FORECLOSURE Law and defenses IN USA
Submitted By Sadanand Naik Bangalore Dec, 24, 2008
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FORECLOSURE: Foreclosure is a Legal proceeding by which a borrower's rights to a mortgaged property may be extinguished if the borrower fails to live up to the obligations agreed to in the foreclosing. Job loss/unexpected unemployment, sudden illness or medical emergency, death in the family, divorcé / loss of second income, excessive to major debt pay home obligations, job demotion or promotion denials, inability loan contract1. The lender may then seek to satisfy it by declare the entire debt due and owing and may
an adjustable interest rate that increases, or unexpected
maintenance expenses are the main reasons for pending foreclosure in USA2 According to the Q1 2008 U.S. Foreclosure Market Report, which tracks foreclosure filings (including default notices, auction sale notices and bank repossessions), 649,917 properties were foreclosed upon during the first quarter of the year2008, a 23% increase from the previous quarter and a 112% increase from the first quarter of 2007. The report also shows that one (1) in every 194 U.S. households received a foreclosure filing during the quarter3. Foreclosure filings were reported on 169,831 California properties during the first quarter, the highest total in the nation at a rate of one (1) in every 78 households — the nation’s second highest foreclosure rate. Foreclosure activity in California increased 32% from the previous quarter and was up nearly 213% from the first quarter of 2007. According to Mortgage Bankers Association Every three months, 250,000 new families enter into foreclosure and one child in every classroom in America is at risk of losing his/her home because their parents are unable to pay their mortgage4.
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http://www.answers.com/topic/foreclosure http://homebuying.about.com/od/4closureshortsales/qt/011708_stopfore.htm http://www.flippingfrenzy.com/2008/04/29/2008-foreclosures-statistics/ http://www.dailykenoshan.com/index.php?option=com_content&task=view&id=7238&Itemid=114
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TYPES OF FORECLOSURE5 Generally there are two types of foreclosure. The judicial and the non-judicial foreclosure. Most of the times if the loan is secured by a mortgage then there will be a judicial foreclosure. If it is secured by deed of trust chances that non judicial foreclosure. Judicial Foreclosure: In this the lender files a suit alleging the default by the borrower and the violation of the deed. The property will be sold through the process of the court. Non judicial foreclosure: This also referred to as power of sale foreclosure6.The mortgage or deed of trust may contain a power of sale clause. In this the lender gets the power to sell off the property either at the public or private auction when the borrower defaults. Besides above there is also a foreclosure which is called as the strict foreclosure where only few states follow this kind of foreclosure. In this a mortgagee(lender) has the right to possess the mortgaged property directly upon default on the mortgage agreement7 It is available in a few states including Connecticut, New Hampshire and Vermont, where a suit is brought by the mortgagee and the court orders the borrower to pay the mortgage within a specified period of time. If the borrower fails to do so, the mortgage holder (Lender) gains the title to the property with no obligation to sell it8. FORECLOSURE DEFENSES9:
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http://www.hud.gov/foreclosure/foreclosureprocess.cfm http://www.answerbag.com/q_view/848 http://www.answers.com/Strict%20Foreclosure.%20 http://en.wikipedia.org/wiki/Foreclosure
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http://books.google.com/books?id=u4zAostHUUkC&printsec=frontcover&dq=foreclosure#PPA60,M1
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There are some legal defenses which the borrower can take to avoid the foreclosure The following federal statutes may be helpful in achieving that goal: These are Service Members Civil Relief Act: This act protects service members from foreclosure while they are on active duty, or within 90 days they have finished their duty. Real Estate Settlement Procedure Act (RESPA): Under this Act, if the borrower has refinanced his home and his current mortgage was executed less than three years ago, he may still have the right to rescind the loan and cancel finance charges if the lender failed to provide the borrower with timely disclosures. Truth in lending Act (TILA) and HOEPA: The lenders failure to disclose material terms in writing, or high interest rates on a non purchase money mortgage loan amounts to the violation of these acts, the violations would include: Fraud: fraud is intentional misrepresentation; Lending abuse: lending abuse occurs when the lender makes a loan to the debtor even after knowing he cannot afford or he will likely to default on; Collusion: collusion happens when there is a relationship between a lender and an appraiser, attorney, or seller, with intent to commit fraud, that the debtor doesn’t know about. Other Possible TILA Violations: Over escrowing: when the lenders collect from the borrower and hold in reserve more than the law allows, for the payment of property taxes and insurance, it amounts to the over escrowing. Junk charges: including yield spread premiums and service release fees. These are the illegal kickbacks paid to a predatory mortgage broker. Undisclosed referral fees to mortgage originators: By law, these fees must be disclosed on loan closing documents, and be included when calculating the financial cost of your loan.
