Resources for preventing foreclosure

What is a Deed of Trust and what is a mortgage and what is the difference?

Okay, let’s go over the basics of buying a home so that we can properly frame the concept of deeds of trust and mortgages. When you buy a home, you probably took out a loan and signed a promissory note. The loan gives you money and the promissory note legally obligates you to pay back the loan. In return for the money, you also gave your lender a mortgage which is a lien against your home. The mortgage is called a “security interest,” which secures “the performance of an obligation (usually but not always the payment of a debt) which gives the beneficiary of the security interest certain preferential rights in relation to the assets.” What that means is that if you don’t pay back the debt, the lender gets the house. Now, another version of the security interest is called a Deed of Trust.

The difference with a Deed of Trust is that the deed, or title to the home, is transferred to a trustee (a trust or title company) instead of to the bank. The trustee holds the property for the loan and if the loan is repaid, the title is transferred to the borrower. If the borrower defaults, the trustee can then sell the property and pay the lender back from the proceeds of the sale without going to court.

You may remember, from the foreclosure process article, that in foreclosure the lender must file papers with the court. With a Deed of Trust, this filing process is unnecessary and so the process is much faster.

You have may have read in the What Happens During Pre-Foreclosure? article about how the bank can accelerate your mortgage, which was step 6:

6. Bank activates an acceleration clause and demands the mortgage be paid in full.

In every mortgage there is a clause that states that there are certain conditions in which the mortgage may be accelerated and the bank may demand that it be paid in full. It’s known as an acceleration clause and it’s designed to protect the lender from borrowers. If the acceleration clause were not in the mortgage agreement, the lender would have no protection from borrowers who did not pay. They couldn’t start the foreclosure process and they’d be stuck without any resolution.

In addition to failure to pay, some other common negative events covered are change of ownership without the lender’s consent, destruction of the property, or other event which endangers the security of the loan. As you can see, all of those events have the potential to negatively affect the value of the home and so the acceleration clause gives the lender some protection. There are other positive (or neutral) events that can trigger the clause such as when the home is sold or when the loan is refinanced.

While the individual steps involved in each of the steps in the foreclosure process are different in each state, the general process itself is the same. This article covers the foreclosure part of the foreclosure process, after the bank has accelerated your mortgage and demanded that the mortgage be fully paid. While this is often the point of no return with your current lender, all may not be lost – contact a foreclosure lawyer or expert as quickly as possible.

Steps In Foreclosure

1. Bank sends a notice of intent to foreclose to you by certified mail.
2. Bank files the necessary papers in court to begin the foreclosure process.
3. The required notices are published in local newspapers. This is not meant to be punitive, this is required by law.
4. At this point, there are still things you can do to avoid going to court, such as selling the house to someone else, but assuming these things don’t happen and the waiting periods for all the legal papers and notices expire, the process will enter a courtroom.
5. Court holds a hearing regarding the claim.
6. Court issues an order to foreclose.
7. The required notices of a foreclosure sale and any advertisements are published in local newspapers.
8. If again nothing is reached, the house is sold to the highest bidder at public auction.

All told, this process can take as little as 30 days (Alabama) to as long as a year (New York) and that length is one of the reasons why banks don’t want to go through with it. You may also notice that at no point are you evicted from your home, that’s because the foreclosure process doesn’t cover that at all. After the foreclosure, you are considered a tenant in the home and could perhaps arrangement to rent it from the new owners. If not, then the new owners have to follow the eviction process of your state which can also take some time as well.

There are numerous points in that process for you to reach a resolution with your lender but the longer you wait, the fewer the options. This is why communication with your lender is crucial if you want to stay in your house.

While the individual steps involved in each of the steps in the foreclosure process are different in each state, the general process itself is the same. Pre-foreclosure is generally the first phase of the foreclosure process and is marked by a borrower’s failure to pay and failure to reach any sort of compromise with the lender that satisfies the lender. Remember, banks don’t want to seize homes, but they have to protect their investments (the loan) by identifying when they can be a problem. Failure to make a payment is a problem because it represents a bigger problem, failure to repay the loan, so to resolve it the bank is seizing and selling the collateral.

Steps In Pre-Foreclosure

1. Borrower fails to make a mortgage payment.
2. Bank sends the borrower a late payment notice.
3. Borrower continues to fail to make mortgage payments.
4. Bank attempts to contact the borrower.
5. No arrangement is made and borrower is still delinquent.
6. Bank activates an acceleration clause and demands the mortgage be paid in full.

The last step, when the bank activates the acceleration clause in the mortgage, is the point of no return. If you haven’t talked to the bank before that step, talking to them now will probably not work because they’ve given you ample time to respond. This is why talking to your lender is crucial, they are willing to work with people who are willing to work, but if you don’t respond at all, you’ve shown them that you aren’t willing to work with them (even if it’s because you’re afraid) so they have to take drastic measures.

Are you about to have your home foreclosed? Can you no longer make your mortgage payments because of unforeseen circumstances or a rate increase? Do not be afraid of foreclosure, do not ignore the notices, do not abandon your house, and don’t panic.

Remember one fact: Given a choice, the bank would much rather prefer to continue receiving some sort of payment from you than receive the house in foreclosure. Read that again… the bank does not want to foreclose, they only do it if they are given no other choice. The bank is not in the real estate business, it’s in the money lending and collecting business, so they don’t have it “out” for you.

It’s crucial that you keep the communication channels open and always try to make alternate arrangements with your lender. Sometimes they will be accommodating, sometimes they won’t be, but if you don’t communicate with your lender then you won’t know. Especially with so many ARMs re-adjusting these next few months, your lender may be especially forgiving as long as you have a plan to get back on track.

So, if you know your payment is going to increase or you foresee any sort of problems, definitely start talking to your lender. The answer may be to refinance or an alternate payment agreement can be reach, but don’t ignore your lender and don’t be afraid to talk.