It is an unfortunate
commentary, but when economic activity declines and housing activity
decreases more real property enters the foreclosure process. High
interest rates and creative financing arrangements also are contributing
factors.When prices are rapidly accelerating
during a real estate "bonanza", many people go to any lengths available to
get into the market through investments in vacation homes, rental housing
and "trading up" to more expensive properties. In some cases, this results
in the taking on of high interest rate payments and second, third and even
fourth deeds of trust. Many buyers anticipate that interest rates will drop
and home prices will continue to escalate. Neither may occur, and borrowers
may be faced with large "balloon" payments becoming due. When payments
cannot be met, the foreclosure process looms on the horizon.
In the foreclosure process, one thing should be kept
in mind: as a general rule, a lender would rather receive payments than
receive a home due to a foreclosure. Lenders are not in the business of
selling real estate and will often try to accommodate property owners who
are having payment problems. The best plan is to contact the lender before
payment problems arise. If monthly payments are too hefty, it may be that a
lender will be able to make some alternative payment arrangements until the
owner's financial situation improves.
Let's say, however, that a property owner has missed
payments and has not made any alternate arrangements with the lender. In
this case, the lender may decide to begin the foreclosure process. Under
such circumstances, the lender, whether a bank, savings and loan or private
party, will request that the trustee, often a title company, file a notice
of default with the county recorder's office. A copy of the notice is mailed
to the property owner.
If the default is due to a balloon payment not being
made when due, the lender can require full payment on the entire outstanding
loan as the only way to cure the default. If the default is not cured, the
lender may direct the trustee to sell the property at a public sale.
In cases of a public sale, a notice of sale must be
published in a local newspaper and posted in a public place, usually the
courthouse, for three consecutive weeks. Once the notice of sale has been
recorded, the property owner has until 5 days prior to the published sale
date to bring the loan current. If the owner cures the default by making up
the payments, the deed of trust will be reinstated and regular monthly
payments will continue as before. After this time, it may still be possible
for the property owner to work out a postponement on the sale with the
lender. However, if no postponement is reached, the property goes "on the
block". At the sale, buyers must pay the amount of their bid in cash,
cashier's check or other instrument acceptable to the trustee. A lender may
"credit bid" up to the amount of the obligation being foreclosed upon.
With the recent attention given to foreclosure,
there also has been corresponding interest in buying foreclosed properties.
However, caveat emptor: buyer beware. Foreclosed properties are very likely
to be burdened with overdue taxes, liens and clouded titles. A buyer should
do his homework and ask a local title company for information concerning
these outstanding liens and encumbrances. Title insurance may or may not be
available following a foreclosure sale and various exceptions may be
included in any title insurance policy issued to a buyer of a foreclosed
property.