Understanding Foreclosures

It is an unfortunate commentary, but when economic activity declines and

housing activity decreases, more real property enters the foreclosure process.

High interest rates and creative financing arrangements are also contributing

factors.

When prices are rapidly accelerating during a real estate “bonanza”, many

people go to any lengths available to get into the market through investments

in vacation homes, rental housing and trading up to more expensive

properties. In some cases, this results in the taking on of high interest rate

payments and second, third and even fourth deeds of trust. Many buyers

anticipate that interest rates will drop and home prices will continue to

escalate. It is possible that neither will occur and borrowers may be faced with

large balloon payments becoming due. When payments cannot be met, the

foreclosure process looms on the horizon.

In the foreclosure process, one thing should be kept in mind: as a general rule,

a lender would rather receive payments than receive a home due to a

foreclosure. Lenders are not in the business of selling real estate and will often

try to accommodate property owners who are having payment problems. The

best plan is to contact the lender before payment problems arise. If monthly

payments are too hefty, it may be that a lender will be able to make some

alternative payment arrangements until the owner’s financial situation

improves.

Let’s say, however, that a property owner has missed payments and has not

made any alternate arrangements with the lender. In this case, the lender may

decide to begin the foreclosure process. Under such circumstances, the lender,

whether a bank, savings and loan or private party, will request that the trustee,

often a title company, file a notice of default with the county recorder’s office.

A copy of the notice is mailed to the property owner.

If the default is due to a balloon payment not being made when due, the lender

can require full payment on the entire outstanding loan as the only way to cure

the default. If the default is not cured, the lender may direct the trustee to sell

the property at a public sale.

In cases of a public sale, a notice of sale must be published in a local newspaper

and posted in a public place, usually the courthouse, for three consecutive

weeks. Once the notice of sale has been recorded, the property owner has until

5 days prior to the published sale date to bring the loan current. If the owner

cures the default by making up the payments, the deed of trust will be

reinstated and regular monthly payments will continue as before.

After this time, it may still be possible for the property owner to work out a

postponement on the sale with the lender. However, if no postponement is

reached, the property goes on the block. At the sale, buyers must pay the

amount of their bid in cash, cashier’s check or other instrument acceptable to

the trustee. A lender may “credit bid” up to the amount of the obligation being

foreclosed upon.

With the recent attention given to foreclosure, there also has been

corresponding interest in buying foreclosed properties. However, caveat

emptor: buyer beware. Foreclosed properties are very likely to be burdened

with overdue taxes, liens and clouded titles. A buyer should do his homework

and ask a local title company for information concerning these outstanding

liens and encumbrances. Title insurance may or may not be available following

a foreclosure sale and various exceptions may be included in any title

insurance policy issued to a buyer of a foreclosed property.

Your local title company will be happy to provide additional information.