Explaining the Different Types of Foreclosures

Posted: 29 Apr 2008 | Categories: Finance

While most consumers are familiar with the term foreclosure The legal process instituted by the lender in a mortgage loan after the borrower’s default., very few have a solid understanding of how the process works. The purpose of this chapter is to provide an easy to follow overview of the foreclosure process. Whether you are a first time homebuyer or a real estate investor, it is important that you have a complete understanding of the foreclosure process before you invest your money in this unique market. While different states require different foreclosure procedures, the basic process is the same for all states.

Foreclosure: Foreclosure is the legal procedure that a lender initiates to reclaim ownership of property after the borrower fails to make payments according to the terms of a loan. The foreclosure procedure essentially terminates the rights that the borrower was granted through a mortgage or deed of trust. This process gives the lender the legal right to take the property title away from the borrower so the property can be sold and the lender can recapture its loan proceeds.

Judicial and Non-Judicial: Depending on the specific state of the defaulted loan, the process will be either a judicial foreclosure, A foreclosure which results from a court action rather than from the power of sale given to a trustee. Judicial foreclosures occur when a trust deed or mortgage deed does not have a power of sale clause, thus compelling the lender to take the borrower to court. This is in contrast to a non-judicial foreclosure, in which a foreclosure can be completed outside the court system. or a non-judicial foreclosure The power to foreclose on a property without court approval.. The key difference between these procedures is the length of time it takes a lender to foreclose on a defaulted loan. In a judicial procedure, it takes the lender approximately 12 - 18 months to foreclosure compared to only 4 - 12 weeks in a non-judicial procedure.

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States with judicial procedures issue legal instruments called mortgages A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan. while states with non-judicial procedures issue deeds of trust The document used in some states instead of a mortgage. Title is conveyed to a trustee rather than to the borrower.. The mortgage foreclosure process takes longer since a lender must initiate a judicial procedure through the courts to obtain a judgment allowing the foreclosure and sale.

By contrast, a default on a trust deed does not require lengthy court action since the title remains with the lender until the loan is paid in full. Additionally, the lender has the power of sale A power granted in a mortgage to sell the property upon the default of the mortgage. which allows the trustee to sell the property more quickly and thus recover the lender’s collateral in a timely manner.

The procedural difference in mortgage and trust deed foreclosures is provided below.

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Trust Deed Foreclosure: There are three principal parties involved in a trust deed foreclosure. The three parties are

(1) The lender A private, public or institutional entity which makes funds available to others to borrow.

(2) The borrower

(3) The trustee A legally empowered person who holds or controls a piece of property for another person.

who is an independent third party holding title to the property until the loan is repaid in full. When the borrower fails to make the required payments on the loan, the trustee simply records a Notice of Default A formal notice to a borrower declaring that a default has occurred and that legal action may be taken. Also known as a NOD., sends a copy to the borrower, and after a specified holding period, a Notice of Trustee Sale The notice which a lender is usually required to give before foreclosure sale of collateral. Also known as a NOTS. is posted on the property.

When searching for properties through Realtystore.com, properties with a Notice of Default are categorized as “Preforeclosures” and properties with a Notice of Trustee Sale are categorized as “Auction” properties.

The Notice of Trustee Sale is advertised to the public for a required period and if the borrower does not bring the loan current, the property is auctioned to the public.

Mortgage Foreclosure: A mortgage is a legal contract in which the borrower secures a loan by using the property as collateral. When the borrower fails to make payments, the lender is forced to take legal action to collect the amount due. The lender will typically send multiple notices to the borrower requesting information about the missed payments in an attempt to work with the borrower to bring the loan current. When these efforts fail, the lender will hire an attorney to initiate foreclosure.

At this stage, the attorney will file several legal documents including a lis pendens A notice indicating that legal action is pending on a property., which is a public notice indicating legal action is pending on the property. If the borrower fails to respond to the complaint, the attorney submits a report to the court with the facts of the case. The judge will then issue a Judgment of Foreclosure and Sale in favor of the lender. At this stage, an auction sale is advertised according to the local statutes.

Opportunities to Purchase Foreclosures: You should now understand how a property ends up at auction through the foreclosure process. We will now turn our attention to purchasing foreclosures during the three different stages of the process. The three stages are as follows:

(1) Before the Auction (Preforeclosures or Notice of Default properties)
At this stage the owner has defaulted on his loan and in many cases would like to find alternatives to avoid foreclosure and the resulting damage to his credit history.

(2) At the Auction (Auction or Notice of Trustee Sale properties)
The property owner has defaulted on his loan and has been unable to bring the loan current. Unfortunately, at this stage the owner is out of time and the property will be sold at a public auction to the highest bidder.

(3) After the Auction (REO, Bank Owned or Government Owned properties)
If the minimum bid at an auction is not met, the ownership rights of the property are transferred to the lending institution that provided the loan. In general, banks are eager to sell these properties so they can get the money back on the defaulted loan and issue a new loan.

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