Foreclosure can be defined as the process of a lender possessing the property of a borrower who has fallen behind on their mortgage payments. The lender can then sell the property to recoup the debt owed. In the current economic times, foreclosures are becoming more common, and both homes and businesses face foreclosure. With the housing market in such bad shape and several businesses over-extending themselves, the outlook for the future is bleak.
a. The Foreclosure Process
Foreclosure is not a one-and-done procedure. The lender must go through several steps, courts, and paperwork to repossess the property and sell it to recover the debt. The process is as follows.
1. Missed Payments
If the borrower misses a certain number of payments in a row, then the lender will contact them to make arrangements for their missed payments. If these arrangements can be made, the borrower may be able to avert foreclosure.
2. Public Notice
If the missed payments cannot be paid, the lender can file a notice of default with the county clerk. This is the first step in the foreclosure process. At this step, it is likely too late in paying the mortgage as it has accumulated interest, and the lender may not be willing to negotiate anymore.
The borrower can file a petition to continue to stay at the property, which gives them an extension of time on payments. The petition will state certain circumstances, and if allowed, they must give enough time for the situation to improve, either through restructuring or some other way.
3. Foreclosure
If the mortgagee’s petition is denied or if they do not file for the extension, then the lender can begin foreclosure. Depending on state laws and other factors, this process can take several weeks to several months before proceeding with the seizure of property.
4. Auction
After the occupants vacate, the lender will auction off the property to the highest bidder to recover the money the borrower owes. A minimum bid must be reached, or the property will stay under the lender’s ownership. The lender then lets occupants of the house know that they have a certain amount of time to pack their belongings and vacate the property.
b. Types of Foreclosure
There are two types of foreclosures.
1. Judicial Foreclosures
This type requires a court order to commence the foreclosure. The lender must go to court to prove they own the mortgage and have the right to take possession. Also, the lender may have to prove that the borrower has missed payments.
2. Non-judicial Foreclosures
This type does not require a court order to commence the foreclosure process. The lender can seize the property without even going to court and then sell it to recoup its losses.
For this to happen, there has to have been a power of sale clause in the mortgage agreement sighed by the borrower. The power of sale clause awards the lender the power to sell the property in case of default of payment.
c. Factors that lead to foreclosure.
1. Loss of job
Many people in the current economy are being laid off or finding themselves with no job at all, resulting in no paycheck from the company. If a person has problems finding a job and cannot afford their home, they are more likely to fall behind on payments. Eventually, they are unable to pay the mortgage making their lender foreclose on them.
2. Relocation
If a person and their family decide to relocate to another city or state to find a new job, it can be challenging for the family to keep up with payments on their home. If they move into another house with a mortgage, they will most likely fall behind on payments in the first house and eventually be foreclosed upon.
3. Divorce
If a couple has marriage problems and the husband or wife decides to get divorced, it can cause problems for the couple’s finances. When couples have marital issues, they don’t always keep up with their bills. Later, they may not be able to pay the higher interest payments and eventually fall behind on payments, making the lender foreclose on them. If a couple divorces and keeps the house but refuses to sell it, the value of the house will depreciate over time until it no longer covers mortgage payments.
4. Long Term Illness
Long-term illness can be extremely hard on a person. This can also cause them not to be able to keep up with the high payments for their house. Healthcare and medicine have become incredibly expensive, and many people do not have the money to pay for them. When a person is ill, they will most likely be unable to pay their mortgage payments, forcing them into foreclosure.
5. Adjustable rate loans
Adjustable rate mortgages allow borrowers to pay off their loans over a more extended period or with a lower interest. However, in the end, the borrower must come up with the same amount of money, and if they have trouble making higher payments, they will eventually fall into foreclosure. It works if there is no increase in the interest rates and long-term equity increases, but it can also be a problem if the borrower cannot pay.
6. Increasing Cost of living
If a person is not making enough money to pay for their home, and their cost of living keeps increasing, it makes it very hard for people to keep up. Some people find themselves struggling to pay the right amount each month. Eventually, they cannot determine the amount they owe and become delinquent. The lender will then foreclose on them. However, foreclosure could be avoided if the borrower got a part-time job or moved to a cheaper home.
Foreclosure is a complex issue. It is essential to realize that it does not occur overnight. A borrower can get in trouble for months or years without becoming aware of the situation until it’s too late. It is crucial for anyone that takes out a mortgage to have a good understanding of the terms associated with it. This way, a homeowner will be prepared for what to expect should problems arise. Make sure to read through the mortgage papers to understand the deal you’ve agreed to.
