So why deal with this depressing subject? Because, I know it well as I deal with it everyday and I find few really understand the process or their options for themselves, their family members or friends. My site provides an an easy source to send people to when the subject comes up.
First a caveat. I am not an attorney - the following is just my opinion and personal experience of the process as a Realtor. Your situation could be much different and you should contact your attorney for specific legal advice applying to your situation. The following process is for Georgia. Other states most certainly will vary in their method.
PRE-PRE-FORECLOSURE - i.e. You are in trouble and you know it. This is when you have lost your job, had medical issues or about to get divorced and lose the spouse income. Basically, life happens and you know you are not going to be able to keep your home in your current financial state. There are some options available to you.
Loan Modification: The first, see if your lender will do a “Loan Modification”. This is when the lender either reduces the interest rate and/or modifies the principal amount or makes other concessions to help you make the monthly payment. Here are a couple links to help you see some of the process:
Making Home Affordable Program - known as HAFA. A HUD program. To see more click HERE.
Short-Sale: You own the house but you have to sell it. You know that there will not be enough proceeds from the sale to pay the first and (if you have one) the second mortgage. This is where Short Sales (I call them Long Sales because they can take months!) take place. A Short Sale is when the lender(s) agree to take less for the the loan than what is owed - release the lien - and allow the property to sell. Note: a short sale does not, in itself, mean the owner does not owe the shortfall to the lender. An ideal scenario is where the lender will SETTLE for the amount and not only release the lien but release the owner from any further obligation. This is starting to happen with more frequency but it is not automatic. If the lender does not release the owner from the obligation, they can still try to collect the deficiency from the owner long after the property has been sold. There may be credit consequences and the IRS may have an issue with a short sale as well. Contact your CPA to discuss - particularly if this was not your principle residence.
Freddie-Mac has a Short-Sale program: Learn more about it HERE.
A Short-Sale still involves a real estate agent. Choose wisely as the short-sale process is laborious and time consuming for everyone! Frequently the agent has the brokerage fee reduced by the lender in the process or the sale will not be approved. I call this a “Commissionectomy” where a portion of the commission is removed. Frankly, this is very unfair to the agent who will likely put in twice the skilled time to get the house sold over the normal sale. Clearly, those of us who do short-sales do so because we can help folks who need our specialized assistance in their time of need. They are hard, frustrating and lengthy. My longest sale took 13 months. However, the least amount of time I’ve spent is 4 days. Expect it to take about 3-4 months. As the Seller, you can REALLY help everyone by providing documents quickly as they are requested. Do not expect to see lenders make intelligent business decisions. I have had lenders initially turn down deals that made sense only to take less down the road. I presented an offer to Chase Bank back in 2008 (when the market was plummeting) asking them to take a net proceeds of $165,000 for a $280,000 mortgage. They repeatedly rejected it - month after month. Finally, they started the foreclosure process (see below) and advertised the home to go to the courthouse steps - WITH an opening bid of $99,000. OK, turn down $165,000 but be willing to take $99,000 - great decision. I had to call the office of Jamie Dimon - the President and CEO of JPMorgan Chase Bank and point out the stupidity of that decision. Fortunately, they pulled the foreclosure but still continued to stall. The sale finally took place but only after the market had dropped even more and Chase ended up with about $115,000. That was the one that took 13 months. Note: The Short Sale Department does not talk to the Foreclosure Department. Do not assume that just because you are involved in a short sale that you are foreclosure proof.
Major milestones of the foreclosure process are:
LEGAL NOTICE OF FORECLOSURE in Georgia foreclosure day is always the first Tuesday of the month (unless it is January 1st or July 4th where it moves to Wednesday) between the hours of 10:00 AM and 4:00 PM. It is outside on the courthouse steps - rain, snow, cold or hot as those of us who regularly go can attest. A property MUST be advertised as a Notice Of Sale Under Power in the legal organ (public publication) of the county for four consecutive weeks prior to the sale. See this example in the Marietta Daily Journal. Just look under foreclosures in the legal section of any legal organ.
FORECLOSURE on the courthouse steps where the property is sold to the highest bidder (the lender will always enter the first bid - usually (but not necessarily) every dime that is currently owed the lender.) If there are other bids in addition to the opening bid by the lender, an investor or future owner occupant has purchased the property. If there are no other bids other than the opening bid of the lender, then the property is sold to the lender for the lenders opening bid. A sale at the courthouse steps (foreclosure) will eliminate any JUNIOR liens from the property other than county property taxes, property assessments and IRS liens and certain mechanics liens. A second mortgage company can foreclose but the first mortgage will still be in place. It’s important to know that while the foreclosure process will drop junior liens from the property, it did not drop the obligation of the (now previous) owner to that obligation. That debt just became an unsecured personal debt (just like a credit card.) In the event the property sells for more than what is owed, then the overage will go to liens next in line and any remainder will go to the now former owner.
POST FORECLOSURE OK, your property was actually called and sold on the courthouse steps. What Now?
Well, the process is: (1) Foreclosing attorney processes the paperwork. (2) If the property was purchased by someone OTHER than the lender (usually a bank) then you will have to deal with them and each will have their own process. If it was purchased by the lender (likely these days) then when the lender gets the paperwork from the attorney then an Asset Manager is assigned the property to dispose of it. The Asset Manager will then contact a real estate agent to deal locally with the property. That person will come to the house to ascertain if it is occupied or not. If not, then they will secure it, list it and sell it. If it is occupied, then that person will explain that the property now belongs to the lender and the lender wants you out. GENERALLY speaking, if you agree to leave peacefully with the property intact and broom clean then they are GENERALLY authorized to offer you cash assistance to help you move. This can be anywhere from $500 to several thousand - you negotiate. This process is generally called “Cash For Keys”. If you cannot come to terms, the bank will start the eviction process.
The bottom line is that at the moment of the calling on the courthouse steps, you went from being the OWNER to becoming a Tenant At Sufferance and your rights are subject to the Georgia Landlord Tenant Laws. You cannot be immediately forced out on the day of foreclosure - you have a couple weeks for the attorney to process, another period for the Asset Manager to assign a local person to evaluate and process the property and another few weeks in the event there is an actual eviction process.
SECOND MORTGAGES If the First mortgage foreclosed then all junior liens are eliminated from the property. This does NOT mean that you no longer owe these debts, it only means that that lien holder no longer has a lien against the property. The only liens that survive the foreclosure are Property Taxes, Property Assessments, IRS Liens and any other SENIOR lien. This means that a second mortgage holder can foreclose but the first mortgage is still in position with a valid lien on the property. On First Mortgages and below when a lien is released from the property, that lien holder now has an unsecured debt - like a credit card debt and the property (now previous) owner still owes it. If the first mortgage holder sells the property netting LESS than what was owed, the former owner is still responsible for that short fall.
REO (Real Estate Owned by the bank) when the property had no other bidders than the lender and the property has gone to the REO Department of the bank. There it is assigned an Asset Manager who’s responsibility is to sell the property - usually through existing, local market, real estate agents. We refer to it as a REO property.
The process is detailed in a photo essay on the next page.
The Foreclosure Process