Real Estate Finance Unit 14

Front 1

Default

Back 1

When a borrower fails to pay a contractual debt, the situation is known as a

Front 2

Loan modification

Back 2

A permanent change in one or more of the terms of a borrower's loan, allows the loan to be reinstated, and results in a payment the borrower can afford

Front 3

Short Sale

Back 3

A sale of encumbered real property that produces less money than is owed to the lender. If the borrower owes more on the loan than the property’s fair market value, the borrower can attempt to negotiate a

Front 4

Short sale

Back 4

In a short sale, the lender can either accept or reject the proposed sale. The defaulting borrower’s financial status and the current conditions of the real estate market influence the lender’s decision to consider a short sale. A lender also takes into account whether the financial loss incurred in accepting a short sale is less than pursuing foreclosure. The short sale is a quicker transaction and less costly than a foreclosure

Front 5

Forbearance, recasting the existing loan on the property, or accepting a deed in lieu of foreclosure

Back 5

The lender can work with a borrower who is experiencing financial difficulties by offering

Front 6

Forbearance

Back 6

The forgiving of a debt or obligation. A lender can waive payments or allow reduced payments until the borrower is economically sound

Front 7

Recasting

Back 7

The act of redesigning an existing loan balance in order to avoid default or foreclosure. The loan period may be extended, payments reduced, or the interest rate periodically adjusted to assist the distressed borrower

Front 8

Deed in lieu of foreclosure

Back 8

A voluntary transfer of the property back to the lender

Front 9

Foreclosure

Back 9

The legal procedure lenders use to terminate the trustor or mortgagor’s rights, title, and interest in real property by selling the property and using the sale proceeds to satisfy the liens of creditors.

Front 10

Power-of-sale clause

Back 10

Deeds of trust or mortgages that contain a _____ allow the lender to initiate the foreclosure process

Front 11

Types of Foreclosure

Back 11

Foreclosure laws vary in each state, but there are three general types of foreclosure proceedings. When the promissory note conveys a power of sale to the lender, a non-judicial foreclosure is allowed. In states that recognize judicial foreclosure, a lender must request a court-ordered sale of the property once the lender proves that the borrower has defaulted on the terms of the loan. Strict foreclosure, which is much less common, allows a lender to obtain title to the property immediately upon default by the borrower and either sell the property or keep it to satisfy the debt

Front 12

1, Non-judicial foreclosure—requires power of sale
2, Judicial foreclosure—requires court-ordered sale
3, Strict foreclosure—no judicial sale, not commonly used

Back 12

Three Methods of Foreclosure

Front 13

Non-judicial foreclosure also known as foreclosure by power of sale

Back 13

The procedure a lender uses to sell a property without the involvement of a court

Front 14

Trustee’s sale

Back 14

The part of a non-judicial foreclosure process in which the forced sale of real property is held through public auction. The opening bids usually start at the amount of the current outstanding debt. Allowed only when there is a power-of-sale clause included in the deed of trust

Front 15

Reinstate

Back 15

The debtor, or any other party with a junior lien, may ______ (bring current and restore) the defaulted loan during the statutory reinstatement period. During this time, the debtor may still redeem the property and stop the foreclosure sale by paying off the entire debt, plus interest, costs, and fees, prior to the date of the sale

Front 16

Notice of default

Back 16

In many states, the foreclosure procedure begins when the lender asks the trustee to file (record) a

Front 17

Preliminary advertising

Back 17

The publishing of a foreclosure sale in a newspaper or other advertising media

Front 18

Notice of sale

Back 18

In some states, the initial step to begin foreclosure proceedings is to file a notice of sale rather than a notice of default. However, in states in which the initial step in a foreclosure is to file a notice of default, the next step is for the trustee to record a notice of sale if the borrower has not paid the debt within the allotted time. This notice sets forth the date of a public auction of the property

Front 19

Trustee’s deed

Back 19

The terms of the sale, or auction, are generally all cash. The sale is held a specified number of days after the notice of sale is filed and is held at a stated date, time, and place. Auction sales often occur at the county courthouse. At the sale, the trustee collects the winning bid price from the successful bidder and issues a ______, which grants title to the property

Front 20

Public Auction

Back 20

If there are no outside bidders at the sale, the property reverts to the beneficiary (lender). In this instance, the trustee issues a trustee’s deed to the original lender, who now owns the property. The sale is subject to certain liens of record that are not eliminated by a foreclosure sale. These include federal tax liens and real property assessments and taxes. That means the new owner is responsible for payment of those liens. The non-judicial foreclosure process eliminates any junior liens

