WHERE WILL THE MONEY COME FROM…

Every week, I consult with property owners who are grappling with over-encumbered properties and running out of money to pay their loans. The key question is “what should we do?”  But the best answer depends on their situation. For an upside-down owner, there are really five choices:

1.  Wait It Out - real estate values move in cycles and already demand is pushing prices up in some markets. Most investors think we’ll see upward movement in the next 2 years, although a return to 2006 prices could take a lot longer.

2.  Modify Your Loan - Most of the recent real estate news concerns efforts to get lenders to “modify” their loans to make them affordable to the borrowers. So far, this is voluntary for lenders and the results have been to reduce payments but not the debt. And these have generally been limited to owner-occupied properties. The key is to connect with the person at your lender that has authority to make a decision. There are Loan Modification companies that can assist you with this process but check their success rates before paying them any money.

3.  Sell the Property - Selling an over-encumbered property requires getting the lenders to take the loss between what is owed and what it will sell for. This is called a “Short Sale”. The key to success is convincing the lender that it is in their best interest to cooperate. This involves a combination of: a)  your “Hardship Package” showing that you can’t pay; b) “Comparables” showing the true current property value; and c) knowing what recourse the lenders would have if the property doesn’t sell. What sinks most short sales is the lender demanding that the borrower sign a “Promissory Note” for any deficiency, although agreeing to pay something may be in the borrower’s interest. Be sure to use a knowledgeable, experienced Realtor to lead you through this process.

4.  Give the Property Back - Sometimes the Lender will be willing to take the property back through a “Deed in Lieu of Foreclosure”. This generally will not work if there are any junior liens plus it requires more investigative work for the lender.  Simply sending the keys back to the lender, ie: “Jingle Mail”, does nothing except give possession back to the lender.

5.  Foreclosure - Every state has laws that may allow the lender to take the property if the loan is not paid. This is called “foreclosure”.  The real issue is whether the lender can get a Judgment against you if they don’t get paid in full. While in most states this is possible, it is not the norm. In California for example, if the lender uses a “Trustee’s Sale” to foreclose (in approx. 4 months), they are barred from getting a judgment against you. In contrast, the “Judicial Foreclosure” required to get a judgment could take 2.5 years. So, step #1 is to check your state’s foreclosure laws. For most borrowers, the real risk of a Judgment comes from those junior 2^nd or 3^rd loans that get “wiped out” by a senior lender’s foreclosure. Depending on when the junior lien was created, the foreclosure might only wipe out their security, not the debt leaving the junior able to sue you for the unpaid loan. So, it is critical to know what loans are on your property and when they were obtained.

No general review can determine what’s best for you. Getting competent legal and tax advice is critical as is your education.

Breaking News for all people facing foreclosure sale.

President Obama will be rolling out a plan to attack the mortgage crisis next week. His target, we’re told will be slowing rising delinquencies and foreclosures by using $50 billion of the bailout monies. In anticipation, several financial institutions  have said that they will stop foreclosures on owner-occupied properties until they see what’s in the Plan. These Lenders include Fannie Mae and Freddie Mac plus Bank of America, J.P. Morgan, Chase, and Citigroup. Since many of these lenders control other lenders, the scope should be very wide. Since BofA has bought Countrywide, we would expect the stoppage to extend to Countrywide loans as well. Although the Plan will be unvieled next, discussion and shaping will last considerably longer. Accordingly, this hold should last at least until mid-March and in many cases continues a hold started last September. This gives some breathing room and hope to many on the edge of a foreclosure sale.

Attorney Stephen J. Beede
In California, Foreclosure comes in two forms each with very different requirements. The following is a general overview of that process:
A. Non-Judicial - (Trustee Sale)
This is the most common process, primarily because of its speed and the fact that no court process is involved. On most loans, the borrower signs a Deed of Trust which gives the creditor a security interest in the real property the loan is on.  If the borrower defaults on the loan, the Deed of Trust gives a designated Trustee the power to protect the lender if there is a default. This is called a power of sale, or more commonly foreclosure.

The process starts with the recording of a Notice of Default in the County where the property is located. This Notice is also posted on the property, published in a newspaper, and mailed to the borrower and all junior creditors.  Once this occurs, the borrower has 90 Days to cure the default by paying all delinquent amounts plus late fees and costs.
If the borrower fails to cure the default within the 90 days, the Lender does the same process with a Notice of Sale. This states that the property will be sold at public auction in 21 days unless within 5 days before the sale the borrower cures the default or pays off the loan in full before the sale. At the sale, the foreclosing lender generally starts the bidding at the amount they are owed. If no-one overbids, the Lender will get the property through a Trustee’s Deed. The foreclosure extinguishes all junior liens on title as well as all leases and rental agreements.

This is a fast track process; Trustee sale can occur within as little as 111 days. However, in exchange for the fast track, a foreclosing lender cannot obtain a judgment against the borrower if the property value is less than the amount owed on the loan.
B. Judicial - (Sheriff’s Sale)
The second process involves a court action and sale and is the only route by which a lender can generally get a judgment against a borrower. The Deed of Trust also gives the Trustee the power to sue to enforce the security agreement. This is typically called Judicial Foreclosure.

The process starts with the Trustee filing a lawsuit against the borrower seeking 1) Sheriff Sale of the real property; then 2) a Deficiency Judgment if the amount obtained in the Sheriff Sale is not enough to pay the Lender in full including a fees, costs, and attorney fees. The borrower is served with a Summons and the Complaint and has 30 days to file an Answer. If the borrower fails to file an Answer, the Lender takes his default and the time is greatly shortened.
At some point in the proceedings, the Court will issue and Order for the property to be sold. After the sale, a Court hearing is held and the Lender can obtain a Judgment against the borrower for the deficiency between the amount of sale and the amount owed. The Lender can then seek to collect on the Judgment by going after the borrower’s other assets as well as garnishing wages.Unless the borrower defaults, the Judicial Foreclosure process can take up to 1.5 years or possibly more. Plus, if it is the borrower’s home, the borrower has an additional 1 year right of re- instatement.  Thus, a Judicial Foreclosure could take 2.5 years before the foreclosing lender could really sell the property to anyone. This makes this a very rare process which is typically only used when a large amount of money is at stake or there are property issues (title, toxics, etc) that prevent the Lender from being able to do a Trustee Sale.
This Report is general in nature and is not intended to provide legal advice to anyone on their specific problems. If you have a problem involving possible foreclosure, get competent legal help as soon as possible.
STEPHEN J. BEEDE is the founder and Managing Partner of BPE LAW GROUP, INC., a Sacramento law firm with offices in Fair Oaks and Roseville focusing primarily on real estate, business, and estates. Steve, together with his wife, Ann,  has been a real estate broker, investor, developer, and manager for 30 years and, owns properties in California and Idaho. You can reach the firm at BPE Law Group, Inc., 11140 Fair Oaks Blvd., Suite 300, Fair Oaks, California 95628, Ph: (916) 966-2260  Fax: (916) 966-2268, e: sjbeede@bpelaw.com.  On the web at www.bpelaw.com