Foreclosure is every property owner’s worst nightmare. In a nutshell, by foreclosure is meant a process by which a property owner loses her right to a property because she failed to keep up with her mortgage payments. Traditionally financial institutions have looked upon mortgages as a safe investment vehicle on the assumption that homeowners would do anything not to lose their property. However, the entire fiasco involving sub-prime lending that almost triggered a global financial melt-down goes to show that particular assumption is not always true.
The entire process of foreclosure is pretty lengthy, and the laws tend to differ from state to state and from country to country. However, irrespective of how long the process takes, it usually takes place via the following gradual steps.
Step 1: Payments missed
The foreclosure process starts once mortgage payments are missed. Homeowners do this for a myriad of reasons, such as unemployment, unexpected medical bills and so on. Sometimes homeowners deliberately stop keeping up with the payments (as evidenced in the most recent crisis) because they believe that ‘the property is under water’, which means that the value of the property has fallen to such an extent that it does not make sense for the property owner to keep making payments. Some homeowners stop making payments because they just cannot find a buyer, and they just don’t want to deal with the upkeep!
Step 2: Financial institution puts up a public notice
In about three to six months depending upon the law, the financial institution approaches the County Recorder’s Office or the Municipality or a similar public office (depending upon where in the world the offending party resides) and informs them that the homeowner has not been keeping up with the mortgage payments. The County Recorder’s Office issues a Notice of Default (NOD) and it is either mailed to the defaulter or posted to the defaulter’s door, whatever the law requires.
Step 3: Pre-foreclosure
After the issue of the NOD, the defaulter typically has 30 days to 120 days to come to an arrangement with the borrower. This can mean anything between coming up with the outstanding amount or agreeing to a short sale of the property. If the defaulter and the lending institution cannot come to an agreement, then the foreclosure process moves on to the next step!
Step 4: Auction
The bank now proceeds to auction off the property with the help of a representative known as a trustee. A Notice of Trustee Sale (NTS) is issued at the County Recorder’s Office, and a copy sent to the borrower or posted on her front door. In most states in the US and in many other places around the world, the borrower has a ‘Right of Redemption’, which means that she can come up with pending payments right up to the time of the auction. Once the auction is started, which can take place at the courthouse, a convention hall or right at the property, the property is sold to the highest bidder. If the property goes unsold, the bank can purchase the property for itself as well. Sometimes a “deed in lieu of foreclosure” which is essentially a new payment plan can be afforded to the borrower as well!
Step 5: Post-Foreclosure
In case there is a buyer or if a deed in lieu of foreclosure is signed, then the process ends at Step4. However, if the bank buys the property at the auction, then they usually hire a real estate agent and try to sell it as soon as possible. Banks aren’t in the business of owning properties; hence if a potential buyer is gifted in terms of negotiation, then she can usually get a good deal!