Disclaimer: The Louie Ortiz Group does not give tax or legal advice. If you have specific legal or tax questions, please consult your CPA and/or attorney. This guide is meant as general information and not meant as tax or legal advice. Please see ful disclaimer at the bottom of this page.
When a borrower stops making mortgage payments to the lender, the loan is in “default”. The lender may then initiate a legal proceeding to sell the property to satisfy the debt. This is called foreclosure, and each step of the procedure is subject to state and federal law.
This information explains many of the terms, timelines and procedures involved in the foreclosure process in Arizona, California and Nevada. However, borrowers, as well as potential buyers and sellers of foreclosed properties, are encouraged to consult legal counsel and a tax advisor. Foreclosure is a serious legal situation that can have a lasting effect upon credit, taxes and many other personal matters.
The Louie Ortiz Group strongly suggests that you consult with your attorney and CPA when considering a short sale or foreclosure and not to rely solely on the information here. Please call us directly at (858) 259-1126 for additional information.
Foreclosure in a Nutshell
A foreclosure begins when the lender on a piece of real property has not received a mortgage payment within a specified amount of time (possibly 3-4 months). The lender will then take steps to recover the money owed, and failing that, “take back” the property. The entire foreclosure process is specified by state and federal law, so the exact timelines and steps required may differ from state to state.
Parties to the foreclosure process have their own terminology. It is helpful to remember:
Borrower = Trustor
Lender = Beneficiary
Trustee = Third party who will act upon instructions from the beneficiary. This is often a title company or neutral party. Check your state for specific trustee requirements.
Types of Foreclosure
Arizona, California and Nevada permit two types of foreclosure proceedings. This mainly discusses the non-judicial foreclosure because it is the most common. Non-judicial means that the process is administered without court supervision, which greatly streamlines the foreclosure timeline while still protecting the rights of the lender and the borrower.
Non-Judicial foreclosures are enabled through the Deed of Trust, which contains a power of sale clause. The Deed of Trust is signed by the borrower at the time the loan is given. The power of sale clause may identify the trustee, plus the timeline and other terms of any foreclosure actions that might take place. The lender must proceed according to the strict procedures and timeline of notifications and waiting periods, then may take back the home and sell it to recoup the debt. By electing the non-judicial procedure, the lender agrees that the sale of the home will completely fulfill all obligations of the debt.
Judicial foreclosure is a more complicated, expensive and time-consuming route toward the same end. The lender files for foreclosure in court and then records a notice of the pending lawsuit (lis pendens). After service of the lawsuit upon the parties named as defendants, those parties have an opportunity to answer. There will be a trial and at the conclusion of the trial the judgment for foreclosure will be issued. Then the judicial sale process begins. The auction proceeds are used to reduce the debt and payoff penalties, costs and attorney fees, but in specific situations, the lender may also ask for a deficiency judgment against the borrower, which means that if the auction did not cover the amount owed plus all the associated costs, then the lender can pursue the borrower for the additional amount. Sometimes a judicial foreclosure allows a right of redemption period in which the borrower is allowed to buy the property back from the successful bidder, often up to one year following the sale (six months in Arizona), however, there is no redemption period; after the auction, it is over.
Whether the lender chooses to foreclose under non-Judicial or Judicial proceedings, in most states it is an “either-or” situation in which only one action may be taken for the recovery of any debt or enforcement of any right secured by a mortgage or other lien upon real estate.
Greatly simplified, the non-judicial foreclosure process consists of three general steps.
First “Notice” is Filed (i.e., Notice of Default or Notice of Sale)
Sale Date Set
Sale or Auction is Held
Step One: If the lender does not receive loan payments as specified in the deed of trust, it may file a document with the county recorder in which the property is located. The exact document varies by state, but may be a Notice of Default (NOD) or Notice of Sale. The notice must then be mailed to all parties with a recorded interest in the property (or with a recorded notice requiring said notice) via certified or registered mail or both. The borrower is given a specified time frame in which to bring the loan current.
