstate the loan is good up to five (5) business days prior to the sale. The beneficiary must accept reinstatement until this period has expired. Within 5 days of the sale the beneficiary may use its discretion as to whether or not to accept reinstatement.

The Auction Process:
Approximately twenty-four (24) hours prior to sale, the trustee will request an additional title update, to be delivered prior to sale time on the day of sale. If the status of title is shows that there is no impediment to the sale (such as a bankruptcy, city or county notice indicating an environmental or safety hazard, or DEH ATF/IRS seizure), the sale may be held as scheduled. The beneficiary will provide the trustee with their instructions regarding the bid price for sale. The trustee will review the bid, audit the foreclosure file, and provide the auctioneer with instructions for the sale. The auctioneer then conducts the sale as instructed, and reports back to the trustee.

After The Property Sells At Auction:
The trustee will notify the beneficiary and prepare the Trustee's Deed, which will vest title into the name of the successful bidder. If a third party is the successful bidder, the trustee will also be responsible to distribute the proceeds of the sale.

If the auctioneer receives no bids for the property which exceed the opening bid, the property will revert to the beneficiary (the bank), who will take title under the Trustee's Deed. These are typically the homes that wind up on the market as "Foreclosed homes" or "Bank Owned" homes.

Finally:
Unlike a judicial foreclosure, there is no statutory right of redemption following a non-judicial private sale.

While this blog outlines the basics of the timeline there is no substitute for qualified help. Feel free to call us or give your attorney a call if you have further questions about your particular situation.

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