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Before Foreclosure: What You Should Know

Q: I am behind in my mortgage payments and worried about foreclosure. What, exactly, is a foreclosure?
A:
A foreclosure is a type of lawsuit in which a lender (such as a bank or mortgage company) sues a borrower who has failed to make his or her mortgage payments or has defaulted under some other provisions in either the promissory note or mortgage. The promissory note and the mortgage are separate but related contracts between the borrower and the lender. The lender in the foreclosure action seeks a court order through the foreclosure action to sell the house to raise money to pay off the debt.

Q: Who can start a foreclosure?
A:
Your lender can initiate a foreclosure, either in its own name or in the name of a servicing company it has hired to collect your loan payments and administer your account. Also, a "nominee" of the lender can file a foreclosure under the terms of the mortgage, which can occur on loans with a "MERS" mortgage.

Q: How soon will I face foreclosure?
A:
Most mortgage agreements state that if you fall behind even one payment, the lender has the right to call the entire loan balance due and start foreclosure. Although few lenders proceed that way after only a one-payment default, by the time a loan is three months delinquent, most lenders are looking closely at whether to foreclose. Almost all promissory notes or mortgages in a loan transaction will contain a provision requiring the lender to send a notice or demand letter prior to accelerating the loan. However, if you sign a business note containing a "cognovit" provision, the lender can have an attorney of its own choosing confess a judgment against you, and a judgment can be entered immediately. You will receive notice of the entry of the judgment later.

Q: Can I prevent having a foreclosure filed against me?
A:
Yes! If you fall behind in your mortgage payments, contact your lender or servicing company immediately. Foreclosures are costly and time-consuming to lenders, and often the proceeds of a foreclosure sale are insufficient to pay off the loan. Most lenders have a "workout" or "loss-mitigation" department you can call at a toll-free number to discuss possible solutions other than foreclosure. Contact information usually appears in the letters that the lender or servicing agent sends you.

Q: What are my options prior to foreclosure if I want to keep my house?
A:
The most common is a repayment agreement, sometimes called a "forbearance plan," where the lender agrees to forbear, or hold back, from exercising all of its rights under the note and mortgage, like filing a foreclosure complain. Terms vary, but generally you must resume payments and arrange to pay the past-due amount over a short period of time.

A second type of workout option is called "loan modification," which can lower your interest rate or extend the final due date of the loan to make your monthly payments lower. This is like a new contract amending the prior note and mortgage you signed.

The federal government has created a national loan modification program for qualifying loans. To see if yours could be modified under this program, see the following website: www.financialstability.gov . This is the “Home Affordable Modification Program” (also called “HAMP” or “The Obama Plan”)  site with information on how you can obtain a loan modification with participation by the federal government.

When you engage in any such "workout" for forbearance or modification, you will have to complete a package and provide copies of documents such as pay stubs, tax filings, and bank statements to the lender for review. If you do not provide every piece of required information or documentation, the lender often will not even begin to review the package.

A third option is to "reinstate" the loan by paying the money you owe to bring your account current. To reinstate your loan, you probably will have to pay your lender's attorney fees and costs in addition to late charges and interest that will have accumulated. The note or mortgage will contain the agreement terms for reinstatement, because there is no statutory right to this. Starting in 2012, the state of Ohio commenced the "Restoring Stability" program that is part of the "Save the Dream Ohio Initiative" and is funded by the U.S. Treasury Department's "Hardest Hit Fund" (HHF). Qualified homeowners can receive up to $25,000 to reinstate the loan. Information for this program can be found at www.savethedream.ohio.gov or by calling the "Save the Dream Ohio Hotline" at 888-404-4674.

Last, you of course have the right to pay off the loan in full if you can obtain the funds. One way to do this is to refinance through a new lender. When you pay of a loan, you will not be liable for attorney fees in most cases.

Q: Is there any way I can keep my house after a foreclosure has been filed against me?
A:
Yes. You have the same options as you did before the foreclosure was filed, but please note that the lender will have accrued more than $1000 in new expenses for the foreclosure. These expenses will include the title exam, filing and service court costs, and possibly attorney fees, and can affect the lender's position while dealing with you.

Q: What if I don't want to keep the house?
A:
One option is to sell the property privately instead of having it sold at a court-ordered sale. You can use a Realtor or find a buyer by marketing the house as "FSBO" (For Sale By Owner), and you will have to sell the house for enough to pay off the mortgage and all other liens on the property. Before a private sale, you will need to get payoff figures from the lender good through the date when the lender will receive a payoff check from you.

Another option is called a "short sale." This is a workout where the lender agrees to accept less than the full payoff through the sale you or your Realtor arrange. You will have to complete a package for a short sale, and the closing will have to account for all other liens, and these other lienholders will have to agree to compromise or even waive their debt balances.

A last option is to ask your lender to take the house back in what is called a "deed-in-lieu" of foreclosure (DIL). This means that you deed the property to the lender in exchange for the lender's forgiveness of any resulting deficiency balance. Lenders will accept DILs only if there are no other liens against the property, and the property is vacant. 

In both the short sale and DIL options, the lender might be agreeing to waive the resulting "deficiency balance." The foreclosure judgment usually will find you and any other liable party responsible for the amount after the sale if the proceeds of the sale are not enough to pay off the debt. The lender would be waiving its right to garnish your wages or bank accounts or take other steps to collect the deficiency.

Q: Can bankruptcy help me avoid foreclosure?
A:
Yes, depending on the type of bankruptcy case you file. Bankruptcy provides temporary relief through an "automatic stay" period that prevents lenders from taking most actions in foreclosure. Lenders often will move for relief from the stay if they intend to proceed in the state court foreclosure action. Bankruptcy is a complex matter; if you are considering it, you will need to consult an attorney with bankruptcy experience.

7/20/2012

Law You Can Use is a weekly consumer legal information column provided by the Ohio State Bar Association. This article was originally prepared by Alan J. Ullman, a Cincinnati attorney, and updated by John R. Cummins, a Cincinnati attorney with the law firm of Manley, Deas & Kochalski.

Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.

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