- The Louie Ortiz Group specializes in assisting borrowers at this stage of the transaction. A sale of the property may be arranged through which the lender will receive the full amount owed on the loan and the foreclosure does not proceed.
- Some lenders will also allow a “short sale” (see the Short Sales section below), where the lender agrees to accept less than the full amount of the debt. Again, a sale of the property and receipt by the lender of a pre-agreed amount will settle the loan and the foreclosure will not proceed.
Step Two: The lender or trustee sets a date of sale and notifies all the parties, including other lien holders, and state and federal taxing agencies. The sale notice must be posted and published for a specified period of time before the sale.
Step Three: The trustee’s sale or auction is held at the steps of the county courthouse, or other designated public location in the county where the property is located. Bidders are generally required to submit certified funds (cashier’s check or money order) in the full amount that they are willing to bid (exception in the State of Arizona where the winning bidder is required to submit a non-refundable deposit in the amount of $10,000.00 with the remainder of funds due by 5:00 PM the next business day). Past due taxes or other senior liens become the responsibility of the winning bidder. If the minimum bid is not met, the property will revert back to the lender and becomes an REO (Real Estate Owned) and can then be purchased directly from the lender.
The Louie Ortiz Group specializes in selling these REO properties. We establish a relationship with the lender providing an important service, which in turn can generate a consistently full pipeline of business for the agent.
Foreclosure Timeline for California
Start (Day 1-3): Notice of Default recorded with county recorder.
Within 10 Business Days: Trustee mails Notice of Default to borrower(s) and anyone with a Special Request for Notice.
Within 1 Month: Mail Notice of Default to all parties with an interest in title.
After 3 Months: Set sale date.
25 Days Prior to Sale Date: Send Notice of Sale to IRS, if applicable.
20 Days Prior to Sale Date: Publish Notice of Sale. Post Notice of Sale. Mail Notice of Sale. Begin publishing Notice of Sale in an adjudicated newspaper (Must run 3 consecutive weeks).
14 Days Prior to Sale Date: Record the Notice of Sale with county recorder’s office.
7 Days Prior to Sale Date: Trustee cannot sell for 7 days after expiration of bankruptcy court order.
5 Business Days Prior to Sale Date: The borrower’s right to reinstate expires.
Sale Date: The property is sold to highest bidder or reverts back to lender.
The timeline displayed here is typical in a California non-Judicial foreclosure. The foreclosure timeline does not begin until the lender feels they have exhausted all avenues for curing the payment delinquency. Normally, this happens after the borrower has missed three monthly mortgage payments and the Notice of Intent to Foreclose has expired. The borrower has probably been contacted by the lender several times prior to beginning the foreclosure process. The official foreclosure process then begins by the lender contacting a Trustee and instructing them to file a Notice of Default.
Avoiding Foreclosure: Tips
For borrowers, foreclosure is a very serious legal procedure which can often be avoided. Housing counseling agencies sponsored by the United States Government offer valuable resources to help you discover special borrower programs. Most of these services are free of charge. Contact the US Department of Housing and Urban Development (HUD) at (800) 569-4287 or visit the department’s website at www.hud.gov for more information.
What to Ask the lender
If you, or someone you know, cannot meet the mortgage payment, HUD recommends that any letters from the lender be answered immediately with an explanation of the circumstances. Many lenders offer assistance, but only for those who stay in the home and do not abandon it. For example, the lender may have a special forbearance program to rearrange payments, or even reduce or suspend them for a period of time. The lender may also refinance the debt or extend the term of the loan to make the payments lower.
Those with FHA loans may also qualify for a “partial claim” payment. This program provides a one-time payment from the FHA Insurance fund to bring the mortgage current. If the loan meets certain criteria, the lender can file a partial claim. The borrower must sign a Promissory Note, and a lien for the amount of the partial claim will be placed against the property. The interest-free amount is due and payable when the first mortgage is paid off or when the property is sold.
