What is Foreclosure?

Though I am neither an attorney nor a mortgage broker, and I do not intend to offer any legal or financial advice, I find that there is a lot of confusion and misunderstanding of issues that revolve around foreclosures. I decided therefore to demystify some things and clear some misconceptions. I will be creating a full resource on the HubNJRE.com site, which you are welcome to visit and bookmark.

What is Foreclosure?

There is a confusion about what foreclosure means. Foreclosure is in fact the process a real estate property goes through after default on the mortgage. It is not a type of sale, or the auction itself, although auctions are often referred to popularly as foreclosure auctions rather than Sheriff's Sales. If a borrower fails to pay their mortgage dues for a length of time, they are moved to a Notice of Default list (NOD), also referred to as Lis-Pendis. This signals that the foreclosure process started. A lender will than commonly accelerate the loan, which means it will require the full payment of the reminder of the mortgage all at once. Since this is an unattainable goal for most people reeling under the burden of month to month payment, let alone a full repayment, this often leads to a reclaiming of their property by the lender. Normally, unless there is some action by the owner, the property will end up at a Sheriff's Sale auction. Those auctions are publicly advertised, and buyers can purchase the properties on the auction block. However if the bank can not obtain, what they consider the minimum value for the property at the auction, the house is taken off of the auction and returned to the lender's asset inventory. Later this property would be sold as a REO (Real Estate Owned) or as a HUD property. (More about those in a separate article)

The reason owners do not sell their property at this point, aside from a common emotional attachment to their home, is the fact that often the value of the house in the market is lower than the reminder of the liens against the house. At times the property was bought at a higher value than the current one (particularly common in a declining real estate market), or the owner may have acquired additional secondary loans and charges after purchase of the home. In these cases even the sale of the house would not cover the amount due.

What is a Loan Modification or Refinancing?

During the Obama administration these options of intervention with a foreclosure have been brought to the foreground. Though the government can not force lenders to modify or re-fi, they can try and facilitate the process. There are a number of initiatives under the Make Home Affordable act. unfortunately only a minority of distressed home owners have been able to make use of these programs so far to save their home, yet it is at times the home owner's best hope. Sadly even in those cases this gives only a temporary reprieve to the indebted home owner, unless the underlying reason for the inability to catch up with the loan is rectified within a short period of time. 

What is a Short Sale?

A short sale is an intervention with the foreclosure process in which the home owner (borrower) sells their house for less than the reminder of the debt. This possible if there is a real hardship the home owner can demonstrate to the lender (such as loss of employment and income, death, illness, or divorce, etc.). In these cases the bank may drop the required amount due in order to allow for a sale of the house, and avoidance of the rest of the foreclosure process. The advantages for the owner are mainly that they can avoid bankruptcy, which would cause a far greater damage to their credit rating, needed to purchase anything, or even rent an apartment, for many years to come.

New HAFA rules put in by the Obama administration are about to activate and may allow owners who have sold their home via short sales to buy smaller more affordable homes following the sale. This however applies only to FHA (Federal Housing Authority) backed mortgages, and there are some restrictions that make this transaction tricky, yet not impossible.

SFR Certification and Realtor Specialization

Short Sales are however a lengthy and more involved process than a regular real estate sale, and for this reason it is important a Realtor has the appropriate training and knowledge.   

SFR stands for Short-Sale and Foreclosure Resource, and is a relatively new certification for Realtors introduced by NAR (The National Association for Realtors). Sadly the state of the economy and the multitude of properties in foreclosure have made such a specialization certificate essential.