The ABCs of the Residential Real Estate Foreclosure Process
By now most Americans are very aware of the fact that real estate foreclosures are at an all time high. In many states and metropolitan areas, foreclosure rates have doubled and tripled since the beginning of 2006. A lot of American homeowners, though, still are not clear on exactly what the foreclosure process is or how it unfolds. In a typical case, when a homeowner is 30 days late on its monthly mortgage payment, the lending institution will place a phone call to the home-owner, reminding them to make their monthly payment. The Lender will follow up with another phone call and usually a written reminder after 60 days of non-payment.
Once the homeowner is 90 days behind on their mortgage, the lender will invariably send the homeowner what is called a “pre-foreclosure letter.” This letter explains to the homeowner that they are in default (violation) of the terms of their mortgage agreement and if payment of the past due amount, including late fees and interest, is not paid immediately the lender will file a foreclosure lawsuit seeking to ‘re-possess’ the house.
Once the lawsuit is filed, the homeowner is also responsible to pay the lender’s attorney’s fees and the other costs of the lawsuit. As just one example, in South Florida, where the foreclosure rates are among the highest in the country, a foreclosure attorney’s fee of $1,200.00-$1,500.00, with additional court costs of about $500.00, is considered reasonable by the courts. Supposing the homeowner had a monthly mortgage payment of $1,500 and was six months behind in payments, the homeowner has to pay $9,000 (called arrearage) in past due monthly payments and additional $2,000.00 in fees and costs to stop the foreclosure lawsuit once it is filed.
Fortunately, there are several manageable remedies for homeowners in foreclosure. These remedies are known in the industry as ‘work-outs.’ The lenders would rather have the stream of monthly mortgage payments flowing in than thousands of re-possessed properties. As a result, many lenders allow the homeowner to pay one or two months worth of the arrearage, along with the attorney’s fees and costs, to stop the foreclosure. The rest of the arrearage is added to the loan and due at the back end of the mortgage. This is called a forbearance plan. Sometimes the lender will agree to a forbearance plan where the homeowner pays only the fees and costs up front and the entire arrearage is added to the back end of the loan.
Another type of work-out is the stipulation to modification plan, or ‘stip to mod.’ In this case, the homeowner agrees to make a certain amount of negotiated payments, generally about 1-2 monthly payments for a fixed period, generally 3-5 months. If the homeowner lives up to the deal, the loan is then modified in writing by the lender, to include a lower, fixed rate of interest, which substantially reduces the amount of the mortgage payments going forward .
“The lenders and banks simply can’t afford to sit on a huge inventory of foreclosed homes, so they have started to bend over backwards to give homeowners workouts,” advises Richard Rolland, who runs Home Safe Arbitration near Ft. Lauderdale, Florida. Home Safe Arbitration is one of hundreds of companies throughout the nation that specializes in negotiating work-out plans between homeowners and their lenders.
“A company like mine will almost always work out better terms with the lender than the homeowner will for themselves,” Rolland notes. “We talk the language all day long, know what info the lenders focus on and have relationships with the lender’s work-out departments due to the sheer volume.”
Rolland further advises that homeowners also hire an attorney to represent their legal interest in the lawsuit and to ensure that companies like his have enough time to negotiate the work-out. “In Florida, a good attorney can prevent the house from being re-possessed for at least five to six months,” says Rolland, “That is usually enough time for us to finalize a fair work-out plan for the homeowner.”
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