What is Foreclosure?

If you fall behind and don’t pay your mortgage payments, the company that holds the note on your home can foreclose on your property (remember, the entity that holds the note on your home today may be different from the bank or mortgage company that originally provided your loan; check your most recent mortgage statement for the name and contact information of the company that currently holds your note or is servicing your mortgage). If your mortgage holder forecloses on your property, it means that your house can be sold to satisfy your unpaid debt.  However, because foreclosure is a process, there are many steps that you can and should take before you’re at risk of losing your property.

Reasons for Foreclosure

In order for there to be a foreclosure there must first be some type of default on your loan. This default is usually due to late monthly mortgage payments, but could also be due to other reasons, such as non-payment of property taxes or contractors placing liens on your property (as we explain below, it is in your best interest to contact your lender or servicer as soon as you know that you will miss a mortgage payment).  

There are many possible reasons why a homeowner may not be able to make their mortgage loan payments. Some of these reasons are:

• Homeowners may have experienced a loss of income or an increase in living expenses to the point where the mortgage payments are no longer sustainable;
• In many areas, two incomes are needed to support a mortgage;

when a divorce, serious illness or other setback occurs, it may be difficult to pay for the mortgage with a single income;

• In some cases, homeowners have taken home equity loans on top of their mortgage payments which leave them overextended;
• Too much other debt (like credit cards, uninsured medical costs and unexpected homeownership expenses) add to the stress of the first mortgage and can overwhelm budgets; and
• Aging and low to middle-income homeowners on fixed or tight budgets have little or no wiggle room in their budgets and may find themselves unable to sustain their payments.

Consequences of Foreclosure:

For the Homeowner:

• Loss of shelter;
• Loss of equity that they have built up in their home;
• Loss of credit rating;
• Loss of property (due to foreclosure);
• Potential difficulties finding alternative housing;
• Moving expenses; and
• Stress, pressures on the family structure;

For the Mortgage Holder:

• Loss of the customer; and
• Loss of future income;

Foreclosure Prevention

New York State allows the borrower a period of time after a default but before a foreclosure sale in which to make a “workout option” to retain your home.  Several types of possible “workout options” are listed below.  As you will see, these workout options all include additional costs that increase as time goes on, so the earlier you contact your loan servicer or mortgage holder to discuss a workout option, the more likely you will be to avoid foreclosure.

What if You Cannot Pay Your Mortgage?

• Call your Mortgage Company (or Loan Servicer) as Soon as Possible. 

You will have to check your mortgage statement for the name and contact information of the company that currently holds your mortgageor services your loan. You have a greater number of options available to you when you are only one or two payments behind. It is human nature to not want to face up to your lender when you have fallen behind in your payments, but quick action can save you thousands of dollars and help to develop goodwill with your lender towards your situation.
 

• Don’t Ignore Warning Letters from your Lender or Servicer. Be proactive and remember most lenders want to avoid foreclosures as much as you do!  Many people are worried that their lenders will rush to foreclose on their home, when in reality it is almost always more costly for a lender to foreclose on your home than it is to work out a payment plan with you.  In fact, workouts, usually cost thousands of dollars less than full foreclosures and they look better for a lender’s public relations.

Furthermore, ignoring the problem will not make it go away. The truth is that, the longer you wait, the greater the chance that you will lose your home. You should tell the lender about your financial situation and discuss a payment plan as soon as possible. However, before you agree to a payment plan or any other workout option, note the following suggestion;

• Seek Advice and Negotiating Assistance.  Don’t make any promises or agree to a workout plan without seeking advice and assistance. Once you have spoken to your mortgage holder contact a reputable counseling agency approved by the Department of Housing and Urban Development (HUD). In Westchester you can contact Housing Action Council at 914 332 5229.  To find counselors in other locations, you can consult a list of agencies at http://www.hud.gov or by telephone at 800-569-4287 or TDD 800-877-8339.  In many cases, they will counsel you on your options at no charge.

