Loss Of Your Equity – Another Big Reason to Avoid Foreclosure at All Costs
By Stuart R. Simone, Esq.
I think it’s safe to say that every homeowner with a mortgage knows that if they lose their property to foreclosure, their credit will be devastated for years to come. making it a reason to avoid foreclosure. (In general, the effect is similar to bankruptcy, except worse; that’s because lenders know that a person can only receive a bankruptcy every 6-8 years, while there is no limit as to how many foreclosures a person can suffer.)
What a lot of borrowers don’t consider is, how much cash money they will lose if their property is foreclosed on. Although many properties that are currently in foreclosure have little equity or are “upside-down” (where the homeowners owe more on the loan(s) than the home is worth), a significant number of homeowners have a significant equity position in their houses. If you have any equity in your property – “equity” being the amount your home is worth over and above all your mortgages and other secured credit – then you need to read this article.
When your lender sells your property in a nonjudicial foreclosure auction and your property has equity, the foreclosure trustee will hold the amount left over from paying off your lender(s). (Sometimes the borrower must go to court to get this “surplus“, but that is another story.) Borrowers with equity often find out two of the most troubling truths about the foreclosure process: (1) Properties usually sell at the trustee sale for far less than the homeowner expects, and (2) Banks are allowed to “eat up the equity” in the property throughout the process… and the do!
The result of this “double whammy”? The property owner with equity who doesn’t promptly sell his home or reinstate his loan stands to lose tens of thousands of dollars if he allows his home to be auctioned at nonjudicial foreclosure.
Although theoretically a homeowner with significant equity in the property has more options to stop foreclosure – such as Qualifying for “a foreclosure loan” (usually at 8-12% interest rate) to reinstate the defaulted loan – the equity also kills the borrower’s chances of getting a loan modification (due to “failing the NPV Test”). The equity also means the borrower cannot strip junior liens in a Chapter 13 bankruptcy.
Worst of all, as soon as the loan goes into foreclosure – this happens when the lender records the Notice Of Default (NOD) – the mortgage servicer will begin accelerating the loan, adding late fees, interest, court costs, and attorney costs, as well as any other miscellaneous charges. This quickly begins to eat away at any equity the homeowners may have had. The longer the house is in foreclosure, the more equity is lost. Homeowners who are unable to put together a plan to reinstate their loan may find that they are locked into the home; they can’t refinance to pay off or reinstate the loan because their credit is shot and they owe so much in arrears that there are no other options left. (At least no standard options – please see KSPreventionCenter.com.)
When the property has significant equity and the homeowners are unable to come up with the money needed to reinstate their loan – lenders require you to pay off everything you owe in one payment – to avoid foreclosure, we advise homeowners to list the property for a “Standard Sale” immediately and attempt to find a buyer as quickly as possible. Starting with a low price is sometimes better than starting high, as the acceleration of fees will eventually make it necessary for the homeowners to raise the price just to pay off the loan and walk away with something. Once the house is purchased by a buyer at the auction, any proceeds of the sale over and above that necessary to pay off the senior mortgage(s) and associated closing costs will be paid to the borrower by the real estate escrow company. (G&S Law also advises all homeowners in default to submit complete loan modification applications in all situations, but make sure you do so more than two weeks before the sale date, and if possible, two weeks before the original sale date listed on the Notice Of Trustee Sale (NOTS)).
Sadly, if the homeowners are unable to use their equity to qualify for a loan to stop the foreclosure or sell the house through a realtor with a Standard Sale, there is little chance they will get any surplus proceeds from the foreclosure auction. By this point, the mortgage company will have charged as many fees and costs as they legally can, so it is unlikely the property will be auctioned for an amount that will pay off the loan in full.
The lender itself is often the only bidder at the sale, and the lender’s “winning bid” is at most the total amount owed (“payoff amount”), which often leaves the homeowners with nothing. Even worse, if there are two or more mortgages and the house sells for less than what is owed to all the lenders, there is the possibility of being sued for a deficiency judgment on the debt by a “sold-out junior lender.”
When a third party bidder – nowadays usually a professional real estate investing company – does offer more than what is owed on the loan, the homeowners are entitled to receive the surplus from the auction sale. If there is any money left after property taxes are paid, the first mortgage is paid in full, and any other liens (second mortgages, civil judgments, etc.) are cleared off, the former owners can claim their proceeds. Unfortunately, the county courthouse (for Sheriff’s sales) or the Foreclosure Trustee (for Trustee’s sales) sometimes fail to inform the homeowners that they are due any money, so we advise foreclosure victims to keep track of the outcome of the auction themselves. Sometimes an attorney such as G&S Law is required to file a lawsuit to collect what little money is left for the foreclosed borrower.
In short, while your lender does not directly have any rights to the equity in a property that is being foreclosed, they will take as much equity from you as possible by keeping your loan in default for a long time and letting their fees and charges suck up your hard-earned equity until there is nothing left. If homeowners want to keep their equity – and avoid the disastrous and long-lasting hit to the credit score that a foreclosure would cause – they need to sell the home, reinstate or pay off the loan, or file a Bankruptcy (typically Chapter 13) as soon as possible.
By the time the sale date is near, it’s probably too late to keep your equity, but maybe not too late to save your home from foreclosure… if you call the foreclosure defense law firm of Gomez & Simone, who can file a civil lawsuit and ex parte restraining order in as little as 10 days or a Bankruptcy in as little as two days. If your sale date is only days away, it’s not too late! Gomez & Simone Law is accustomed to working on a last-minute, Emergency basis, and have saved dozens if not hundreds of homes from foreclosure at “the last minute.” Call now to set up an in person consultation with one of our attorneys at (855) 219-3333. As you can see, you have no time to lose.
Gomez & Simone is a full service real estate law firm representing homeowners and tenants, with offices throughout Southern California. This article is informational only and should not be used as legal advice. Please note that laws may have changed since this article was published. Before taking action, we recommend that you consult with an foreclosure defense real estate attorney about your specific matter. Attorney advertising.