A Guide to Foreclosures In California

If you are facing foreclosure on a property in the State of California, the folks at  JT Legal group offered us this nice breakdown of the process and steps you need to know specifically for California.

  1. What is Foreclosure?

When a homeowner cannot make a payment on a mortgage, the lender or the mortgage company initiates foreclosure against the property. A homeowner can fail to make mortgage payments for a variety of reasons: unemployment, inability to work due to a medical condition or injury, excessive debt or billing obligation, job transfer, or a divorce.

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A foreclosure is the legal process that occurs when a buyer defaults on a loan and the lender “forecloses” (forces the sale of) the home to pay the outstanding loan. Typically, when a person buys a home, they borrow part of the purchase price from a bank or a mortgage company. The lender puts a lien on the property to secure payment for the loan. If the borrower or homeowner defaults on the loan or the mortgage payments (doesn’t pay), the lender can foreclose.

For more information about foreclosure laws:

Foreclosure process – Civil Code section 2924

Foreclosure consultants – Civil Code section 2945

  1. Types of Foreclosures in California

There are two types of foreclosures that lenders can utilize to foreclose on deeds of trust or mortgages in the State of California: judicial foreclosures and non-judicial foreclosures.

Non-Judicial Foreclosure

A nonjudicial foreclosure is the most common type of foreclosure in California. A lender utilizes a nonjudicial foreclosure when there is a power-of-sale clause. A power-of-sale clause is a clause written into a mortgage or the deed of trust authorizing the lender to sell the property in the event of default in order to repay the mortgage debt.

If a lender chooses to pursue the borrower via the nonjudicial foreclosure process, the lender gives up its right to collect a deficiency judgement against a borrower. A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying loan in full. However, most lenders prefer the non-judicial process because it cost less and is more time efficient. In California, deficiency judgements are exceedingly rare, and only possible after a judicial foreclosure.

Judicial Foreclosure

A judicial foreclosure is when a lender files a lawsuit to get a court order to foreclose on the home. It is used when there is no power of sale clause. After the lender obtains a court order, the home will be auctioned off in a public auction. However, it is rare for a lender to utilize the judicial foreclosure option in California.

A lender can get a deficiency judgment against the homeowner but the homeowner retains the right of redemption. The right of redemption allows the homeowner to buy the home back from the successful bidder at the auction for up to one year after the sale. This process is longer and more costly than non-judicial foreclosure.

  1. Understanding The Foreclosure Process

The following is the foreclosure process for a nonjudicial foreclosure.

  1. The lender MUST contact the homeowner and anyone else on the mortgage loan to assess the homeowner’s financial situation and explore the different options to avoid foreclosure. It is important to note that the lender:
  • Cannot start the foreclosure process for at least 30 days after contacting the homeowner to make an assessment;
  • The lender must advise the homeowner that he or she may request another meeting to avoid foreclosure and it must be scheduled within fourteen days; and,
  • The homeowner can allow a lawyer, a HUD-certified housing counseling agency, or another other advisor to speak on homeowner’s behalf. Additionally, the homeowner is not forced to accept the plan that the representative and the lender came up with during their discussions.
  1. If no plan could be worked out to avoid foreclosure, the lender records a Notice of Default in the county where the property is located. The lender will send the homeowner a copy of the Notice by certified mail within ten business days of recording the Notice of Default. At that point, the homeowner has 90 days to “cure” or pay the amount owed.
  1. If the homeowner fails to cure the default, a Notice of Sale is recorded at least ninety days after the Notice of Default is recorded. This Notice basically states that the lender will sell the home at an auction in twenty-one days.
  1. The Notice of Sale must meet the following requirements:
  • Sent by certified mail;
  • Be published weekly in a newspaper of general circulation in the county where the home is situated for 3 consecutive weeks before the sale date; and,
  • State the date, time, and location of the foreclosure sale; the address of the property; the trustee’s name, address, and phone number and an accompanying statement that the property will be sold at a public auction.
  1. At the public auction, the successful bidder must pay the full amount of the bid immediately with cash or a cashier’s check. The successful bidder will receive the deed of trust. The lender typically bids at the auction for the amount of the balance plus the cost of the foreclosure. If no one else bids, the lender keeps the property.
  1. Stopping Foreclosure Sale in California

If the homeowner gets the money to pay the defaulted amount, he or she has five days before the foreclosure sale to cure the default payment and stop the process. This is referred to as the “reinstatement” of the loan. Additionally, during the twenty-one day period, any person, entity or institution, with an interest in the home has a right to redeem the home up until the nonjudicial foreclosure sale. However, they must pay the loan in full.

