It is an unfortunate commentary, but when
economic activity declines and housing activity decreases more real property
enter the foreclosure process. High interest rates and creative financing
arrangements also are 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. Neither may 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.