Demystifying the Law: Foreclosures
Scarcely a day has gone by in recent years when housing foreclosures haven’t been in the headlines. But even if you’ve closely followed the economic collapse and mortgage meltdown, there may still be things you don’t understand about foreclosures. This article will attempt to demystify the topic.
By now, most people probably know that when you take out a loan you put up collateral to secure the loan. In the case of purchasing a home, your house and property are the collateral for that loan. Foreclosure is the legal process a lender uses to take possession of loan collateral when the borrower defaults, or falls behind, on loan payments.
The home owner has a couple of options during the foreclosure process:
- Work with the lender on a loan modification in an effort to end foreclosure proceedings and arrive at a more manageable mortgage payment
- Walk away from the home and allow the lender to take possession of it
- Pay off the entire loan (known as redemption) before the foreclosure sale
- Bring the mortgage payments up to date (known as reinstatement)
- Hire a lawyer to challenge the legality of the foreclosure proceedings
Foreclosures in the News
Recently, there have been a number of new foreclosure topics in the news. Let’s delve into some aspects of foreclosures that people are currently discussing.
Several lenders, including JPMorgan Chase, PNC Financial, Ally Financial, Bank of America and Goldman Sachs, recently placed a moratorium – or freeze – on foreclosures. They are halting the foreclosure process while reviewing paperwork to ensure each of their foreclosures are legal and accurate.
In part, the freeze comes from the revelation that banks employed robo signers or auto signers to approve and process foreclosure documents without reading them. Some bank officials apparently signed thousands of loan documents a month without reviewing them, and many allegedly lacked the financial knowledge to even understand the documents they signed. Lenders must do certain legal due diligence before completing a foreclosure, and robo signers would indicate that due diligence wasn’t being performed.
The federal government is also mulling over whether to place a nationwide moratorium on foreclosures.
There are advantages and disadvantages to a moratorium on foreclosures:
- A moratorium might allow some people to keep their homes because it would give them time to modify their loan or become current on their loan payments.
- With or without a moratorium, some people can’t make their loan payments. For those, a moratorium will just delay the inevitable foreclosure.
- Home buyers might be reluctant to purchase foreclosed homes because of fears about the legality of the foreclosure.
- A moratorium would reduce the number of homes for sale in the United States, which could push up real estate prices.
- Foreclosure is the legal penalty for failing to make loan payments. A moratorium is, at least temporarily, a "get out of jail free" card and means that people wouldn’t be penalized for failing to make loan payments.
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