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Author Topic: What happens during foreclosure?  (Read 23283 times)
always_seeking
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« on: July 20, 2008, 12:58:43 am »

When a house goes into foreclosure. Does the owner just walk away, the bank gets the house, and that's the end?

I'm sure the bank probably sells the house. If there's a loss does the owner have to pay the differencee?

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zharkov
or, the modern Prometheus.
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« Reply #1 on: July 20, 2008, 5:53:40 am »


Key question:  When the bank sells the house, does it pay off the balance of the mortgage?  If not, then the former homeowner is liable to pay back the remainder that he or she owes the bank.


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conjugate
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« Reply #2 on: July 20, 2008, 6:37:21 am »

Key question:  When the bank sells the house, does it pay off the balance of the mortgage?  If not, then the former homeowner is liable to pay back the remainder that he or she owes the bank.

It depends.  Suppose the owner walks away owing $100,000, and the bank has to sell the house for $75,000.  The owner is still liable for the remaining $25,000 (as I understand it).  That can happen when prices drop, and it really sucks being "upside-down," i.e. owing more than it's worth. 

I've paid enough on my house that this should not be a problem; I should still get more for it (even though I'm not sure of its current market value) than I owe.  I also think I should be able to sell it, so I am cautiously optimistic that I won't have to find out about foreclosure personally.

Now depending on how the owner goes about the foreclosure there are different possible outcomes.  For example, it is expensive to file bankruptcy but it can change matters to some degree (for details see a lawyer).  I know people who would file for bankruptcy but they literally cannot afford to, which is strangely ironic.  It may also depend on which flavor of bankruptcy (7 or 13) they file; I don't know enough about this to speak authoritatively, so I would suggest that if this is an immediate rather than a theoretical concern, talk to a financial advisor.  I understand MMI(sp?) is supposed to be good, but again, get advice from others.
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bluesocks
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« Reply #3 on: July 20, 2008, 10:32:03 am »

What about a short sell?  The homeowner works directly with the mortgage company to sell the house for whatever he/she can get for it.  That money goes to the mortgage company and then the rest is forgiven.  This would be a lot better solution than going into foreclosure, I would think.

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zharkov
or, the modern Prometheus.
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« Reply #4 on: July 20, 2008, 11:16:30 am »

What about a short sell?  The homeowner works directly with the mortgage company to sell the house for whatever he/she can get for it.  That money goes to the mortgage company and then the rest is forgiven.  This would be a lot better solution than going into foreclosure, I would think.



Sounds great, but obviously you need to get the mortgage company to buy into this kind of deal.
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ahhh_history
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« Reply #5 on: July 20, 2008, 12:44:18 pm »


Key question:  When the bank sells the house, does it pay off the balance of the mortgage?  If not, then the former homeowner is liable to pay back the remainder that he or she owes the bank.


Actually, this depends.  It can vary by state, the amount, and by what the loan was (i.e., if it is a refinance, yes, they are more likely to be able to go after the deficiency.  If it is a first mortgage, depending on the terms and amount, they might not be able to).  According to my short-sale and foreclosure specializing neighbor, many banks are quickly trying to change this. 
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oldadjunct
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« Reply #6 on: July 20, 2008, 3:54:54 pm »

Homes are foreclosed by the mortgage holder, not the "mortgage company" (which in practice and common parlance is the mortgage originator who almost always sells the loan at closing to the ultimate lender).  At foreclosure the mortgage holder reclaims possession/ownership of the property regardless of the debtor's equity.  It is well within the mortgage holder's rights to foreclose on a property in which the borrower has 80-90% equity.

OP, the forecloser is the mortgage holder, except when there is a second mortgage in which case the debtor may still be liable for a deficiency on that second loan with neither possession nor title on that loan's security.

