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2. The Business of Foreclosure
In this module:
• Mortgage theory
• Types of foreclosure
• Professionals involved in foreclosure
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Lien, Title, and Intermediate Theory
• Lien theory: Title is in borrower’s name title; mortgage deed lien filed by the lender.
• Title theory: Title is in the lender’s name; borrower is granted a trust deed.
• Intermediate theory: Borrower holds title unless loan is in default; ownership goes to the lender upon default.
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Lien, Title, and Intermediate Theory
Why is it important to know which theory is used in your state?
The theory determines:
1. Who owns the property prior to foreclosure
2. The timeline of foreclosure
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Lien, Title, and Intermediate Theory
Who benefits?
Lien (mortgage) benefits the borrower —it ‘buys’ more time
Trust (deed) benefits the lender—it’s more expedient
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Types of Foreclosure
Judicial
• Ordered by court
• Timeline is longer
• Many states allow “summary judgments”
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Types of Foreclosure
Non-judicial
• Pre-authorization to sell is granted in the loan document.
• Trustee is granted the right to sell upon a foreclosure.
• Timeline is shorter.
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Types of Foreclosure
Judicial usually occurs in lien (or mortgage) states.
Non-judicial generally occurs in title (or deed) states.
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1) Pre-lien30 days
2) Lien30 days
3) Notice of default (NOD) 90 days
4) Notice of sale 21-25 days
5) Trustee sale
If unsold
6) REO
A. Pre-Foreclosure
B. Auction
C. REO
Foreclosure Process
Notification 30 days following default
NOD initiates the foreclosure process and redemption period
Auction—sheriff’s sale
REO—bank-owned property
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The Foreclosure Process
Redemption period
• Provides the borrower the opportunity to recover the property after the foreclosure process begins
• Varies from state to state
• Ask the lender, “Can the borrower redeem the property by paying past due amount including penalties and interest, or must it be paid in full?”
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The Foreclosure Process
The lender’s situation and incentives?
• Lender’s role changes from servicing the borrower to selling the property.
• Lender is motivated to recover the current and minimize the future loss.
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Professionals Involved in Foreclosures
Lender-Employee Asset Manager • Employed by lender• Project manager overseeing the REO
from list-to-sell
Outsource Asset Management Company (OAMC)
• Third party performing same duties as an asset manager
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Professionals Involved in Foreclosures
Finder• Third-party company• Similar to a utility player in baseball
—takes on any responsibility required by the OAMC or asset manager
• Typically has limited decision making authority
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Professionals Involved in Foreclosures
REO Representative• Third party from lender• Listing broker
Vendor Management• Property preservation including re-
key, trash-out, etc.
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Professionals Involved in Foreclosures
Eviction Specialist• Makes sure REO properties are
vacated
Loss Mitigation Specialist• Attempts to assist in avoiding
foreclosure through workout programs
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Professionals Involved in Foreclosures
Auditors• Local government resource for
properties
Attorneys• Hired by lender• Performs legal work• Works with lender’s loss mitigation
specialist