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Failure
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insurance (PMI) may be terminated: for example, PMI may be discontinued if debtor’s equity exceeds 20% of the value of his home, or if he makes prompt payment for 60 months. Improper ARM adjustments: These are adjustable rate loan agreements, based on a particular financial index (prime rate, LIBOR, one to three or five year treasury bills etc.) and are often reset for early termination of lease agreements for a residence or vehicle. Additionally, some credit contracts may have interest rates reduced to 6 percent, including those for mortgage loans, credit cards, and vehicle loans. Other grounds Accepting payments after foreclosure: It is also one of defense to foreclosure, if the lender does so and the mortgagor is not in bankruptcy. Take complete loan payment history. It is better on the part of the debtor to keep a record of payments made to the lender and keeping records of receipts. HOEPA- predatory practices associated with subprime lending. Review all loan documents, beginning with the initial loan application. If proper disclosures regarding the cost of credit are not made in accordance with TILA’s regulation Z, it is possible to stop foreclosure by challenging and rescinding the loan up to three years after the loan was made- longer if the lender forecloses. TILA requires lenders to make certain preliminary disclosures on loans subject to the RESPA within three business days of receipt of a written loan application. A final disclosure statement is required at the time of loan closing. The documents must disclose the interest rate charged on the mortgage, transaction charges, service charges, loan fees, mortgage insurance, the full amount of the loan, and the annual percentage rate(APR) EVICTION OF THE BORROWER10
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http://books.google.com/books?id=R8L3GTLAm3oC&printsec=frontcover&dq=foreclosure&lr=#PPA26,M1
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All states require that the borrower gets at least some notice before his house is sold. If it is a judicial foreclosure the borrower will get 15 to 30 days time to respond to the court complaint that states the foreclosure lawsuit. In some states notice of intent to begin foreclosure proceedings will be given to the borrower. When the foreclosure approved by the court and the order of sale is made, the notice will be published. Presale notices for non judicial foreclosures would be 20 to 30 days. It is only 15 days in Georgia and 4 months in Oregon and Utah. In some states like California two notices will be served on the borrower. One is to giving the borrower a period of time to make up the missed payments (cure the default) and a second one (notice Of Sale) giving the borrower a date of sale in case he hasn’t caught up on the payments. Debtor is always better to stay in the property even though he is in default. Otherwise the lender may consider that debtor have abandoned the property and start foreclosure procedure very quickly. Debtor can stay until he receives the notice of eviction after the sale of the property. He can also negotiate with the lender for debtors stay in the property even in default. Delaying the process of sale of the borrower’s house/property: In case of Judicial foreclosure, the lender is required to file complaint before the court stating borrowers default, and then the notice of complaint will be served on the borrower for his answer. There will be an hearing/argument on the case. It would take 2-6 additional months. If there is solid evidence there by the borrower side, such witnesses would be examined and chances of dismissal of the case. It is suggested that whenever a borrower receive a notice from the court, he must appear and reply for that, otherwise there would be foreclosure default judgment against the borrower by the court. But in Connecticut or Vermont we would not see the sale of property. The judge can directly transfer the title to the lender.
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In case of Non judicial foreclosure borrower can file an action in a state court seeking court order (TI) holding up the sale until you have gotten a chance to argue your case. In most states borrower must post a bond (a kind of insurance policy) to protect the owner from financial losses during the delay caused by the case. In some jurisdictions you can file a demand to delay the sheriff’s sale which can give you up to 6 or 12 months extra time, assuming the court rules in your favor11. Challenging the process in the court, filing for an adjournment of the case, or filing for bankruptcy are also some other methods to delay the foreclosure sale. Other grounds: Disputes over borrower’s states foreclosure procedure such as defects in the notice of default, notice of sale. (In such cases judge can order for stay till the procedural aspects corrected), or Disputes with the lender over the deed of trust or promissory note (dispute the amount, regulation Z requirements, fraud in original transaction, the promissory note or the deed of trust is defective, the promissory note was left blank-chances of lender filling it, borrowers loan had complex or unusual terms)( if dispute of mortgage- likely of judicial foreclosure) REDEMPTION PERIOD: It is a period after debtor home has already been sold at a foreclosure sale when he can still reclaim his home. Debtor will need to pay the outstanding mortgage balance and all costs incurred during the foreclosure process. Many states have some type of redemption period. The redemption period and availability is often determined by whether the foreclosure is judicial or non-judicial. And, timelines and procedures can vary greatly from state to state.