Unfortunately, there are those who prey upon people in financial difficulty. Most likely, anything that sounds too good to be true probably is. To avoid scams it is important for the borrower to:
- Check with a lawyer or the mortgage company before entering into any transaction involving the property.
- Remember that the loan must be paid even if the deed is signed over to someone else. The lender must formally release the mortgage debt.
- Make sure all promises are made in writing.
- Not sign anything with blanks to be filled in later.
- Read and understand all documents before signing.
In addition to the damage it can do to a borrower’s credit rating, foreclosure can also cause major tax consequences. Most people assume that a foreclosure will automatically “cancel” taxes, but this is usually not true. That is why it is important to involve a tax attorney or advisor in all considerations of foreclosure and alternatives to foreclosure.
Loans against personal property, such as a bank loan or seller carry-back loan to purchase an owner-occupied residence, are called “non-recourse” loans. Various state laws protect borrowers from personal liability on a purchase mortgage for the home they occupy. Under these types of “non-recourse” loans, the tax liability is the outstanding amount of the loan, or sales price if higher.
A greatly simplified example: The borrower owes $100,000 on the home he lives In. Even if it is foreclosed upon or given as deed-in-lieu of foreclosure back to the lender, or the lender accepts a short sale payoff, the borrower is still taxed as if the property had sold for $100,000.
If the loan is a “recourse” loan, i.e. the borrower is personally liable if the property is sold for less than the amount owed to the lender, then the borrower has both personal liability and tax consequences. To obtain a personal judgment against the borrower, the lender must instigate a Judicial foreclosure. The borrower would be relieved of personal liability if the lender proceeds with a Trustee’s Sale (or non-Judicial foreclosure) on the property.
Again, a foreclosure, deed-in-lieu of foreclosure or short sale all involve a tax obligatory which is computed as if the property were sold for its value or, in certain cases, if the debt exceeds the property’s value.
The Louie Ortiz Group is There to Help
Another possibility is a pre-foreclosure sale or even a short sale of the property, which avoids the foreclosure process. Some lenders also allow a deed-in-lieu of foreclosure in which the borrower signs the house over to the lender to avoid the foreclosure. This may not be as damaging to the credit rating as a foreclosure, but lenders only consider this option if a pre-foreclosure sale is not possible. The Louie Ortiz Group can help with these types of sales to avoid foreclosure.
Bookstores are full of books purporting to help people “buy foreclosed properties at discounted prices”. An equal number of websites promise bargains in hot markets, or promote “lists of properties in foreclosure” for a fee. In reality, there are good buys for those who are willing to work at it, but the process of locating properties and working through the legal and emotional entanglements is not for the faint hearted.
For those hoping to find a true bargain in real estate by purchasing a foreclosed home at auction, there are some important points to keep in mind.
Finding Properties to Purchase
- Statistics have often shown that a very low percentage of recorded NODs Trustee Sales result in the owner actually losing the home to foreclosure. Consequently, there are plenty of agents and professional foreclosure specialists seeking the same properties.
- NOD/Notice of Trustee Sale lists are available from information service providers or in adjudicated newspapers where they must be published before a sale can take place. Prepare to spend several hours a week doing research of public records and act fast.
- Ask your professional sphere of influence (such as mortgage brokers, attorneys, insurance agents, tax specialists, and accountants) to keep an eye out for possible foreclosure situations.
- Run ads that may attract the eye of people who might get out from under a home loan, such as “I buy houses.”
- Search the newspapers. Look for classified ads that say “must sell,” “vacant,” “motivated”, or “lost job”.
- Watch for HUD auctions, but don’t expect to be the only one in line.
Other Tips from the Experts
- If you want to negotiate a pre-foreclosure sale, remember that property owners who fall behind in their mortgage payments are frequently unable to properly maintain the home, and phones and electricity may be shut off.