Finding a foreclosure defense law firm can help you keep your property from being sold in a public auction. Most law firms will provide a free consultation with an experienced foreclosure attorney who will review your case, discuss your options, and hopefully find the best solution for your unique situation.

  1. What Happens After Foreclosure?

After the property has been sold, the new owner must serve the homeowner with a three day written notice to “quit” or move out. If the homeowner refuses to move out or fails to move out within three days, the new owners can put the old homeowners through a formal eviction process. This is called “Unlawful Detainer,” and typically takes several weeks. The new homeowners will have to get a court order to get possession of the home.

  1. Rights of Tenants During Foreclosure

If the old homeowners were renting the home to tenants, the new homeowners must honor the existing lease; however, if the tenants have a month-to-month lease or if the owner/landlord also lives in the home that was foreclosed on, the new owner may evict the tenants and/or the former landlord or renew the existing lease. If the new owner elects to evict the tenants, he or she must give them ninety days notice before being the eviction process.

About Law Firm JT Legal Group is one of California’s most experienced and prolific law firms in the areas of Foreclosure Defense and Probate. Our attorneys take pride in our extremely high success rate, meticulous work ethic, and passionate defense of our clients’ rights.

Note: Attorney advertising. Nothing posted on this blog is intended, nor should be construed, as legal advice. Blog postings and hosted comments are available for general educational purposes only and should not be used to assess a specific legal situation. Nor does any comment on a blog post create an attorney-client relationship. The presence of hyperlinks to other third-party websites does not imply that the firm endorses those websites, their contents, or the activities or views of their owners.

The material provided in this article is for informational purposes only and should not be relied on to make any legal decisions without first consulting a licensed California attorney. The authors of this website are not licensed to practice law in California but the information was prepared and submitted by a licensed California law firm.

Short Sale Tax Break Set To Expire

Short Sale Tax Break Set To Expire

For homeowners looking to complete a Short Sale Loan Modification or Deed in Lieu of Foreclosure an important tax deadline is looming which may change your thinking about which foreclosure option is right for you.  In fact, if Congress fails to act by the end of the year one of the most effective government sponsored tools to help struggling homeowners will end and the financial crisis will worsen yet again.

Generally, few people realize that the total dollar amount forgiven by banks in short sales and loan modifications is considered taxable income by the IRS and could have a huge impact on your tax liability.  Fortunately, the Mortgage Forgiveness Debt Relief Act was passed in 2007 to eliminate tax liability for 5 years when borrowers utilize one of the Ten Foreclosure Options available to stop foreclosure sales.

Brief History

Under the U.S. tax code, all types of forgiven debt are treated as ordinary income and subject to regular tax rates.  As a result, if your home is underwater and you owe $250,000 on your loan but complete a short sale or loan modification for $150,000, the $100,000 forgiven or reduced debt would normally be taxable.  Depending on your tax rate, the tax liability in this example could exceed $20,000.

By passing the Mortgage Forgiveness Debt Relief Act in 2007, Congress wisely eliminated the need to pay taxes on income that never actually existed and allowed homeowners to truly move on once the Foreclosure Process was complete. 

Current Status

This critical exemption from taxable income is set to expire on December 31, 2012 and could have dire consequences for both homeowners and the real estate market overall.  Should Congress fail to extend the Act, millions of stressed out American homeowners who’ve survived the foreclosure process will be hit with the double whammy of unexpected taxable income AND likely being forced into a higher tax bracket as a result of the extra income.

