What exactly does the term “foreclosure” imply? Simply put, the foreclosure process allows a lender to recoup the amount owed on a defaulted loan by selling or taking possession of the land. According to the United States Foreclosure Market Study, there were 330,105 properties in “some level of foreclosure (default, sale, or bank-owned)” in the United States as of May 29, 2020, so it’s not unheard of. If you (or someone you love) is facing foreclosure, make sure you know what to expect. Although the process differs from state to state, there are usually six stages to a foreclosure.
Most lenders would rather not have to foreclose on a home.
Phase 1: Payment Default
If a borrower misses at least one mortgage payment, he or she is said to be in default. The lender can submit a missed payment note if it has not received the payment for that month. Mortgage payments are typically due on the first of each month, with many lenders extending a grace period until the 15th. The lender can then assess a late payment fee and issue a missed payment notice.
After two missed payments, the lender would typically send a demand note. This is a far more severe situation than a late payment note. However, the lender may still be able to negotiate with the borrower to make payment arrangements at this stage. Normally, the creditor will have to pay the late fees within 30 days of receiving the message.
Phase 2: Notice of Default
After 90 days of missed payments, a note of default (NOD) is sent. The notice is prominently displayed on the home in some states. The loan will be turned over to the lender’s foreclosure department in the same county where the property is located at this stage. The note will be registered; the borrower is told.
Usually, the lender will grant the borrower another 90 days to make up the payments and reinstate the loan. The “reinstatement period” is what it’s called.
Phase 3: Notice of Trustee’s Sale
A notice of trustee sale will be registered in the county where the property is located if the loan is not brought current within 90 days of the notice of default.
In most cases, the lender must also place a notice in the local newspaper for three weeks stating that the property will be auctioned. The notice and newspaper will include the names of all owners, as well as a legal description of the land, its address, and the date and location of the sale.
Phase 4: Trustee’s Sale
The property is now up for public auction, and the highest bidder who satisfies all of the conditions will be awarded the property. The lender (or a company representing the lender) can determine an opening bid based on the outstanding loan’s value as well as any liens, unpaid taxes, and closing costs.
When purchasing a foreclosed house, the buyer has the option of determining how long the previous owners can remain in their former residence. A trustee’s deed upon sale will be given to the winning bidder until the highest bidder has been accepted and the sale has been completed. The purchaser then owns the property and has the right to immediate possession.
Phase 5: Real Estate Owned (REO)
If the property does not sell at the public auction, the lender will take ownership and try to sell it through a broker or with the help of a real estate-owned (REO) asset manager. 8 These properties are commonly referred to as “bank-owned,” and the lender can attempt to make the property more appealing by removing some of the liens and other expenses.
Phase 6: Eviction
The borrower is frequently allowed to remain in the home until it is sold, either at a public auction or as an REO house. An eviction notice is issued at this stage, requiring all occupants to vacate the premises immediately.
It’s possible that the tenants will be given several days to remove their personal belongings. The property will then be visited by the local sheriff, who will evict the people and any remaining belongings. The latter are stored and can be retrieved for a fee at a later date.
Many lenders will try and work out a plan for the borrower to get caught up on the loan to escape foreclosure during the foreclosure phase. The obvious issue is that if a borrower misses one payment, catching up on several payments becomes extremely difficult. It’s worth consulting with your lender if there’s a possibility you’ll be able to keep up on payments—for example, if you’ve just begun a new job after a time of unemployment. If a foreclosure is imminent, understanding what to expect at each stage will help you plan for the six stages of the foreclosure process.
Thanks to the Covid-19 pandemic last year, millions of Americans took advantage of payment suspension and mortgage forbearance services offered by lenders and the federal government. However, when these emergency services come to a close this year, the Consumer Financial Protection Bureau wants to ensure that millions of families are not pushed into foreclosure.
According to the Mortgage Bankers Association’s data for the week of March 21, 2020, about 2.5 million homeowners are still participating in any form of forbearance program a year after the pandemic began. Despite these schemes, about 5% of homeowners are actually delinquent on their mortgages, according to the MBA’s latest study. As forbearance policies come to an end this fall, this number could skyrocket.
The CFPB is introducing a simplified loan modification mechanism, which normally enables borrowers to apply to have their loan interest rate lowered, their loan term extended, and/or their monthly payments reduced, in addition to requiring mortgage servicers to conduct a review period.
Servicers will be able to provide certain loan modification options based on incomplete applications thanks to the streamlined process. Before a service can make a decision, borrowers must typically apply a slew of documents, including proof of income such as pay stubs, tax returns, and recent bank statements.
According to the Consumer Financial Protection Bureau, streamlining the process will encourage servicers to bring homeowners into less burdensome payments sooner. Only loan modification options that do not raise homeowners’ monthly payments, extend the duration of the mortgage beyond 40 years, or incur any fees will be eligible for the expedited method.
President Joe Biden ordered federal housing regulators to extend mortgage forbearance programs for another six months and prolong foreclosure relief programs in February, affecting an estimated 70% of single-family home mortgages in the United States.
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