Short sales generally result in a seven year notation on a credit history as "in lieu", the difficiency balance remains the responsibility of the borrower though the debt is no longer secured by real estate.
« Last Edit: July 20, 2008, 3:57:13 pm by oldadjunct » Logged

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Daniel Patrick Moynihan

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oldadjunct
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LIFO. Enough said.


« Reply #7 on: July 20, 2008, 4:09:46 pm »


Terminology is important here.  The proper terms refer to "position" on title.  Typically you would think of a "first mortgage" and a "second mortgage" (purchase money and home equity respectively).  The term "refinance" is actually a loan that replaces one/both of these two and has little to no bearing.  The critical issue is the position on title that the loan occupies.  First position loans take precedence in pay off at foreclosure.  Though it does happen, second position lenders (home equity lenders) are generally reluctant to "take down" a first position loan since they almost certainly will be the loser.
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Everyone is entitled to his own opinion, but not his own facts.
Daniel Patrick Moynihan

OMG!  My partner gave me hu!  What do I do to get rid of hu?
clean
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« Reply #8 on: July 20, 2008, 4:57:21 pm »

Quote
When a house goes into foreclosure. Does the owner just walk away, the bank gets the house, and that's the end?


There is also the question of Mortgage Insurance.  If one put less then 20% down when the house was purchased, the lender most likely required PMI (Private Mortgage Insurance). If you default, they are on the hook for about 20% of what you borrowed if the house sells for less than what you borrowed for it.

IF you have FHA or VA insured loans, there is a different formula that escapes me now, but basically they also insure that the lender is made whole if there is a deficiency.


AS for just "walk away", that depends too.  The PMI company now has recourse against the borrower, though I dont know if they persue it regularly.  Besides, if you lost your house, you probably dont have a lot worth going after anyway.

IF you think that you are in danger of foreclosure, contact the lender quickly.  They want to know when there is a problem early, rather than late.  Further, given that there may be a lot of foreclosures in your area, they would rather have someone in it paying something and keeping it up, than for them to have to mow the yard and such.  They have  a lot of incentive to work with you on this.  They are in the business of lending money, not investing in or selling real estate. 

Hope this helps.

clean
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oldadjunct
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LIFO. Enough said.


« Reply #9 on: July 20, 2008, 6:44:18 pm »

They are in the business of lending money, not investing in or selling real estate. 

Hope this helps.

clean

Often stated in principle, seldom honored in practice.  I have made a good (great?) deal of money on the difference between the two.

Believe me, when push comes to shove an institutional mortgage holder will always opt for REO (Real Estate, Other) over stringing out an untenable payment schedule. A foreclosure moves the debt from non-performing asset to asset (devalued as it may be).  The "you don't really want to own this" works only if you owe enough to change the lenders POV from lender to partner.  Your mortgage balance is not "partner worthy".  You would know already if it were.
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Everyone is entitled to his own opinion, but not his own facts.
Daniel Patrick Moynihan

OMG!  My partner gave me hu!  What do I do to get rid of hu?
always_seeking
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« Reply #10 on: July 21, 2008, 9:26:11 am »

Thanks everyone. My neighbor (at the old house) is letting her home go into foreclosure. She mentioned it so casually like it was nothing.

Property values are way down in our area. I hope that I can get a renter into the old house before she vacates.

Sigh! A thief on one side and a soon-to-be vacant house on the other side. The neighborhood is going to all sh!t.
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imawakenow
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« Reply #11 on: July 21, 2008, 11:47:29 am »

Since you have a vested interest in the outcome, have you thought about suggesting she look into any of the mortgage/foreclosure relief programs out there?

You/she could start at the county level. If there have been a lot of foreclosures in your county, it's possible the county government will have a program or at least someone who is trying to help owners avoid foreclosure.

Then try the state.

And of course the federal government has multiple initiatives to help owners avoid foreclosure.

My guess is that if she's ready to walk away, she's unlikely to take the initiative to follow through but there may be help for her if she wants to keep the house.
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