Understanding Judicial Foreclosure

Foreclosure

Foreclosure is one of the most severe and difficult financial processes for any consumer. Unfortunately, foreclosures are also peaking, meaning thousands of American families are now facing this dire consequence. What does it mean, and what can you do to avoid foreclosure?

What is Foreclosure?

Foreclosure is the legal process through which a lender (most typically a mortgage lender) claims an asset from the consumer borrower. Foreclosure is almost always the result of default on payment. A very important consideration for mortgage payment is that lenders cannot take partial payment on the mortgage monthly payment. What that means is that, unlike a credit card, you cannot mail in a portion of your payment… a mortgage payment is all or nothing. This also means that if you miss one payment, the next month you have to re-pay the current month and all arrears! This, in addition to exotic mortgage products and rising rates, can drive many otherwise financially stable people into foreclosure.

There are two types of foreclosure: judicial and non-judicial foreclosure.

Judicial Foreclosure:

A judicial foreclosure basically means that the foreclosure is a court ordered legal process. Instead of a trustee, the foreclosure actual moves (sometimes moves very slowly) through the court system. In states that use a judicial foreclosure process, the mortgage deed or mortgage lien does not have a forced power of sale clause… so the lender has to formally take the homeowner to court. This can help by buying you some time.

Non-judiciary Foreclosure, or Statutory Foreclosure:

Many states avoid the judicial foreclosure process, and instead, the mortgage lender notifies the borrower with a notice of default. Since the mortgage loan terms already specify that a sale process kicks off right away (without going through the court system) – the lender can start the foreclosure process very quickly. Then the borrower has a fixed period of time (which varies state by state) to either sell the home, or negotiate to solve the financial problem. If the consumer does not accomplish this on their own, the mortgage lender then can come in and auction off

the home to the highest bidder.

How to Avoid Foreclosure:

While it’s a stressful time, it is important to be aware that there are options to avoid foreclosure. It’s also important to know: Lenders hate to foreclosure! That’s right, a foreclosure is almost always a last ditch option for your mortgage company… they frequently lose money, it’s a lot of work and expensive to manage the foreclosure process, and it’s very bad for their reputation – the risk of being in the news for foreclosing always scares lenders.

So, to try to minimize the number of homes that get foreclosed on, many lenders have loss mitigation departments. A mortgage company’s loss mitigation group will work with consumers to ‘re-age’ and rehabilitate the borrower. This can be done by loan modification (where the actual loan terms change), forbearance (where missed payments are allowed and frequently tacked on to the end of the mortgage term) or other payment plans to get you back on track.

If you cannot refinance, can you sell the home and get more out of it? If there is no equity, then you should start thinking about negotiating with your lender. The two key variables are time and money… so figure out if you are in a judicial foreclosure or non-judicial foreclosure state – and how many days you have left until the foreclosure auction. Also, start saving up all the cash you can to try to make-up the missed payments or to use to negotiate loan forebearance with your lender’s loss mitigation department.

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