Timeline of Standard Collection Practices (Pre-Filing Period)

Generally, each mortgage holder or loan servicer establishes its own collection practices for the time period after a default but before a foreclosure notice has been filed (the “pre-filing period”). However, while there may be slight differences between lenders, there are certain standard industry collection practices:

Between 0 and 15 days late:

• Mortgages are generally due on the 1st day of every month and delinquent, if not received by the 15th.

Between 15 and 30 days late:

• Borrower will be assessed a late fee.
• Borrower will receive their first late notice and/or a “delinquency notice” by mail.
• Borrower will receive their first phone contact from their lender. 
• IF a lender or a servicer has not received payment by the 30th day, a borrower will likely be reported to the credit bureaus.

Between 30 and 60 days late:

• Lender will continue to attempt to contact the Borrower by phone.
• The lender may hire a property inspection firm to determine property condition and occupancy. 
• Borrower will receive second and sometimes third delinquency letter.  Many Servicers or Lenders will include HUD’s “Foreclosure Avoidance Pamphlet” (or a similar notice) with this letter, with a toll free referral number for delinquency counseling.

Between 60th-90th days late:

• Lender will continue to try and contact the Borrower by phone, mail, or in person to arrange repayment terms or discuss foreclosure prevention options.
• If no resolution has been reached by the 90th day, the Lender generally mails a “Notice of Default” giving the borrower 30 days to reinstate the Loan or enter into a work-out agreement. Ultimately, your mortgage documents govern the timeline of foreclosure and the lender’s foreclosure option.

What Options do you Have (Pre-Filing Period)?

Depending on your situation, your mortgage holder has several options that they may be able to provide you. During the pre-filing period discussed above, the two primary options offered by a lender or servicer are (1) a repayment plan and (2) a loan modification.  

Repayment Plan: A repayment plan allows you to cure a default by making your regular monthly mortgage payments, when they are due, plus a portion of amount that you owe (including some fees and costs). For example, a typical agreement may call for making one and a quarter month’s payments until the default is resolved. Homeowners who may benefit from this type of plan are those who have experienced temporary financial hardships (i.e. medical, financial crisis, etc).

Short-term repayment plans are usually informal -- although the servicer may verbally approve the plan, it is a good idea to have the servicer confirm it in writing. 

Loan Modification: If you and your servicer agree that you can’t afford a repayment plan, they may offer you a loan modification. A loan modification permanently changes one or more of the original terms of your loan to make your monthly payments more affordable.   For example, your servicer might agree to extend the maturity date of your loan or to lower your monthly interest rate or to change your interest rate from an adjustable to a fixed rate mortgage.

Note that a loan modification doesn’t permanently reduce (or allow the servicer to write-off) the unpaid principal balance of your loan. Also, loan modification is usually only an option if your loan is at least 12 months old, there have not been any previous loan modifications and you provide proof that you have a stable income to support the new payments.

Both loan modification and a repayment plan may be a good idea during the first several months of your default. As the default continues and the lender assesses certain fees on the loan, these two options become more and more expensive. We describe some alternative work-out options for a later-stage default in the last section of this article.  

The Foreclosure Process

As we’ve emphasized, the earlier you contact your loan servicer or mortgage lender to discuss any financial difficulty you’re having and a workout option, the more likely you will be to avoid foreclosure. However, if you’re more than 90 days past due on your mortgage loan or you’ve received any of the notices, summonses or court papers described in the following timeline, you still have some options available, as we describe below. However, it is still important to act quickly, rather than delay.