The obvious solution is not only extending the Act but making its provisions permanent so borrowers aren’t facing an annual guessing game about important financial issues.  The good news is that the Senate Finance Committee approved a bi-partisan bill on August 2nd that would at least extend the tax relief through 2013.

The bad news is that despite Senate Committee approval, the bill must still pass the full Senate (likely) and the House of Representatives (who knows) before becoming law so the best advice is to act now if at all possible. Complete your loan modification or short sale before the end of the year or risk becoming a political pawn subject to the vagaries of an increasingly unreliable political system.

If you can’t get approval for your Foreclosure Option by the end of the year, make sure to vote for the people you think are most likely to help you and the rest of the people in our country.  Sometimes collectivism makes a lot more sense than individualism and making sure that children and families have a safe and secure place to sleep at night is or should be a no-brainer.

Related Content:

Sample Foreclosure Letters

Tips For Short Sale Approval

Foreclosure Lawsuits

Legal Defenses to Foreclosure

image provided by freedigitalphotos.net

Control Foreclosure Stress and Enjoy Life Again

 Foreclosure Process and worrying about financial problems in general is a normal reaction and a concern shared by millions of other people just like you.  Homeowners who never worried about job loss or the prospect of losing their homes are now amongst the three million current foreclosure cases with many more families behind in payments and soon to be in foreclosure as well.

Read more about the magnitude of the foreclosure crisis and why the recent Nationwide Foreclosure Settlement won’t help many homeowners.

Regardless of the problem and no matter how dark things look, never forget to enjoy life.  We all have different religious and spiritual beliefs but what they all have in common is the recognition that life is short and precious and it’s up to you  to make the most of your life in the brief time we’re privileged to be alive.

What that means is to find the things that matter most to you and focus on them rather than your problems, at least for awhile!  Never forget to make the people closest to you happy and tell them how much they mean to you, make sure to spend quality time with your family and never neglect your cats and dogs and the remarkably unconditional love they provide.  Most importantly, make sure to do the things that make you feel good whatever are.  Crank up your favorite music, reread your favorite book or find a new one, call a friend you haven’t spoken to for awhile or dust off your baseball glove or tennis racquet and remember what it feels like to be a kid again.  Anything that makes you happy, just don’t hurt anybody!  And don’t just nod your head in agreement, do something about it!

If you don’t have anything that sparks your passions, find something that does.  It’s never too late to learn new computer skills or sign up for an online class,  take up dancing, jogging or try different activities like painting or yoga to meet new people who like to do the same things.

For others you have plenty of interests but not enough time, money or motivation.  Make time and choose the things that are realistic and easy to get started and pull out your fishing rod, shine your bowling ball, shoot pool, head to the local beach or mountains or any one of the thousands of options you have to make each day unique and interesting.  We all have a certain number of days known only to God, but there’s always one less than the day before so make each day count for you and the people you care about and don’t let foreclosure stress control your life.

More on the Dangers of Foreclosure Stress

Related Content:

Defending Foreclosure Lawsuits

Avoiding Deficiency Judgments

Tips To Get Your Short Sale Approved

Sample Foreclosure Documents

 How Strategic Default Works

 

Photo provided by freedigitalphotos.net

Who Owns Your Mortgage and Why Care?

Who owns your mortgage?  What a dumb question – the bank owns my loan and their contact information is at the top of the bill I get each month!  Sorry, wrong answer and one of the many reasons why the Foreclosure Process is so confusing.  Read on and we’ll try to make it less confusing.  Learn About all Your Foreclosure Options to Beat the Bank.

Initially, there’s an important distinction between loan servicing companies (the company that sends your monthly bill) and the company that actually owns your mortgage. Loan servicing companies are hired by the true owners of the loan to handle everything from billing and collecting monthly payments to filing foreclosure lawsuits when needed. What makes things even more complicated is that most loan servicing companies are owned by large banks and financial institutions which means you might get a letter from a division of Chase Bank as the servicing company for a loan owned by IndyMac, Deutsche Bank or others but not Chase!  Is Your Mortgage Underwater?