Front 21

Judicial foreclosure

Back 21

The procedure a lender uses to sell a mortgaged property with the involvement of a court

Front 22

Judicial Foreclosure

Back 22

A beneficiary (lender) may choose a judicial foreclosure instead of a trustee sale under a deed of trust. The reason a beneficiary may decide to choose a judicial foreclosure under a deed of trust is that a deficiency judgment is allowable. If a deficiency judgment comes from the court, the lender has the right to collect any unpaid amounts on the loan from the borrower

Front 23

Lis pendens

Back 23

The attorney for the lender contacts the mortgagor to try to resolve the default. If no resolution occurs, the attorney files a _______ (action pending) with the court. The lis pendens gives notice to the public that a pending action has been filed against the mortgagor. Any prospective buyer for the property is then notified of the cloud on title

Front 24

Referee’s deed in foreclosure, sheriff’s deed, or a certificate of sale

Back 24

Depending on which state the property is located in, the new owner receives a referee’s deed in foreclosure, sheriff’s deed, or a certificate of sale. The first two are special warranty deeds that give the buyer title the borrower had at the time of the original loan. Referee’s deeds and sheriff’s deeds are used primarily in states with no statutory redemption laws. The buyer gets immediate possession of the property after the sale, which is final

Front 25

Redemption

Back 25

The legal right of a borrower to make good on a defaulted loan within a statutory period of time and thus regain the property

Front 26

Redemption period

Back 26

A period of time established by state law during which a property owner has the right to recover real estate after a foreclosure or tax sale by paying the sales price plus interest and costs

Front 27

Strict foreclosure

Back 27

A type of foreclosure in which the mortgagee initiates a lawsuit on the defaulting mortgagor, who must pay the mortgage within a specific time frame as ordered by the court. If the defaulting mortgagor is unable to pay back the mortgage, the title to the property involuntarily transfers to the mortgagee

Front 28

Junior loans

Back 28

There may be second or even third loans against a property. These are known as junior loans. In many foreclosures, the proceeds of the sale do not pay all the debt. Therefore, a fair system of priorities for paying off lenders was created. The proceeds of the sale are used to satisfy the debt with the highest priority first, and then the next highest priority debt is paid, then the next, and so on until either the sale proceeds have faded to nothing or all holders of debt relating to the property have been repaid. sometimes, the property does not bring enough money at the foreclosure sale to satisfy all the creditors who have loans against the property. In those cases, the loans that are not paid off are eliminated

Front 29

-Stay silent and hope the proceeds from the foreclosure sale are enough to pay off the loan balance
-Bid for the property in order to protect his or her investment
-Start its own foreclosure proceedings

Back 29

Most junior lienholders record a Request for Notice of Default (or Delinquency) to protect themselves in the event the borrowers default on senior loans. Upon learning of the impending foreclosure by a senior lienholder, the junior lienholder has three choices

Front 30

Foreclosing FHA Loans

Back 30

If a borrower defaults on a loan backed by the Federal Housing Administration (FHA), a lender can file Form 2068 – Notice of Default with a local FHA office. The filing must take place within 60 days of the default and must contain a detailed account of the borrower’s delinquency. In order to curb the foreclosure process, FHA counselors may ask the lender to recast the current loan terms to reduce the borrower’s payment or offer forbearance in order for borrowers to work out their financial situation

Front 31

Foreclosing VA Loans

Back 31

If the Department of Veterans Affairs (VA) insures the defaulted loan, the lender can file a claim with the local VA office. Delinquency claims must occur after the borrower has defaulted for more than 3 months. After the VA office is notified of the default, the VA has subrogation rights to bring the loan current

Front 32

Subrogation

Back 32

Refers to the substitution of one party’s entitlement of debt obligations to another party

Front 33

Foreclosing VA Loans

Back 33

A lender with a loan secured by the VA must also work with the borrower in order to prevent foreclosure proceedings as much as possible. If foreclosure is inevitable, then, like the FHA foreclosure process, the lender can bid up to the amount of the balance owed at the foreclosure auction and submit a claim for losses to the VA. The VA must then decide whether it wants to pay the balance and any costs incurred during the foreclosure proceedings, take title to the property, or have the defaulting veteran stay in the home while the VA covers the difference of the property’s fair market value and unpaid balance

Front 34

Deficiency judgment

Back 34

For a lender, sometimes the proceeds of the sale are not sufficient to satisfy the foreclosed debt. In addition, the expenses incurred while pursuing a foreclosure can be costly and the lender may want to recover those expenses as well. If that happens, the lender may try to sue on the promissory note and obtain a ______ against the borrower to recover the money owed on the defaulting balance of the loan