Most home owners in the United States take out a mortgage, or a collateralized loan, to purchase their home. Whether the loan is for a house or for a condominium, when the owner falls behind on the payments, the provider of the loan – a bank or mortgage company -has foreclosure as a remedy. The bank can move to take possession of the house to satisfy the mortgagee’s debt. While the exact process and timing can vary by state law, or even by county within a state, foreclosure has a fairly straightforward process in most locales.
A foreclosure action commences with the filing of a notice of default. The bank or lender informs the owner that he or she is behind on the payments, and the homeowner may still work with the lender to stave off foreclosure. One of the ways in which foreclosure can be forestalled is a short sale. In a short sale the seller sells the property for less than the outstanding balance or amount owed on the mortgage. Lenders must consent to a short sale, but save the cost and fees associated with bringing a foreclosure action. The seller avoids a foreclosure from appearing on his or her credit report, although there are downsides as well. The seller may still have some notation of the short sale on the credit report and, importantly, the seller may owe taxes on the “income” derived from the short sale. To the extent that the seller no longer has to pay money that was once legally owed, the amount forgiven in the short sale process may qualify as “income” – and thus subject the seller to a tax liability assessed on the difference between the higher outstanding mortgage balance and the lower selling price.
Should the lender and borrower be unable to come to terms, the next step in the foreclosure process is the notice of trustee sale or auction announcement. The exact process of the auction varies considerably by state and even county, but the basic premise is that the lender notifies the borrower, files some documentation with the county, and provides notice of the auction to the public. Some of the actual auctions are the stereotypical courthouse steps auction, but today many counties conduct an eBay ® style online property auction.
Purchasing auctioned foreclosure properties can be fraught with risk. While buyers may find a property at just a fraction of its market value, auctioned foreclosure properties are sold “as is.” Not only may the previous owners have removed appliances and fixtures, the property may need significant repairs. Further, and likely even more costly, the title on the property may not be clear. Foreclosure actions can actually be brought by any number of creditors on a particular property, including holders of HELOC or home equity lines of credit or even HOAs or homeowner associations. Just because one creditor or lienholder on a particular property has instituted foreclosure on a property does not mean that other creditors or lienholders will give up their pursuit of the money owed to them. Purchasers of a foreclosed property would then own the property along with the responsibility to pay the lienholders on the property.
Homeowners served with a notice of default or even a notice of trustee sale may successfully defend foreclosure actions. Banks, lenders, and lienholders must follow particular legal procedures in order to bring a foreclosure action; the failure to do so may vitiate the creditor’s ability to sustain the foreclosure. Further, the sheer number of foreclosure actions facing creditors may mean that creditors will only pursue the foreclosure actions that have the greatest return on investment; that may mean that the economics of foreclosure can benefit some homeowners who would otherwise face foreclosure.