Foreclosure property tracker RealtyTrac has reported that in the first half of 2010, a total of 1,961,894 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 1,654,634 U.S. properties. Foreclosure activity in the second half of 2010 shows no signs of slowing, if not accelerating. Many of my clients seeking foreclosure help have asked me how a typical foreclosure works. If you are seeking to avoid foreclosure in Washington, DC or Virginia, you must educate yourself and act quickly.
In the current market, there are certainly many foreclosures that are not typical, and I have numerous anecdotal examples. Mortgage lenders are extremely backlogged, and pending investigations of foreclosure mills in both federal and state courts are not exactly speeding things along. In a typical foreclosure, however, here is a timeline of events:
1. If you fail to pay your mortgage for 30 days past the due date, the lender will likely enter you into their “preforeclosure” database. Realistically, however, most lenders wait until you are two to three months (60-90 days) delinquent on your mortgage payments before they will take any action, simply because the foreclosure process is expensive.
2. How quickly your lender will move to foreclose on your property will depend on the amount of equity in your home:
A. Your lender will move very quickly if there is significant equity in the home, and the lender feels it may be able to cover its loan on the open market within a reasonable period of time.
B. The lender can (and will) take much longer if your home is “under water,” that is, that you owe more on the mortgage note than the home is worth on the market.
3. To initiate a foreclosure action, the lender issues a notice of default at least 30 days before they begin with the procedure to sell the defaulter’s home. To be valid, the notice must state that the borrower has breached the deed of trust and that the lender has the right to sell the property as a result. The bank typically mails the notice to the borrower’s nominated address, or posts to the door; alternatively, the notice of default may be personally served on the borrower.
4. After a second 30 day period has passed, the lender must serve a further notice on the borrower. This “trustee sale notice” or “auction notice” must specify the place, date, and time of the foreclosure auction. The trustee sale notice will state the amount of your unpaid mortgage balance, plus accrued interest, contractual penalties, and cost of the foreclosure. The notice will also give the name and address of the trustee conducting the auction on behalf of the lender.
5. Once an auction date has been set, you as the borrower have two options:
A. Your first option to avoid the foreclosure sale is to repay the entire mortgage and fee balance (the “arrearage”) within at least 11 days prior to the foreclosure auction.
B. Your second option, if available, is to file for Chapter 13 bankruptcy protection, in which case your mortgage arrearage will be repaid over a period of three to five years.
6. Foreclosure auctions are usually held at the courthouse on Friday mornings. If there is any equity left in your home, investors will gather to bid on the property. The winner must pay cash on the spot. In many cases, however, the amount owed on the property is more than the property is worth. In those cases, the first mortgage holder may be willing to accept bids below what is owed on the first mortgage.
7. If the property sells for more than the total all of the liens (mortgages and otherwise) and costs against the property, the former homeowner will be paid the difference. Obviously, this does not happen very often. After all, if there was equity in the home prior to the foreclosure, the borrower would have simply sold the home prior to the foreclosure.
8. In most cases, the home will sell for far less than is owed on the first mortgage. At that point, the lender has two options: obtain a judgment or issue a 1099 for forgiven debt. The lender’s determination of which option to pursue depends upon the borrower’s last-reported income:
A. If the borrower has other (usually real property) assets or very high income, the lender will obtain a deficiency judgment, which will be a collectable debt against the former borrower. Once obtained, the lender can legally pursue collection efforts against the foreclosed-upon homeowner, including liening and garnishment.
B. If the former homeowner’s income and assets are determined to be too low to pursue collection efforts, the lender can simply write off the debt and report to the IRS a 1099 statement of forgiven debt. The borrower will be liable for the the amount of the “forgiven” debt as taxable income for the year of the foreclosure.
Virginia and the District of Columbia have the property market-stabilizing effects of our local federal government, so valuations and income levels are to a large degree innoculated to national trends. I must stress, however, that the above timeline is a typical. If you are facing foreclosure in either Washington, D.C. or Virginia, you should get advice on how to proceed in a manner best suited to your situation.
If you receive a notice of default, act quickly and determine your options. Call (202) 448-5136 to speak with a DC foreclosure attorney familiar with local foreclosure procedures in both Washington, D.C. and Virginia.
D.C. is a non-judicial jurisdiction in which foreclosure begins with a Notice of Foreclosure posted or mailed according to the form prescribed by the Recorder of Deeds. The form requires identification of a “Holder of the Note” and a “Security Instrument” recorded in the land records of the District of Columbia. The attorney general’s enforcement statement invites homeowners to inform the Office of the Attorney General if foreclosures “continue to be commenced or pursued with deceptive foreclosure sale notices” so that the Office may consider bringing enforcement actions to stop foreclosure proceedings and seek restitution for consumers. In other words, if you believe that you are being foreclosed upon by a party other than the properly recorded mortgage holder, then you should call the attorney general’s office at (202) 442-9828.