- Properties sold at foreclosure sales and auctions are sold “as is”, and must be repaired, often at considerable cost, before they can be resold on the market.
- Potential buyers of auction properties may not have the opportunity to inspect the property before purchase.
- Foreclosure properties may also be encumbered by tax and other liens, which become the responsibility of the owner after a foreclosure sale. It is likely that these homes cannot be covered by title insurance, so research, research, research is the key to uncovering the secrets of a foreclosed property before purchase.
The safest bet for those new to the process is finding REO properties (properties that have been taken back by the lender). They have been cleared of liens and taxes, and any tenants have already moved on. Most large lenders have departments who deal with this type of property.
Understanding Short Sales
Borrowers who are facing foreclosure may ask the lender to accept a discounted payoff on their loan. This is called a “short sale” or “short payoff”. It allows the borrower to avoid a foreclosure action, and may offer the lender an expedited and less costly resolution of the situation.
Historical trends tell us that the number of short sales has increased when changing markets soften home prices and leave homeowners with a higher mortgage interest rate or loan balance. For the consumer, negotiating a short sale with the lender may seem a daunting task, particularly at a stressful time when foreclosure looms. A short sale allows the borrower to maintain a better overall credit record than with a foreclosure. It also allows time for the homeowner to relocate on a more convenient timetable instead of facing eviction and possibly a deficiency judgment down the road. A short sale may impact the borrower’s tax situation, so a tax advisor should be consulted.
Most lenders have specific criteria to consider a short sale that relate to the borrower’s ability to repay the debt. Some lenders will consider a short sale only if the borrower can produce evidence of hardship. A property that is distressed or requires extensive repairs may also qualify. If the lender were to foreclose on this type of property, it would have to pay for all the repairs necessary to sell the property. A short sale may represent a more cost-effective way to pay off the loan.
The following tips review many of the aspects of a short sale, but consumers are urged to consult their attorney, HUD homeowner counseling center, tax professional, and other appropriate professional agencies for assistance.
Determining Short Sale Price
For the owner or agent, selling a short sale property is much like selling any other home – with a few extra steps thrown in for good measure. Remember that state law also governs the activities of those who act on behalf of property owners who are facing foreclosure, so an in-depth working knowledge of the process is essential. Here is a handy checklist to help sort through the details.
- Ask for details of the loan by sending a loan information request letter signed by all sellers
- Order a preliminary report/title commitment from a title company
Estimate a purchase price by:
- Calculating current outstanding balances on all Deeds of Trust
- Checking for other lien holders and negotiate for a reduced payoff
- Accepting that commission may be reduced if there are insufficient funds
- Reviewing all other liens and judgments
- Comparing the market value to the amount needed by the seller
- Seeking the right price to make a quick sale
Negotiate a purchase price with the lender, including:
- Repair costs
- Other fees including creative financing options
Factor in other closing costs that may be required such as:
- Title insurance
- Recording fees
After you have established the sales price:
- Advise the seller (in writing) to consult a tax professional and ask the seller to acknowledge in writing for your file
- Note Notice of Default (NOD), foreclosure pending and terms to be approved by the lender on MLS or other listing services
- Order inspections and obtain comparables for the appraiser
- Disclose, disclose, disclose to any potential buyers
- Submit all offers to the lender along with the buyer’s prequalification letter
Short Sale Documents
For those who will negotiate with a lender to begin a short sale, the first step is to determine the equity position of the homeowner. Be prepared with this information:
- Is the seller in bankruptcy? (The court and bankruptcy trustee must agree to the sale)
- Current loan balance, type of loan, interest rate, impound account information, and other loan details
- Past due payments
- Has a Notice of Default (NOD) or Notice of Trustee’s Sale been recorded?
