Joe Capote

This post is part one in a series of posts writting in a effort to help borrowers understand the foreclosure process. Experts agree that there will be an increase in short sales and REO’s (pre-foreclosure and foreclosures) in San Mateo county over the next year. Given that we are an affluent county, we are behind the curve in terms of these types of properties in comparison to the east and south bay counties. However, right now there are as high as 40% of the available homes on the market are short sales/REO’s and this number looks as if it will rise. This series will attempt to help borrowers understand the timelines and steps on the road to foreclosure. More importantly, it attempts help borrowers to better understand when it make sense to look into loan modification, bankruptcy, sell the property in pre-foreclosure (possible short sale) or let the lender foreclose.  I’ll get started by looking at some of the steps involved on the road to foreclosure.

Firstly, lets take a look at the parties involved and some of the terminology.  A mortgage loan is secured by a deed of trust. The deed of trust is the security for your loan. It is what is documented in the public records. A deed of trust contains three parties: A trustor, which is the borrower. The trustee, which is the entity that holds the “bare legal’ title (usually a title company), and the beneficiary, which is the lender. It is the trustee that holds the “power of sale” clause in the event of default.

Step 1. Borrower defaults on a loan. The borrower can default for a number of reasons. The lender (beneficiary) attempts to reconcile with the borrower (trustor) directly. When this fails, the trustee files a Notice of Default (NOD) with the county in which the subject property is located. This is notice that the loan is in default and officially signifies that the home is in foreclosure and the process has begun. The filing of the NOD can be anywhere from 30-90 days from the first missed payment, depending on the lender. If the mortgage is not made current within 3 months from the filing of the NOD (not 90 days – 3 calendar months), the trustee then files the Notice of Trustee Sale (NOTS). This is the 21 day notice that the trustee intends to sell the property at trustee sale. Once a trustee sells the property at Trustee’s sale, all sales are final. 

Step 2. Loan Modification. The borrower (trustor) will usually take this step first. The borrower calls the lender or mortgage servicer and tries to negotiate a loan modification. This process is dependent upon the lender’s willingness to negotiate and nothing more. This is not a right of the borrower to have a loan modified, nor is there any legal ramifications to the lender if they choose not to modify. This has resulted in a hodgepodge of loan modification scenarios, and a wave of loan modification sheisters have cropped up in both the real estate and legal professions, adding to the confustion.

Step 3. Short Sale (Pre-foreclosure). After being denied or not qualifiying for a loan modifcation, the borrower will then investigate a short sale. They contact their local realtor and list the property for sale. Depending on where in the foreclosure process and the expertise of the realtor, the property is either approved for short sale by the lender’s loss mitigation representatives or the short sale fails.

Step 4. Borrower calls attorney to file a chapter 13 bankruptcy. Since the borrower is in default and the current mortgage is in arrears, the borrower does not qualify for a chapter 13 bankruptcy. Depending on the expertise of the legal professional handling the bankruptcy, the case is filed in the proper county in an effort to stall (where it will probably fail), or the borrower will be advised to walk away from the property and let the bank foreclose.

Proper undstanding of all the options available, as well as an understanding of the borrower’s individual scenario is key to understanding the best options for the trustor (borrower). Problems arise when the borrower waits to long to act, or gets bad advice from unqualified professionals. It is important to understand that the sooner the borrower takes action, the more options are available to him/her. Taking action at the first sign of default or even when the trustee files the Notice of Default leaves more options open to the borrower as opposed to waiting until the Notice of Trustee Sale is filed. Waiting this long to take action really limits the steps the borrower can take.

This should do well to set up the next part in the series: All About Loan Modifications

Filed under: Buyer's Blog, Seller's Blog, bankruptcy, foreclosure, pre-foreclosure, short sale