This is a continuation from the previous article on Short Sales.
The banks will go through a judicial or non-judicial foreclosure process if the bank and the debtor cannot come to an agreement on resolving the issue of late payments. The lender decides whether to pursue a judicial or non-judicial foreclosure.
Judicial Foreclosure Process:
If the alternatives mentioned in a previous article are not acceptable by the lender or an acceptable workout is not possible, the lender may choose to go through the judicial foreclosure process. When the borrower is not able to make the monthly payments, the lender will send demand letters to the borrower and if payments are not kept current, the lender will have an attorney file documents with the court to go through a judicial foreclosure. It could cost the lender about $8,000+ and takes about one year to foreclose plus the amount of the unpaid monthly payments and legal fees.
The judge will review the documents and grant the foreclosure process to proceed at which time a commissioner will be selected to complete the foreclosure process. The commissioner has control over the rent and eviction rights over the property but has not received title to the property but has the authority as if he was the "owner". The commissioner cannot force the debtor to hold open houses. There may or may not be open houses held on the subject property depending on the circumstances.
The commissioner must advertise the property for sale and set an auction date. The auction is almost always held at noon at the court house steps and the commissioner will open the bidding with the pre-qualified bidders. All interested parties that want to bid on the property must show the commissioner a cashier's or certified check for 10% of the anticipated bid price. The bidding is opened by the commissioner and all interested parties will bid on the property. When the bidding stops, the highest bidder will give the check to the commissioner and there will be a court confirmation hearing that will be held in the judge's chambers. The confirmation hearing could be held within 30 to 60 days from the auction date depending on the court calendar.
On the day of the court confirmation hearing, the judge will ask if there is anyone who wants to bid on the subject property. All interested parties will go into the hallway outside of the courtroom and show their cashier's check to the commissioner. Bidding must start at 5% higher than the auction date price and bidding continues until the highest bidder is determined. When the bidding stops, they all step into the judge's chamber and the purchase is confirmed by the commissioner and the judge. There is no right of redemption in Hawaii by the defaulting party.
The successful bidder now has 30 to 45 days to complete the purchase and must get the financing to close on the transaction. If the bidder is not able to complete the transaction, the 10% deposit will be forfeited and the property will be put out to bid again. The licensee will not be paid a commission on a judicial foreclosure and must make arrangements with the buyer to be paid a commission.
When the property closes, all prior liens are eliminated and the buyer will have clear title to the property. The only entity that has the right to supersede the successful bidder is the IRS if there is a tax lien on the taxpayer.
Judicial foreclosures preserve the right to a deficiency judgment for lenders. This process takes about 7 to 12 months but may be extended if the borrower declares bankruptcy.
Non-judicial Foreclosure Process:Usually takes about 2 to 4 months to foreclose at a cost of about $3,000+. The lender cannot go after any deficiencies if the property is sold for less than the mortgage amount.
In a non-judicial foreclosure, the lender exercises the right to foreclose on the property without going thorough the court system through a "power of sale" clause in the mortgage.
Lenders try to work with borrowers in making a deal first before going to foreclosure. Most lenders are open to short sales, it saves them from having to sell the houses. Main question for lender is how will they handle the deficiency amounts?
If borrower has assets or good income, lenders may go to judicial foreclosure
Acceleration letter - borrower has 30 days to cure the delinquency or face foreclosure action. Once the lender decides to foreclose on the property, the lender will order a title commitment to transfer title after the foreclosure auction. Lender will name all the parties that are on the in their correspondence to the debtors. If parents have cosigned on the note, it may cause tremendous stress and financial obligations on the parents. Lenders will go after the deeper pockets of all parties that are legally obligated to pay the loan.
The state tax office needs to be notified of the pending non-judicial foreclosure process. The lien holder of record will set date of auction 30 days out, they must run ads for the auction in 3 consecutive weeks. The lender’s representative must post a notice on premises 21 days before the auction date.
Foreclosure action may terminate the rental agreement if the property is being rented:
- Government subsidized rentals will have the leases honored
- Other tenants may be out after the foreclosure
- Ejection - not eviction
After the court house auction, in a non-judicial foreclosure, there is no court confirmation and no right of redemption. The IRS has the right to redeem the property if there were delinquent income taxes. The successful bidder has to eject the occupants if they have not moved out of the house by the closing date.
There are usually no open houses in a non-judicial.
- Buyers must bid sight unseen if no open houses are held
- Usually no bidders - if anyone bids, it is a junior lien holder or a relative of the defaulting party
- Bidders must come up with 10% of the bid amount in order to bid on the property
Owners must sign the conveyance documents to transfer property. Once the lender takes title and possession to the property, the property will be sold as a Real Estate Owned property (REO). REO means that a bank has taken title to the property by way of a foreclosure action. All junior liens are eliminated and there are no deficiency judgments against the borrower. The bank will sell the property in the open market and get rid of the property. Bank owned properties for sale in the open market are known as REO properties.
The banks will select their favorite Realtor to list the property in the Multiple Listing Service and will try to sell it at fair market value.
The federal government has passed a new law that allows the debtor that has been forgiven of the mortgage loan to avoid paying the income tax on the amount that was forgiven. In the past, forgiveness of debt was deemed to be a taxable event. Congress got rid of that tax burden for those taxpayers whose income level is below a certain amount. Check with your CPA if you fall in that category.
It is imperative that consumers be familiar with the foreclosure process and what information lenders need to make a decision on a loan that is in default. The debtor needs the help of a Realtor who is familiar with the foreclosure process to try and salvage the property. Lenders do not want to foreclose. They would rather negotiate a suitable settlement where both the lender and the debtor can win. Lenders are open to short sales and other solutions and foreclosure is their last resort.
I teach classes on the foreclosure process and the schedule of classes that I teach can be seen at www.abeleeseminars.com. You are welcome to sign up for the class for $50 per class. If you agree to work with Abe Lee Realty, the class fee is waived. All people who buy or sell real estate are highly encouraged to take the pre-licensing course even if you do not intend to get a real estate license. You will learn all the basic information you will need to have a smooth transaction and be an educated consumer. The course is $450 for a live class and $425 for the independent course. If you are a displaced employee, I give a $200 discount on the courses. If you agree to let us represent you in a real estate transaction, you can take the class for free. You can earn thousands of dollars in referral commissions if you pass the state exam and join our real estate referral company.
For more information, call Abe Lee at 216 4999 or email:
abelee@hawaii.rr.com