- Other liens, judgments and taxes
To begin discussions with the lender’s Loss Mitigation Department (which may also be called the Foreclosure, Short Sale, Loan Modification or Reinstatement Department), have these documents handy:
Hardship letter from the homeowner explaining why mortgage payments are not being made
Copies of borrower’s most recent bank statement, pay stubs, income tax statements (usually two most recent of each statement are required)
Broker Price Opinion (BPO) letter
Net sheet showing all expenses and what the lender will net at close of escrow
Preliminary report/title commitment from a title company
Marketing plan for the home
After written confirmation of the lender’s acceptance has been received, these items will be required:
- Signed copy of complete sales contract
- Copy of buyer’s loan application
- Copy of buyer’s deposit and receipt from escrow
- Updated HUD/settlement statement
- Updated preliminary report/title commitment, if applicable
Short Sale Tips
Tips for Working with the Lender on a Short Sale
- Each lender will have its own set of rules, so be sure to talk with the appropriate department for its list of requirements.
- Inquire about the time frames for all processing, and send everything requested as soon as possible.
- Be aware of the foreclosure date and ask for a postponement if possible.
- Discuss the benefits of a short sale with the lender.
- Confirm everything in writing.
- Collect all the contact information (including physical address and/or delivery options) of the appropriate person or department at the bank or lending institution.
Property Information and Title Services
- Contact your local title representative for property profiles and general individual property tax information.
- Notices of Default and/or Notices of Trustee’s Sale are recorded with each county recorder and are part of the public record. Many title operations can access these lists for those real estate professionals who wish to work with pre-foreclosure or short sale properties.
Short Sale Escrows
The Louie Ortiz Group is in place to assist you through a short sale escrow. There are some special requirements, so be sure to discuss the transaction thoroughly with your escrow officer when the order is opened.
- When you open your escrow, be sure to advise your officer that the property is a potential short sale. The preliminary report/title commitment will show all vested owners of the property and all recorded liens. The seller will also be asked to complete a Statement of Information (also known as an “SI” or an “S of I”) which will help determine any outstanding judgments.
- Demands for payoff on the existing loan should be requested after the seller has negotiated with the lender.
- Demands on other existing liens, Judgments or tax liens should be requested after the seller has negotiated with the other creditors.
- Once the existing lender approves the HUD proposal, no changes can be made unless the escrow officer receives written confirmation from the lender.
Glossary of Foreclosure Terms
Absolute Auction: Auction with no minimum bid amount. The highest bidder wins.
Abstract (of title): A history of all transactions shown in the public records affecting a particular tract of land.
Acceleration Clause: A provision in a promissory note that specifies conditions under which the lender may advance the time when the entire debt which is secured by the mortgage becomes due.
Adjustable Rate Mortgage (ARM): Mortgage loans under which the interest rate is periodically adjusted, in accordance with some market indicator, to more closely coincide with the current rates.
Affidavit: A written statement made under oath before a notary public or other Judicial officer.
Agreement: A legally binding contract made between two or more persons.
Appraisal: A report from an independent third party detailing the estimated value of real estate.
Balloon Note/Balloon Payment: A promissory note with amortization payments scheduled for a long term, usually 30 years, but maturing in a shorter term, often five to seven years. It requires a substantial final balloon payment for the remaining principal.
Bankruptcy: A federal court proceeding under the United States Bankruptcy laws where an insolvent debtor either has its estate liquidated and debt discharged, or is allowed to reorganize its affairs under the protection of the bankruptcy court.
Beneficiary: A person or entity that is legally entitled by a will, trust or insurance policy to receive money or property.
Chain of Title: The history of successive ownership and transfer In the title to a tract of land.
Clear Title: Real property ownership free of liens, defects and encumbrances or claims.
Closing (also called Settlement): The completion of a real estate transfer, where the title passes from seller to buyer or a mortgage lien IS given to secure debt.
Closing Costs: Expenses involved in closing a real estate transaction over and above the price of the land.