Foreclosure Timeline  

• Generally-speaking, if no work-out plan or reinstatement plan has been agreed upon by the 120th day, Lender will refer the loan to its foreclosure department or to legal counsel to begin foreclosure proceedings.
• In New York State, foreclosure of most residential properties must be conducted through a judicial process. Lender’s legal counsel will begin the process by filing notice papers with the court.
• Within 120 days of filing, the lender must serve the borrower with these papers, together with a special notice, which describes certain rights of the borrower (Please note that at this point, if the borrower has not done so already, it is highly advisable for him/her to contact an attorney).
• A Borrower must respond to this service by appearing in court within 20 days (under some limited circumstances, the borrower may have more time to appear; however, since the borrower risks losing certain rights by not appearing in time, waiting until the last minute is strongly discouraged).
• At the end of the judicial proceedings, if the lender is victorious, the court will order a judicial sale.
• Prior to the sale however, the lender must publish a notice of sale in a local newspaper for at least four weeks. This notice of sale must be delivered to the borrower.
• After the expiration of the four weeks, the Lender is allowed to sell the property at a public auction. Once this sale has taken place, the borrower loses all right to redeem the property (i.e. pay off the mortgage and retain the property) and eviction proceedings may begin.
• NOTE: according to the “Soldiers and Sailors Civil Relief Act”, the Lender may not initiate foreclosure proceedings if the delinquent borrower has been called for military duty. However, there are exceptions to this law (for example, if the service member gives written consent authorizing the foreclosure proceedings). Consult an attorney if you think this may apply to you.

What Options do you have During the Foreclosure Process?

At this stage, your servicer or lender may still consider the type of “loan modification” that we’ve described above.  However, depending on your financial circumstances and how much time has passed since you’ve entered default, you should start to consider the following workout options;

Forbearance: Forbearance is an agreement to suspend or reduce normal monthly payments for a period of time. This does not change the terms of the loan and usually lasts for no more than one year. At the end of the forbearance period, the borrower must cure the delinquency through a lump sum reinstatement or a repayment plan.  This is the type of workout you may want to arrange if your situation is going to be longer term (i.e. a more serious medical condition, a long term of unemployment.)

Long Term or “Special” Forbearance: Repayment plans that extend past the 6-18 month term are usually combined with some type of forbearance. They are called “special” forbearance and they are usually applied under the following circumstances:

• The reason for default is temporary;
• The homeowner shows a strong willingness to retain ownership of the property; and
• There is evidence that the homeowner will be able to resume making full monthly payments at some point and has excess income to pay off the past due balance within 9-12 months (or up to 18 for FHA insured loans).

Refinance: In a refinancing, a borrower obtains a new loan with more favorable loan terms, in an amount adequate to pay off the total debt of their existing loan, including any delinquency. Conventional refinance may be an option if:

• You have substantial equity in your home or your interest rate is at least 2% higher than current market rates;
• The proceeds from the new loan (in addition to any cash resources you may have) will be adequate to pay off the past due amount; and
• You don’t have poor credit due to default or other financial problems.

Note that if you existing mortgage loan is FHA insured,  HUD has a “streamlined refinance” program that allows refinancing of your delinquent loans with no qualifying requirements.

Partial or Advanced Claim: In some cases, your lender will loan you the money to get your monthly payments caught up to date. Lenders may then seek reimbursement from HUD for the amount of the loan. In order to obtain a partial or advance claim, the lender may require the homeowner to make at least three full monthly payments.

Partial claim may be utilized when:

• The homeowner demonstrates a strong desire to retain ownership of the home;
• The cause of the default is temporary and specific, but cannot be resolved any time soon;
• The homeowner has the ability to resume making full payments but is unable to repay the arrears either through a loan modification or a repayment plan;
• The homeowner is no more than 12 months in default; and
• The total amount of the new loan will not exceed 12 monthly payments.

Reverse Equity Mortgage: This option is available only to borrowers 62 years and older. It allows these homeowners to use the equity in their homes to pay off the loan. In this option, the lender gives cash to the homeowner and, in return, the homeowner takes a mortgage. The amount given to the borrower is based on the value of the property. In contrast to a traditional mortgage, the amount of debt in a reverse mortgage increases over time.

