When a homeowner fails to make their agreed upon payments, sooner or later their home will enter foreclosure. This allows a lender to recover the remaining balance owed on a property by selling it to another buyer.
However, while the inevitability of foreclosure is a universal constant in the United States, the process is not. The process of foreclosure typically falls into one of two categories: judicial and nonjudicial.
Nonjudicial foreclosures in California and elsewhere are complicated, but avoid the need for court intervention.
In ‘nonjudicial foreclosure’ states—much of the Western United States, including California, falls into this category—home loans are secured by deeds of trust. A deed of trust names the lender as a trustee with the authority to foreclose on a property if the terms of the loan repayment are not met.
Every state has its own milestones for the foreclosure process. These indicate when notices must be sent to a borrower, how much time they have to make up missed payments, and when a home can finally be sold.
In California, this timeline is rather lengthy. The clock starts when a homeowner misses a scheduled payment. It should be noted that missing a single payment does not automatically put a homeowner’s loan into default. Default typically occurs when a borrower is 30 days late, but the loan agreement will specify this interval. As long as a borrower makes up the missed payment(s) within 30 days and keeps up with subsequent payments, their loan will not enter into default (though their credit history will take a hit).
Once a payment has been delinquent for more than 30 days—or whatever the agreed upon threshold is—the lender may file a Notice of Default. They must then inform the borrower in writing of the filing within 10 days. This notice officially indicates that the borrower is in default and explains what can be done to get back into compliance with the terms of the loan agreement. This includes making up all missed payments, and any interest that has accrued. Once the borrower has been notified they are in default, they have about 90 days to catch up on their mortgage payments.
If they fail to do so, the lender can schedule an auction date for the home if the borrower has not caught up on their payments. The borrower will be notified via a Notice of Trustee Sale, sent by certified mail.
The auction may occur no sooner than 20 days after sending the Notice of Trustee Sale. If the borrower fights foreclosure, a court may delay the auction. The lender can also choose to delay auction for up to one year—any longer and a new Notice of Trustee Sale must be issued.
Once all the foreclosure requirements have been met—this process usually takes about 180 days in total—the home is sold at auction to the highest bidder. Once a home is auctioned, the borrower’s involvement with the property is ended. The former homeowner may be responsible for certain fees but is not required to make further payments on the mortgage, even if the home sells for less that the balance owed by the borrower.
If nobody buys the property, then ownership reverts to the lender. Such properties are often referred to as ‘real estate owned’ (REO) property.
Judicial foreclosures, particularly common in the Midwest and Northeast, add another layer of complexity to the process.
Much of the Midwest and New England region is dominated by what are known as ‘judicial foreclosure’ states. In these states, home loans are secured by mortgages, rather than deeds of trust.
Depending on the state, judicial foreclosure may allow a lender to foreclose on a property after even a single missed payment. This is unusual, however, and many lenders prefer to give borrowers three to six months to get caught up.
Once a lender is confident that a borrower is unwilling or unable to make payment, they can initiate the foreclosure process by sending a Notice of Intent to the borrower. A borrower can stop this process by catching up on their mortgage payments and paying off any interest and late fees. This typically involves proposing a repayment schedule to bring the debt current. In many states, there is a 30-day window to propose a repayment plan.
If the borrower fails to do so, the lender can then file a lawsuit against the borrower to take control of the property. The major distinguishing element of judicial foreclosure states is that a lender must go through the court system to foreclose on a property. Unsurprisingly, this often complicates and lengthens the foreclosure process.
This process begins when the lender files a ‘summons and complaint,’ which summons the borrower to a court hearing. This document will also include the lender’s complaint, and a request for judgment. The borrower has about 15 to 30 days to respond or opt to appear in court. If the borrower fails to do either, the court will likely issue a default judgment in favor of the lender.
If the lender is granted the ability to foreclose, the foreclosure process from this point on is similar to the nonjudicial process, for the most part. However, in some states borrowers are responsible for paying off any difference between what they owe and the auction price of the home.
Real estate investors generally favor nonjudicial states, but foreclosure can even take several years in these states.
It likely will not come as a surprise that having a court involved in the foreclosure process can impose significant delays on the foreclosure process. While it’s not unusual for it to take years for a lender to successfully foreclose on a home in nonjudicial states, judicial states are particularly onerous.
However, not all nonjudicial states are created equal when it comes to the foreclosure process. According to data gathered by ATTOM Data Solutions, in the fourth quarter of 2017, the states with the longest foreclosure times were:
- Indiana – 2,370 days
- Nevada – 1,933 days
- Florida – 1,493 days
- New Jersey – 1,298 days
- Georgia – 1,263 days
Of the five, Indiana, Florida, and New Jersey are judicial states, while Nevada and Georgia are nonjudicial states. (These figures should be taken with a grain of salt, as some of the foreclosures involve legacy loans originating from before the recession.) Thus, it’s advisable that investors considering investing in mortgages or deeds of trust first understand the peculiarities of a specific state’s foreclosure process.
Alternatively, mortgage pools offer the advantage of working with investment managers who know which particular markets offer the lowest risk profiles. To learn more about the merits of mortgage pool investments, contact Socotra Capital by calling 855-889-7626, or send us a message using our contact form.