Clouded Title: A land title having an irregularity, possible claim or encumbrance that, if valid, would adversely affect or impair It.
Contract of Sale: Agreement by one person to buy and another person to sell a specified parcel of land at a specified price.
Conveyance: The transfer of title or property from one person to another.
Deed: An instrument for conveying real estate.
Deed of Trust: A form of security instrument for mortgage loans.
Default: A failure to meet legal or contractual obligations.
Deficiency Judgment: When the proceeds from a foreclosure sale are less than the amount due on the debt.
Encumbrance: Any interest, right, lien or liability attached to a parcel of land (such as unpaid taxes or an unsatisfied mortgage) that constitutes or represents a burden upon the property.
Equity: The market value of real property, less the amount of existing liens.
Escrow: Closing a real estate transaction when all required documents and funds are in place with a third party for processing and disbursement.
Execute: To sign a legal instrument. A deed is said to be executed when it is signed, sealed, witnessed and delivered.
Federally Insured Loan: A mortgage loan that originates in a federally-insured government program like the Federal Housing Authority (FHA)
Foreclosure: A legal proceeding following a default by a borrower in which real estate secured by a mortgage of deed of trust is sold to satisfy the underlying debt.
Instrument: A written document.
Judgment: The decision of a court regarding the rights of parties in an action.
Junior Mortgage: A mortgage lower in lien priority than another. For example, a second mortgage or home equity line.
Lawsuit: A dispute between two or more parties that has been filed in the court system by one of them.
Lien: A monetary charge imposed on a property, usually arising from some debt or obligation.
Lis Pendens: A recorded legal notice that there is litigation pending relating to the land, and a warning that anyone obtaining an interest subsequent to the date of the notice by be bound by the judgment.
Market Value: The average of the highest price that a buyer would pay and lowest price a seller would accept.
Mortgage: A conditioned pledge of property to a creditor as security for the payment of a debt.
Note (also called a Promissory Note): A written promise to pay a sum of money, usually at a specified interest rate, at a stated time to a named payee.
Power of Attorney: A written instrument by which one person, the principal, authorizes another, the attorney-in-fact, to act on his or her behalf.
Principal: A sum of money owed as a debt on which interest is payable.
Public Records: Records which by law disclose constructive notice of matters relating to the land.
Real Estate (also called Real Property): Land and anything permanently affixed to the land such as buildings, fences, and those things attached to the buildings, such as plumbing and heating fixtures, or other such items that would be personal property if not attached.
Recording: The noting in a public office of the details of a legal document, such as a deed or mortgage, affecting the title to real estate.
Redemption: The right of the owner in some states to reclaim title to property if he or she pays the debt to the mortgagee within a stipulated time after foreclosure.
Release: To relieve from debt or security or abandon a right, such as release of a mortgage lien from a part or all of the land mortgaged.
RESPA: The Real Estate Settlement Procedures Act (12 USc. 2601 et.seq.) that, together with Regulation X promulgated pursuant to the Act, regulates real estate transfers involving a “federally-related mortgage loan” by requiring, among other things, certain disclosures to borrowers.
Satisfaction: An instrument releasing the lien of a mortgage.
Senior Lien or Mortgage: If there is more than one lien on land, those liens are ranked by priority. A senior lien or mortgage is entitled to be paid first in foreclosure or bankruptcy, before a junior lien.
Tenant: One w ho has right of possession of land by any kind of title.
Title Defect: Any possible or patent claim or right outstanding in a chain of title that is adverse to the claim of ownership.
Title Insurance Policy: A contract of title insurance under which the Insurer, in keeping with the terms of the policy, agrees to indemnify the Insured against loss arising from claims against the insured interest Trustee: Person or entity w ho is given the legal authority to manage money or property on behalf of somebody else. In a foreclosure action, this is often the title company.
Trustor: A person who creates a trust by transferring property to a trustee. When a borrower signs the Deed of Trust, the borrower becomes a trustor.