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http://books.google.com/books?id=zJpe57lsP5YC&pg=PA45&dq=foreclosure+stop&lr=#PPA287,M1
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Can the debtor buy back the property after a foreclosure sale is Depends on where you live, whether or not there a clause in the mortgage or deed of trust that gives you the right to redemption? Some state allows the right to redemption on property after it has been foreclosed on. Borrower also can list the property with a real estate agent and delay foreclosure12. In many cases borrower can talk with the loss mitigation department of the lender who holds borrowers mortgage and discuss getting an extension to give debtor a more time to sell home. Lenders don’t want to own the real estate after a foreclosure. They will surely give the debtor a time to sell as long as reasonable efforts are being made. Lenders will rely on their on real estate agent and they may refer debtor’s property to real estate agent for short sale. If the real estate agent reports that the debtor is trying to hamper the sale, he may tell this to the lender and lender may begin foreclosure procedure. ALTERNATIVES TO THE FORECLOSURE13 Special forbearance: This is where lender may be able to arrange a repayment plan based on debtors income. He may even provide for a temporary reduction or suspension of payment. But debtor must be able to meet the requirements of the new payment plan. Mortgage (loan) modification: This is a process whereby a homeowner's mortgage is modified and both lender and homeowner are bound by the new terms. The most common modifications are lowering the interest rate, reducing the principal balance, 'fixing' adjustable interest rates, increasing the loan term, forgiveness of payment defaults & Fees, or any combination of these Refinance the debt or extend the term of mortgage loan:
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http://books.google.com/books?id=QRZ6_olVHvsC&printsec=frontcover&dq=foreclosure&lr=#PPA57,M1 http://www.hud.gov/offices/adm/hudclips/forms/files/pa426h.pdf
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This is a process whereby a lender reduces the principal balance of a homeowner's mortgage in order to permit the homeowner to refinance with a new lender. The reduction in principal is designed to meet the Loan-tovalue guidelines of the new lender (which makes refinancing possible). Partial claim: Under the Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The mortgagor (debtor) will execute a promissory note and subordinate mortgage payable to United States Department of Housing and Urban Development(HUD). Currently, these promissory or "Partial Claim" notes assess no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property. Your lender may be able to work with you to obtain a one time payment from the FHA Insurance fund to bring your mortgage current. Debtor may qualify if: 1. his loan is at least 4 months delinquent but no more than 12 months delinquent; 2. he is able to begin making full mortgage payments. When lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay the lender the amount necessary to bring debtors mortgage current. Debtor must execute a Promissory Note, and a Lien will be placed on debtor’s property until the Promissory Note is paid in full. The Promissory Note is interest-free and is due when debtor payoff the first mortgage or when debtor sell the property. Pre-foreclosure sale: This will allow debtor to avoid foreclosure by selling his property for an amount less than the amount necessary to pay off mortgage loan. Debtor may qualify if: 1. the loan is at least 2 months delinquent; 2. debtor is able to sell his house within 3 to 5 months; and
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3. a new appraisal (that the lender will obtain) shows that the value of debtors home meets HUD program guidelines. Deed in lieu of foreclosure: A Deed in Lieu of foreclosure (DIL) is a disposition option in which a mortgagor voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. A DIL of foreclosure may not be accepted from mortgagors who can financially make their mortgage payments. As a last resort, debtor may be able to voluntarily “give back” his property to the lender. This won't save debtor house, but it is not as damaging to debtor credit rating as a foreclosure. Debtor can qualify if: 1. if he is in default and don't qualify for any of the other options; 2. debtors attempts at selling the house before foreclosure were unsuccessful; and 3. debtor don't have another FHA mortgage in default.
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