Although usually owned by banks, these companies only make money if your foreclosure remains active so they generally have little or no incentive to settle your case.  If the case is resolved and the foreclosure process ends, the loan servicing company loses out on the extra fees for handling collection matters on your account which makes finding the real owners even more essential.  Given the huge numbers of mortgages in default, the actual owner of your loan likely has little or no information about your situation until you let them know directly.

Use our Sample Documents and Letters to Explain Your Situation to the Bank.

Once you figure out who services your loan, the next issue is confirming who truly owns your note and mortgage and who has the right to sue you as a result of that ownership.

Learn about the Difference Between Your Note and Mortgage.

The easiest way to find out who owns your note and mortgage is asking the loan servicing company in writing for ownership documentation. Although you’re legally entitled to it, you may need to ask for it several times as they’re often unwilling to provide the information.  If a Foreclosure Lawsuit has already started, make sure the banks produce paperwork confirming that they owned the note and mortgage at the time the lawsuit was filed and don’t just rely on what they’ve said in the lawsuit which may be entirely wrong.  See our discussion on Foreclosure Defenses as well as our Sample Foreclosure Answer for help in getting this information from the bank and why they had to own the mortgage before the lawsuit was ever filed.

Surprisingly to many homeowners the current owner of your mortgage is almost never the original lender from your initial loan closing or the lender from your mortgage refinancing or home equity line of credit. Instead, after your loan closing most if not all of the original lenders sold your loan documents to Fannie Mae, Freddie Mac and others who then resold the mortgages to financial institutions on Wall Street.  See How Mortgage Insurance Can Help Stop Foreclosure.

Bundles of thousands or more of these mortgages were then sold as shares of stock or bond offerings known as mortgage backed securities on the financial markets meaning your loan documents may have been sold several times and the ownership issue is muddled at best. Although many legal scholars disagree as to whether the stock or bond fund owns each underlying mortgage or whether the shareholders each own fractional interests of each mortgage, the prevailing notion is that the trustee for the bond or stock fund is the actual owner and therefore the only party who can legally make ownership decisions regarding your mortgage.  Learn How Strategic Default Works.

What the confusion over who owns your mortgage means is twofold-the first is that figuring out who really owns your loan may be difficult and in some cases impossible. Secondly, ownership issues and who has the right to sue you may be a life saver or more accurately a home saver.  As you’ll see from our discussion of Foreclosure Defenses, the failure to own the note and mortgage at the time the foreclosure lawsuit was filed or not providing the proper documentation to show how they actually became the owners of your mortgage and the right to sue you can result in dismissal of the foreclosure lawsuit and Saving Your Cave.  Read More on How SavetheCave.com Can Help You Stop Foreclosure.

Related Content:

Will the Nationwide Foreclosure Settlement Help You?

See How Foreclosure Stress Can Make You Sick

Florida Ground Zero in Foreclosure Battle

Photo by Photo by Graur Codrin

How To Avoid Deficiency Judgments

Whether or not the bank can collect a Deficiency Judgment from you depends on what your promissory note says and which state you’re in.  More About Deficiency Judgments.  Because your default and any resulting Foreclosure Lawsuit comes from a breach of your promissory note (not the mortgage), you’ll need to read your note carefully to see if it provides for personal liability against you.  Difference Between Your Promissory Note and Mortgage.

However, in some states like California Deficiency Judgments are prohibited on most residential loans (although refinancing can be an exception). California and others like it are called Non-Recourse states because they prevent personal liability on your home loans.  Many other states unfortunately including Florida, New York and Texas permit Deficiency Judgments against homeowners although your loan documents may still protect you.

The best way to avoid a Deficiency Judgment is selecting a Foreclosure Option that lets you control the outcome. By using a Short Sale or Deed in Lieu of Foreclosure thereby working with rather than against the bank, you’ll be in a much stronger position to demand waiver of the deficiency balance as a condition to working with them. Banks would much rather waive the right to collect a Deficiency Judgment than pursuing a costly Foreclosure Lawsuit with little or nothing to gain.