A reverse mortgage allows the homeowner to draw down the home equity without having to repay the loan for quite some time. However, to be eligible, the homeowners must have sufficient equity built up in their property.

 The advantages of this program are:

• The homeowner pays no monthly payments (Some of these mortgages have no repayment obligations as long as the homeowner remains in the property; the mortgage however, including all of the interest and any other charges accrued must be repaid when the last living borrower dies, sells the home, or permanently moves); 
• There are several options to take the payoff:

-- As one large payment, made to the homeowner in cash or used to pay off outstanding debt (or a combination of both)
-- As fixed monthly payments to the homeowner for a set amount of time (a “term plan”); or
-- As a line of credit to be drawn as needed.

Straight Sale: If the homeowner has enough equity in their home, they
may be able to sell their property prior to foreclosure.  They would then
use the proceeds to pay off the outstanding balance owed to the lender. This option would be best for:

• Homes that are in marketable condition and can be sold within 90-120 days;
• Homeowners who are willing to sell the property at or below market price in order to generate a quick sale;
• Situations where there is enough equity in the home to repay the entire outstanding balance due on the property and any additional closing costs; and
• Situations where the lender knows that the property has sufficient equity value, the homeowner is making efforts to sell the property and lender is willing to delay foreclosure proceedings to allow sufficient time to sell the property (Note that most lenders will require that the homeowner list the property with a real estate broker.)
  

Assumption: A mortgage assumption occurs when a new buyer takes over a homeowner’s loan and loan payments. Many mortgages have provisions that prohibit assumptions. However, in order to prevent foreclosures many lenders will agree for a delinquent loan to be assumed. Usually,

• A qualified applicant can assume both the title to the home and the mortgage obligation;
• [VA loans obtained after March 1, 1988 and FHA loans created since December 15, 1989, require lender approval].
• Keep in mind that under some assumptions, the current owner may remain liable if the new owner defaults on the loan; and
• The assumption transaction must net enough to pay the homeowner’s claim in FULL. However a lender may approve an assumption combined with a pre-foreclosure sales (see below).

Pre-Foreclosure Sale (short sale): When the homeowner does not wish to remain in the property, the property may be sold for less than the amount necessary to pay off the loan. The lender must agree to accept the proceeds of the sale (or some other agreed upon amount) to be applied toward the outstanding debt and waive its right to any accrued late fees or property inspection costs. Additionally, Freddie Mac and the mortgage insurer must approve this option. Finally, forgiveness of debt resulting from a short sale may have tax consequences. Consider a short sale when:

• The homeowner is capable of listing the property for sale at the current market price;
• The homeowner shows financial hardship;
• If Freddie Mac is involved, the homeowner defaults on the modification plan; and
• If there is any deficiency in the amount from the sale of the property, the homeowner is capable of making cash contribution and/or signing a promissory note and forwarding Freddie Mac the proceeds of any hazard insurance.

Deed in Lieu of Foreclosure (DIL): This option involves the homeowner voluntarily giving up their title to the lender in exchange for discharge of debt. In accepting the deed the lender is also accepting responsibility for all liens against the property. Lenders will therefore research title very carefully before accepting DIL. This option may be available when:

• The homeowner generally demonstrates financial hardship;
• The lender/servicer demonstrates that no other workout options are appropriate and the property has not deteriorated significantly or does not have any liens filed against it;
• The homeowner has had the property listed for sale for at least 90 days, at no more than 110% of market value and all attempts to sell the property have been unsuccessful;
• The homeowner has little to no equity in the property;
• Mortgage insurer, investor, and or VA approve this transaction;
• The amount of the lender’s deficiency is reported to the IRS as income; and
• The homeowner is capable of paying potential costs associated with the DIL.

Please note, this Foreclosure Curriculum is intended to provide a basic overview of the foreclosure process in New York State only. Certain assumptions that it makes may not be applicable to your particular situation. It should not be considered legal advice. Please contact a licensed NYS attorney if you need to discuss the law that applies to your particular situation.