Foreclosures are still at an all-time high across the country. While there are signs that the slowing market may be heating up again (in certain areas of the country it NEVER STOPPED BEING HOT) and The Fed lowering those interest rates to levels not seen in decades, all those “exotic” loans have come due and are now payable. As a result of all this and the now much stricter federal lending guidelines, this will easily create 60 million foreclosures TOTAL over the next 2-3 years, barring extreme government intervention.
This market was truly poised to explode and HAS!
It doesn’t matter if you are in a “hot” real estate market or a “cold” real estate market, there are plenty of foreclosures for you to list and sell. If the economy is strong, there will always be people who, for many reasons - job loss, illness, or divorce, to name a few – cannot make their mortgage payments and default on their loan. In a weakened economy, the number of mortgage defaults skyrockets – which creates even more opportunities.
Introduction to Foreclosures
An estimated 80% of home mortgages are what they call “exotic” loans. They are ARMs (Adjustable Rate Mortgages) starting with a 1% interest rate – or less. In recent years pre-2006, the government allowed all the lenders to go wild with no restrictions on loans. If you could fog a mirror, you could qualify for a home mortgage. The stated income loans got totally out of hand.
Let’s say you bought a $300,000 home. The real mortgage payment amortized over 30 years would make your mortgage payment somewhere around $3,000. However, by taking out one of the “exotic” loans, you would only have to pay $900 a month.
Why? In many cases, the lender gave you a menu of five different payments for you to choose for that month. It’s just human nature for people to select the lowest payment. For the lender it doesn’t matter because they keep adding the difference onto the back of the loan – creating negative amortization for the borrower.
Here are some of the obvious problems:
1. The majority of people could not make the monthly payments on a fully amortized loan.
2. By choosing to make the lowest payment, they forced the lender to add the difference onto the back of the loan.
3. Real estate values have gone down, while interest rates have gone up. The equity that homeowners were counting on to equalize the negative amortization was wiped out.
4. The new federal guidelines for home mortgages forced people to abandon their homes. When / If they refinanced, they won’t be able to afford the high monthly payments of a fully amortized loan … many wont’ even be able to qualify for these loans.
5. Since the majority of “exotic” loans are usually for term of 3-5 years, we can expect millions of foreclosures in the next 3-5, or more, years.
6. The new federal lending guidelines will have an impact on home buyers as well. They will be limited in the type of financing they can obtain, thereby limiting the number of houses that will be sold.
7. Lastly, politicians on the local level have been spending money like drunken sailors. They obtained these funds by taxing properties to the max. this, too, has caused problems for homeowners. Between the new higher monthly mortgage payments and sky-high property taxes, many homeowners may have to leave their homes and be foreclosed upon.
What is a foreclosure?
It is the legal way the owner (the lender) of a mortgage (called the mortgagee or grantee) is able to begin a multi-stage process that ends with the property securing the mortgage being sold at auction or turned over to the lender. In some states the mortgage is called a deed of trust and the lender is called the beneficiary.
If terminology like mortgagee, grantee, trust deed, or beneficiary seems confusing, then you realize why we are beginning with explanations of certain terms used in documents, which are the basis for foreclosures.
There are special “key” words used in the foreclosure process. These words carry exact meanings to different stages of real estate, including the land, improvements to the land (like a home built on it), rights to the property, pledges to borrow and repay, etc. these key words include terms like deed, note, mortgage, trust deed, security deed, mortgage foreclosure, trust-deed foreclosure, judicial foreclosure, power of sale, etc.
Foreclosure – A legal remedy available to a mortgagee or grantee (the lender) when the borrower does not comply with the terms of the security instrument. An orderly process is begun and continues through various stages until the property pledged in the security instrument is sold at public auction to satisfy the lender’s claim.
Deed – A written document that transfers title to real estate. There are different types of deeds, depending on where you are located. Different areas use different deeds.
General Warranty Deed – The grantor (the seller) agrees to defend the grantee (the buyer) against all attacks against title. The deed contains language that the seller warrants the property is freely his to sell and that no one else is claiming the property belongs to them.
Quit Claim Deed – The grantor releases any claim he may have on the specific property. Its purpose is to remove a potential or actual cloud on the title to the property. It does not warrant anything. The warranty deed is preferred to any other type because it conveys, in most cases, the most comprehensive degree of ownership. It evidences that ownership in the granting and conveyance of clauses of the deed. It is strongly suggested you don’t use a quit claim deed as many courts don’t want to recognize it.
Trustee’s Deed – A conveyance of title from a trust to another party. The grantor of the trust, through its fiduciary or agent, is called the trustee. The trustee acts only upon written direction of the beneficiaries of the trust.
Certificate of Sale – A document executed in many states by the county clerk, which conveys title to real estate to the successful purchaser at a foreclosure sale. It doesn’t guarantee anything. It just says that an individual bought a certain property and that no warranties are made of any kind.
Note & Mortgage – a mortgage consists of two parts:
1. The note, which is considered to be evidence of the debt.
2. The mortgage contract, which secures the debt.
The note is the promise to repay the loan. In the mortgage contract, the borrower agrees to be subject to certain legal action if he doesn’t repay the loan as promised.
The borrower is called the mortgagor because he gives a mortgage to the lender, to whom he owes money. The lender is called the mortgagee.
Trust Deed – A security instrument similar to a Warranty Deed. The seller is the grantor or trustor. The third party appointed by the lender to hold the trust deed is called the trustee. The lender is the beneficiary.
Again, this is a security instrument and should not be confused with other types of trusts.
Security Deed – Georgia is the only state using a security deed to secure a loan on real estate. The owner of the property is called the grantor and the lender is the grantee. As the grantor, the owner actually vests title to the holder of the security deed and has only equitable title until the debt is paid. The laws in Georgia state that a mortgage is merely a lien. A security deed actually passes title to the property. There are different foreclosure procedures across the country.
It goes without saying that the lender will use the easiest and quickest method to foreclose on the property. The prime requirement in most states is that there be an orderly process by which the grantor or mortgagor is given a final opportunity to cure the default.
If the default is not cured, then there must be an equitable procedure to expose the property to public sale in order to yield the best price.
The objective and the result are the same whether the sale is judicial or by power of sale.
Generally, the breach of any obligation of the grantor or mortgagor under the security instrument will create a default. This includes failure to pay taxes, insurance premiums, or even not keeping the property in reasonably-good condition.
Mortgages and security or trust deeds are used as collateral for the loans. The lender is looking to the property as its quality collateral – not the ability of the borrower to repay the loan.
However, some states have statutes that attempt to protect the homeowner against being unfairly pressured into signing away the major equity they have built up over the years they have owned the property. An example is the state of California. They have a unique 5-day right of recession period during which an investor cannot do anything to pressure a homeowner who is in default if that homeowner decides to cancel the equity purchase contract on their home.