Learn About All Your Foreclosure Options

 Sample Foreclosure Documents and Letters

On the other hand if you just Walk Away or force the bank to pursue a foreclosure lawsuit to the bloody end, the normally unfriendly banks will be colder than ice and happily chase you down for the deficiency balance and anything else they can get their claws on. Read Why Walk Away is Your Worst Foreclosure Option.

A final note about possible tax consequences.  It’s important to understand that any amount the bank agrees to waive may be treated as income by the IRS. The idea is that you’re supposedly “saving” money by not paying off your mortgage in full which may qualify as income.  So even when the bank agrees to waive your deficiency balance and not pursue a Deficiency Judgment against you, they may still be required to issue a “1099” declaring your income. Can’t win for losing!  The good news is that at least through the end of 2012, the income will not be taxable for short sales although its unclear if the exemption will be extended.

Even if you can’t get a a resolution to your foreclosure lawsuit before the tax exemption expires in 2012, it’s not all bad news because its one or the other — the bank can’t pursue both collection of a deficiency judgment and calling the loss  income to you so there is some control over which method is best for you.  For example, since many homeowners involved in foreclosure lawsuits otherwise have little or no income, a 1099 for the difference between your mortgage and the amount paid in a short sale would have little actual financial impact and in that example would prefer to waive the Deficiency Judgment.

Consequently when you’re negotiating final terms of a short sale or deed in lieu of foreclosure with the bank, tell them your preference and insist  it be included in the final agreement. Make sure to GET IT IN WRITING if its not already part of the final written agreement because verbal promises won’t work.

Related Content:

What to do With Your Second Mortgage

Importance of the Default Notice

Don’t Let Foreclosure Stress Control Your Life

Who Owns Your Mortgage

Image provided by Wikimedia Commons

 

 

Tips For Short Short Sale Approval

 

 

There are many things you can do to improve the chances of  short sale approval. In fact, by doing a little basic research about your home’s current value and learning all you can about the Foreclosure Process you’ll make a proposal that will be hard to refuse.

Full Coverage of Foreclosure Short Sales

The biggest hurdle in getting short sale approval is convincing the lender that its the best outcome for both sides. By confirming that your mortgage is underwater and that you can’t afford the monthly payments, the lender will quickly realize that there are few options and a short sale is much cheaper and easier for them than a protracted Foreclosure Lawsuit.  Further, as the inventory of bank owned properties continues to grow they are less interested in adding your home to that inventory and much more inclined to work with you.

To confirm to the bank that your mortgage is underwater, you’ll need to document how much your home is worth based on comparable sales in the area. You can get this information from a local realtor you trust, an appraisal company or one of the many online websites that provide price estimates like zillow.com and other sites. How Do You Know if You Have an Underwater Mortgage?

Once you can show the lender that your mortgage is underwater and by how much, the next step is submitting a package with all of your supporting materials.  To help you contact the bank to both explain your financial condition and request your specific Foreclosure Option, we’ve prepared several different Sample Documents including cover letters and financial hardship letters for each foreclosure option.

 Sample Foreclosure Documents

As for supporting information, banks typically require a hardship letter that explains the nature and cause of your financial problems together with tax returns and recent pay stubs to make sure they’re not getting ripped off by people who don’t really have financial problems. By using our Sample Documents to guide you, the bank will recognize they’re dealing with an educated borrower and be much less inclined to take advantage of you.

Related Content:

Deed in Lieu of Foreclosure Hardship Letter

Short Sale Cover Letter

Loan Modification Hardship Letter

Photo by Ambro

Foreclosure Blame – It’s Not Our Fault!

Foreclosure Blame- It’s Not Our Fault!  So if we didn’t cause the foreclosure crisis who did?  That’s right, greedy banks and lenders who care more about profits than what’s good for you or the country.  Unfortunately, banks are no longer your friend as the age of the local community bank that actually cared about you and your neighborhood are long gone and replaced with faceless monsters with no heart or soul, just a bottom line and bottomless cup that always needs more money and bigger profits.  Read About the Nationwide Foreclosure Settlement and How They Won Again

As a result when homes became so overvalued that most borrowers could no longer qualify for a loan, the banks simply created and funded the sub-prime mortgage market rather than letting prices stabilize naturally.  By providing risky loans with exorbitant fees, they further fueled an unsustainable real estate bubble while at the same time betting against the housing market and expecting it to fail through hedge funds and other securities.

