Über die Autorin bzw. den Autor

McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

Buying Real Estate Foreclosures

The McGraw-Hill Companies, Inc.

Contents

Chapter One

Each state in the United States has its own legal procedures for taking foreclosure action. We can, however, find common ground in the basic principles that trigger the commencement of foreclosure actions and in the guidelines that help to control the actions in each state through to their conclusions. In Chapter 1, we introduce the legal procedure that occurs when a lender forecloses, including the definition of a foreclosure action, the types of instruments used to secure loans, the process and duration of judicial and nonjudicial proceedings, and the time frames for foreclosure of defaulting loans in each state. Knowledge of these important issues helps potential buyers (1) identify optimum purchasing opportunities that arise at specific intervals throughout the procedure, (2) recognize certain statutory regulations that may affect purchasing decisions, and (3) begin their new foreclosure venture with a strong foundation to build upon. In upcoming chapters, we bolster this foundation with proven techniques for buying foreclosures safely and sanely.

An Overview of the Legal Procedure in Foreclosure Actions

A foreclosure action is the legal procedure that a lender initiates to reclaim ownership and possession of a property after the borrower fails to repay the loan in accordance with the contractual terms. The foreclosure procedure terminates those rights that the borrower had secured, either through a mortgage or through a deed of trust.

Initially, when a borrower is late with a loan payment, the lender usually attempts to communicate with the borrower (i.e., via a telephone call or letter) to advise the borrower that the loan payment is overdue and to request an explanation for the nonpayment and an opportunity to work out a repayment plan with the borrower. Is the delay temporary? Is the situation that caused the late payment unusual and unlikely to recur? Will the defaulting borrower be able to resume making payments very shortly?

In some states, the mortgage and/or note or the deed of trust also requires the lender to issue a default notice advising the borrower that if he or she does not pay the arrears by a certain date, the entire loan balance will be "accelerated." If the lender is not required to send a default notice or to accelerate the loan, the lender may allow the defaulting borrower to reinstate the loan by paying only the late monthly payments. Once the lender accelerates the loan, however, rather than the borrowers owing just the unpaid monthly installments (plus any late charges that have accrued), the entire remaining loan balance becomes due and payable.

As an example (illustrated in Figure 1-1), suppose a borrower obtains a loan with terms that stipulate that the loan will be in default if the borrower is 90 days late in making the monthly loan payment.

In our example, the unpaid loan balance at the time of the default is 90,000 and the borrower's monthly loan payment is 1,000. After missing one monthly payment, the borrower is 30 days late and owes the lender 1,000 (plus late charges). After missing the second consecutive monthly payment, the borrower is 60 days late and owes the lender 2,000 (plus late charges). After missing the third consecutive monthly payment, the borrower is 90 days late. At this point, instead of the borrower's owing the lender 3,000 (plus late charges), the due date of the loan accelerates, in accordance with the 90-day default provision, meaning that the lender may call the entire remaining loan balance of 90,000 due and payable in full. If the borrower in our example is unable to pay the lender the entire loan balance and cannot work out an alternative repayment plan with the lender, the lender may opt to sell the property to the public at an auction in order to recapture its losses. The auction will be held at a designated location that is open to the public, such as the local county courthouse, town hall, or some other such place. The public is notified according to local custom, usually through advertisements published in the town, village, or city newspapers. A court-appointed referee, a sheriff or a trustee is appointed to accept verbal bids on behalf of the foreclosing lender from those who attend the auction and will award the contract of sale to the highest bidder. The initiation of the foreclosure action is guided by the instrument that created the borrower's obligation to repay the loan. All states use either a mortgage or a deed of trust.

Mortgages and Deeds of Trust

Mortgages and deeds of trust are the legal security devices that are executed by the lender and the borrower when the borrower obtains financing from the lender to purchase or refinance real estate. On a nationwide scale, the states are about equally divided in their statutory adoption of mortgages and deeds of trust, and a few states even use both.

Figure 1-2 is an illustration of a deed of trust, Figure 1-3 is an illustration of a note and mortgage, and Figure 1-4 is a chart illustrating the differences between a mortgage and a deed of trust.

Understanding Mortgages

In those states in which a mortgage has been adopted as a security instrument (lien theory states), the borrower owns and retains title to real property and the lender holds a mortgage that creates a lien against the borrower's real property. When real property is mortgaged, the borrower signs two separate legal documents, the promissory note (note or bond) and the mortgage. The note is evidence of the borrower's promise to pay the debt and sets forth the monthly loan repayment terms, including the payment amount, the due date, the grace period, the interest rate, default terms, and so on. The mortgage is a two-party instrument executed by the borrower (mortgagor) and the lender (mortgagee) that protects the lender by pledging the real estate that is the subject of the loan as security, or collateral, for the debt. If the borrower fails to make payments as agreed upon under the note, and the borrower is unwilling or unable to bring the payments current, lender has the right to protect its interests by initiating a foreclosure lawsuit to force the sale of the property in order to satisfy the outstanding loan balance.

Understanding Deeds of Trust (Trust Deeds)

In states where deeds of trust (also called trust deeds) are adopted as a security instrument (title theory states), these deeds of trust are used in place of mortgages. Deeds of trust are similar to mortgages in that they pledge real property as security for the loan that was taken out by the borrower to purchase the property. However, whereas a mortgage is a two-party instrument between the borrower and the lender, the deed of trust is a three-party instrument between a trustor, a beneficiary, and a trustee. The borrower is called the trustor, and the lender is the beneficiary. The third party, called the trustee, is usually an intermediary with no interest in the property, such as a title or escrow company. The trustee's job is to hold the title to the property in trust for the benefit of, and on behalf of, the beneficiary, as security for the payment of the debt, until such time as the promissory note has been satisfied and the loan paid in full. The trustee reconveys the property to the borrower after the deed of trust is paid in full....