Phoenix Area Real Estate Guide

Foreclosures and Something New?

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When you see news about foreclosures, be wary when they report actual figures or percentages.  Most of the time, those news reports include properties entering any portion of the foreclosure process, NOT actual foreclosures.

Why?  Because many of the news sources are companies that sell "potential" foreclosure lists to clients.  Investors snap up almost any good deal before it goes to auction.

At any given time, approximately 4.5% of borrowers are late making their mortgage payment. 

Of those, only about one in ten ends up somewhere in the official foreclosure process, but that doesn't mean they lose their house to foreclosure.

Most do not.

Most of those borrowers reinstate their loans.  Foreclosures are not at an all-time high.

In a best case scenario of a mortgage loan in default, the owner finds some way to come up with money by borrowing against the property, their 401K, from a family member or some other source, they reinstate any mortgages, then begin  making payments regularly. 

The second best-case scenario is that there is enough equity in the home so that the owner can sell the property, pay off any mortgages and (hopefully) have a little left over. 

That isn't always possible.

Sometimes the lender may allow the borrower to negotiate a repayment program, but that negotiation must take place before the lender enters the official foreclosure process.  >>>

  There is a new twist in the foreclosure process, though, if you have a second mortgage.  We will get to that later.

Keep in mind that the foreclosure processes are not the same in every state.  For that reason, we will generalize a little bit, rather than being detailed and specific, but you will get the idea.

When foreclosure becomes a reality, the lender must jump through a few hoops.  Depending on which state you live in, official documents are recorded or posted, a reinstatement period must run its course, then the lender publishes the sale in local newspapers, and an auction is scheduled.  The minimum bid at the auction is the amount to pay off the principal, any accrued interest, plus foreclosure fees and attorney fees.

Provided someone bids at the auction, if there is any extra money after paying the debt - it goes to the former homeowner.  However, if things get this far there is usually no equity in the property, no one makes a bid, and with no bids at auction -- ownership of the property reverts to the lender. 

Then the lender can sell the home on the open market as a "bank-owned" property and recoup as much money as possible, minimizing its loss.

There is almost always a loss.  Lenders do not want to foreclose.

If there is a second mortgage behind the first, things become more complicated.

Since the property is also collateral for the second mortgage, in times past the second mortgage lender  would calculate whether or not it made

 (cont Foreclosures - pg 3)