When  the bubble finally burst, homeowners were left with few options other than foreclosure with prices too high to sell or refinance and the banks neither accepting responsibility nor offering obvious solutions like principal reductions and loan modifications.  Rather, banks simply flooded the courts with flawed and defective foreclosure lawsuits and saturated the real estate market with cheap foreclosed homes which further worsened the existing crisis on all fronts.

Now that you know the real story, it’s just a matter of choosing the Foreclosure Option that works best for you rather than worrying about lenders who caused the problem in the first place.  Once you decide on a foreclosure plan, you’ll no longer be intimidated by the very companies that put you in foreclosure and be more concerned with protecting your foreclosure rights. Beat the Banks and Protect Your Foreclosure Rights

Future posts will discuss possible foreclosure options, Defenses to Foreclosure Lawsuits and updates on legal and legislative developments that may help you succeed in your battle with the bank.  See the rest of  SaveTheCave for detailed information on foreclosure strategies as well as Sample Foreclosure Letters and Documents to implement your foreclosure plans.

Read More on How SavetheCave.com Can Help You Stop Foreclosure

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Don’t Let Foreclosure Stress Control Your Life

Sample Foreclosure Answer

Importance of Default Notice

Mortgage Insurance to Help Stop Foreclosure

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Ten Ways to Stop Foreclosure and Protect Your Foreclosure Rights

The fear of losing your home is a big deal and an emotion shared by millions of other homeowners so you’re not alone. However don’t let fear control what may be the most important financial decision of your life so try to relax and take the time to learn everything you can about the Foreclosure Process and understanding that you have Ten Different Ways to avoid foreclosure sales.  Once you know that there’s hope for a good outcome you take the fear and emotion out of the picture and make decisions that are best for you and your family.

Learn How to Use SavetheCave.com to Stop Foreclosures.

This post will briefly discuss ten ways to stop foreclosure and methods to stop foreclosure sales. You can also find more in-depth coverage and Sample Foreclosure Documents for each of the Foreclosure Options discussed here by visiting our Foreclosure Options section.

The most frequently discussed foreclosure option is a Short Sale which involves selling your home for less than the amount of your loan after getting bank approval for the sale.  If you try for a short sale to avoid foreclosure it’s also important to know how to avoid Deficiency Judgments and what to include with your request for short sale approval.

Short Sale Cover Letter

Short Sale Financial Hardship Letter

The second foreclosure option is a Loan Modification from the original lender or re-financing from a new lender to lower your overall monthly payments. This option is the primary feature of the recent Nationwide Foreclosure Settlement discussed in a related blog and will be the focus of more advertising and financing options in the next several months because of the agreement.  Results can vary greatly with different lenders so be sure to put together the right information needed to convince the bank that your request is real and that a loan modification is essential to help you avoid foreclosure rather than an easy way to save money you already have.

Loan Modification Cover Letter

Loan Modification Financial Hardship Letter

The third most popular alternative is a Deed in Lieu of Foreclosure which is the quickest and easiest way to stop foreclosure sales and avoid foreclosure lawsuits.  The process simply involves transferring your property to the bank with a document similar to a quitclaim deed but it may not release you from a possible deficiency judgment or income tax consequences so be sure you understand the possible consequences before moving ahead.

Deed in Lieu of Foreclosure Cover Letter

Deed in Lieu of Foreclosure Financial Hardship Letter

A fourth way to stop foreclosure is closely related to the Deed in Lieu of Foreclosure and is called Deed-For-Lease and is becoming more common with Fannie Mae and other lenders.  What this involves is executing a Deed in Lieu of Foreclosure together with a Deed-For-Lease which lets you rent your home from the bank and stay in your current property.  This is a new and exciting foreclosure option that we’ll cover in more detail in future posts but you can get more information now by visiting KnowYourOptions.com which is a site sponsored by Fannie Mae.

