Foreclosures Drawing a Closer Look

The current economic climate has placed many homeowners at risk of foreclosure. Federal officials want to ensure that the policies and procedures being used by the largest mortgage companies allow foreclosures to proceed lawfully. According to Federal Reserve Chairman Ben Bernanke, over 20 percent of those who have a mortgage owe more than the value of their home, trapping them in upside-down mortgages. Most homeowners have never been through the foreclosure process and do not know what to expect, making this an especially difficult time for families faced with losing their home.

A federal review of foreclosure procedures will be complete in November. The results of this examination could result in mortgage companies being forced to comply with specific federal regulations, or face penalties. Some mortgage lenders temporary halted foreclosures when the problems first surfaced, to allow companies to make adjustments to their practices. Most of these companies have since resumed foreclosing upon homes and properties.

Currently, all 50 state attorneys general are investigating the foreclosure processes being used. Large mortgage companies, such as Bank of America and J.P Morgan Chase, are being examined for the practices employed to evict people from their homes. It is alleged that documents had defects in notarization and also contained forged signatures of borrowers.

Perhaps the most concerning allegation against mortgage companies involved the use of "robo-signers" who would sign foreclosure documents without taking the time to review the situation. This placed many individuals into the process without a complete analysis as required by law in many states. The investigations may lead to fines or criminal charges against the lending companies.

Foreclosure in Minnesota

In Minnesota, foreclosure rates remain high. According to HousingLink, there were over 7200 foreclosures throughout the state that past quarter, the second-highest total on record. This number presents a 23 percent increase over 2009 numbers during the same period. The metro area showed a 21 percent increase over second quarter numbers.

Each state has specific rules that lenders must follow if they decide to bring foreclosure proceedings against a homeowner. In Minnesota, Lenders are required to give homeowners notice of the pending action. They must also pass along the homeowner's information to a foreclosure counseling service. If the borrower pays the amount he or she owes, plus costs, the process is required to end. Once the notice is received, the lender begins preparations for the sale of the property. An announcement called a sheriff sale notice is made as to the location of the sale, and bidders will be allowed to purchase the home. This sale occurs at the county court house and not at the homeowner's property. The homeowner then usually has 6 months to pay off the mortgage or vacate the property at the end of that period.

Alternatives to Foreclosure

For those who are in financial trouble and facing foreclosure, other options may be available. Filing for Chapter 13 bankruptcy is a popular choice for homeowners. Chapter 13 bankruptcy allows those who file to keep their homes. Debts are paid back in full or at a percentage over a three- to five-year period. Missed mortgage payments can be included as part of this payback plan. Those who want to keep their home often look toward Chapter 13 bankruptcy if they are in financial trouble.

Occasionally, it may not be a wise idea to stay inside a bad mortgage. If possible, a debtor may try to work out a short sale with the lending agency. Short sales have become more common, as banks will try to recover some money on a failing mortgage. A borrower and lender agree to sell a property for less than the mortgage's worth, allowing lenders to avoid the timely foreclosure process. In some instances, lenders may still hold the borrowers responsible for past-due payments, and possibly even the difference between the mortgage and the amount received in the short sale.

In this market, it can be difficult to sell a home, even for substantially less than it is worth. In some of these situations, it may be possible for the borrower and lender to work out a deed in lieu of foreclosure. In this scenario, the debtor transfers a deed to the property to the lender to satisfy the debt. This is advantageous because it helps the lender avoid a costly foreclosure proceeding, and the borrower avoids the negative credit impact that a foreclosure brings.

In this market of falling values and negative equity, the real problem in the foreclosure process often lies with the second mortgage. Taking a step back, the lenders hold two obligations: 1) a note that states the homeowner owes money, and 2) the mortgage, that is a lien on the property and can be foreclosed if payment is not made according to the terms of the note. The first mortgage elects to foreclose its lien and takes the property, and the second mortgage elects to sue the debtor for money on the note. A Chapter 7 bankruptcy may be available to relieve the homeowner from an often substantial debt in that situation.

When foreclosure seems like the best answer, be sure to discuss your questions with an experienced attorney. Specific requirements must be satisfied in order to end your obligation to your lender. It is important to act as soon as you receive a notice of foreclosure if you wish to remain in your home. If you wait too long before taking action, you might lose the opportunities available to you.