The fifth way to stop foreclosure is renting out your home for 2-3 years while temporarily moving to a cheaper location to reduce your expenses and get back on your feet financially.  You can also rent out rooms or any portion of your home but either way the obvious advantage is the ability to save your home and avoid foreclosure completely. Read More on Foreclosure Rentals to Stop Foreclosure.

The sixth foreclosure option is Defending Your Own Foreclosure Lawsuit or hiring a lawyer to help you.  As a result of the numerous  mistakes and fraudulent documents used by banks and loan servicers to support their lawsuits, there are a number of very strong defenses available to help fight foreclosure cases.  Although we recommend hiring a lawyer to handle your case or at least consulting with one for an hour or two to help understand local laws and procedures, you can defend your own foreclosure lawsuit.

Foreclosure Defenses

Sample Foreclosure Answer

Foreclosure Lawsuits

The seventh foreclosure option is filing for bankruptcy protection which results in an automatic stay of all foreclosure actions.  Although its the single most effective way to stop foreclosures and avoid foreclosure sales at the last minute, the stay is temporary and is not a long term solution.  If you feel that bankruptcy may be the best option for you, meet with an experienced bankruptcy attorney in your area and make sure that your first meeting or consultation is free.  Read More About Foreclosure Bankruptcy

The eighth foreclosure option is called “Forbearance”  in which lenders agree to temporarily suspend or reduce monthly payments for a specific period of time if you’re in a situation where the short time off will help resolve your financial crisis.  There are many programs available for veterans and other homeowners with additional information at Fannie Mae’s KnowYourOptions.com and directly from participating lenders.  Forbearance to Stop Foreclosure

Strategic Default is the ninth foreclosure alternative and actually a combination of one or more of the earlier foreclosure options we’ve covered.   Essentially, Strategic Default is the decision to stop making mortgage payments that you can otherwise afford to pay with the goal of reducing the principal balance of the loan, the interest rate or both to more accurately reflect the value of your home in today’s depressed housing market.  With home values down 50% or more in many places it can be a very effective way to improve a dramatically under performing asset and is nothing more than a business decision with no moral implications or obligations whatsoever.  Blame the Banks for the Foreclosure Crisis.

Strategic Default to Stop Foreclosure

Sample Foreclosure Letters

The last option to avoid foreclosure is to Walk Away which for reasons covered in our foreclosure options section has the highest risk of a negative outcome with the least to gain as a result of doing it.  It’s listed last for a reason and don’t even think about doing it until you understand more about the foreclosure process and how much time and how many different options you have.

Related Content:

Read more about the Foreclosure Process 

Nationwide Foreclosure Settlement

Dangers of Foreclosure Stress

Photo by Simon Howden

 

How Strategic Default Works

How Strategic Default works and what it means are often discussed but rarely understood so let’s make it easy. Strategic Default is a foreclosure alternative where you stop making mortgage payments that you can otherwise afford as part of an overall plan to avoid foreclosure and improve your finances through reduced or eliminated payments.  Read About All of Your Foreclosure Options

There are two options to start the Strategic Default process –  contacting the bank from the start to let them know what you’re planning and why or waiting for the bank to figure it out on their own. Of course if you decide to contact the lender from the start don’t tell them that you’re formally declaring Strategic Default just focus on your financial problems and the remedy you’re hoping for.

Full Discussion of Strategic Default to Stop Foreclosure

There are advantages to each of your timing options with the hope under option one that working with the lender from the start  leads them to actually help you or at least not pursue a Deficiency Judgment. Not exactly Christmas morning. With option two, the benefit of delaying contact with the bank translates to time and money as the longer the Foreclosure Process continues the more money you’ll save on housing costs.

Regardless of when you actually speak with the bank, DON’T BE INTIMIDATED and don’t let anyone question the morality of your decision. Banks have no moral standing whatsoever to question your ethics or integrity because you’re making a decision that’s in your best financial interest, which is what banks do every day. The difference is that your banks’ never ending quest for short term profits has severely damaged the US economy while you’re just trying to keep a roof over your head.  Read About the Nationwide Foreclosure Settlement and Why the Banks Won Big Again.

Because Strategic Default is not a stand alone remedy, use the specific methods outlined in  SaveTheCave.com  on Foreclosure Loan Modification , Short Sales and Deed In Lieu of Foreclosure to compile whats needed to convince your lender to give you what you want. Using letters from our Sample Documents, put together a professional looking package including evidence that your mortgage is underwater and by how much and be sure to send the materials to the actual owner of your loan rather than the loan servicing company who may have no real interest in helping you. Is Your Mortgage Underwater?

If you’re asking for a Foreclosure Loan Modification by having your principal reduced to fair market value, make sure the bank knows that you’re much more likely to make affordable future payments and that eventually your investment will pay off for both sides.  In addition to avoiding the time and expense of foreclosing on your house, the housing market improves overall meaning banks make more loans and we can all get back to enjoying life and family rather than just trying to survive.  Don’t Let Foreclosure Stress Control Your Life

If you want permission for a Short Sale without the risk of a deficiency judgment, let the bank know that your credit score has already taken a hit and you have nothing to lose. Tell them in clear and unambiguous language that if they don’t agree to a short sale, they’ll face a long and expensive Foreclosure Lawsuit with nothing to gain but adding more property to an already bloated real estate portfolio. Banks only want to make money and don’t like holding excess property with ongoing maintenance, tax and insurance costs so use this knowledge to your advantage.

Related Content:

Short Sale Sample Hardship Letter

Florida Foreclosure Process

Sickness Linked to Foreclosure Stress

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Your Second Mortgage in Foreclosure

What happens to your Second Mortgage in foreclosure is a rarely discussed topic but an important one nonetheless, especially for your post-foreclosure plans. Although many homeowners have second mortgages, which include lines of credit and home equity loans, very few understand the important distinction between the first and second mortgage.

By just looking at the actual documents there is very little difference between the first and second mortgage. Each consists of a “promissory note”, which includes the actual terms of the loan, and a “security agreement” which is called a mortgage or deed of trust and protects the bank by allowing them to sell your property to recover its losses.  Learn More About the Difference Between A Promissory Note and Mortgage.

The primary difference between the first and second mortgage is the priority of who gets paid first. Assuming that your primary mortgage was properly recorded by the bank, that loan will always be paid first and in full before the second mortgage can collect a dime.

Since the second mortgage actually uses your property to secure repayment just like your first mortgage, if your primary lender doesn’t get paid in full the second lender loses the right to collect on the property. Although the loan doesn’t go away, the second mortgage loses its “secured” status and becomes “unsecured” and much less likely to be repaid.  See How SaveTheCave Can Help You Stop Foreclosure and Avoid Foreclosure Sales.

What to do About Your Second Mortgage

Ignore is too of a strong word, but for now your focus should be squarely on your primary loan as it controls if and when a foreclosure lawsuit is filed. Since many homeowners have underwater mortgages, the likelihood of the second mortgage getting paid through a short sale or foreclosure is nearly nonexistent. Therefore what happens to your second mortgage in foreclosure is of secondary concern for now.

Once the property is sold, the second mortgage literally disappears unless your home sells for more than the first mortgage. Although the mortgage goes away, the promissory note remains in place.

Banks can then try to collect on promissory notes without the benefit of a mortgage, but most such efforts would be futile when people can’t even pay their first mortgages. Futile, but not impossible because when there’s money around greedy players can’t be far behind.

What will likely happen once the foreclosure crisis settles down is that banks and collection companies will try collecting unsecured second mortgages and deficiency judgments remaining after foreclosure. While many of these claims could be settled for pennies on the dollar, if collection efforts become too aggressive it may be time to meet with an experienced bankruptcy attorney in your area to help reduce or eliminate the remaining unsecured debts.

However, one step at a time as the future will take care of itself so deal with the present and the issues directly in front of you which is developing your foreclosure plans to avoid foreclosure by dealing with your primary mortgage.

Related Content:

Avoiding Deficiency Judgments

Sample Foreclosure Documents

Who Owns Your Mortgage

Dangers of Foreclosure Stress

Photo By Herscheid Stottmert

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