The Planning Process of a Foreclosure


What do we do now?

Our home has a mortgage that far exceeds the value.
We cannot sell it to even meet the balance due. In fact, there is not much of a market to sell a house anyway. If we can afford the current mortgage payment, we are paying a high price for a devalued property. If we cannot afford the current mortgage, we are sure to be thrown out of our house.



THE PLAN

The first reality is that this is a true dilemma: there are no good answers. The choices are not easy and not attractive; our best path is to make an informed choice among hard alternatives. The psychological problem is that faced with unappetizing options, our first reaction is not to choose at all. The result is, of course, that we are choosing by not choosing. Worse, the "frozen-headlights" approach is likely to lead to negative consequences.

We need control – to the extent we can achieve it. The first step is to make an informed plan. Know what the alternatives really mean, not based on neighbors, co-workers, real estate salespeople or media; rather, the know the actual facts here in Nevada, here in your community.

What is a "non-judicial" foreclosure contrasted with a "judicial" foreclosure? How long does it take? Can I forestall it? What happens to the debt on the mortgage?

What is a "short sale"? Is it a better alternative? Will it be better for my credit rating? How long does it take? Is the debt waived? Are there tax consequences?

How much does it cost to defend a foreclosure? How long will such a defense keep my family in the house? Can I get a modification? Will a modification reduce the principal balance on the loan adjusting my value to market levels?

Whatever you choose to do, make an INFORMED PLAN and execute on it.



Forclosures

Although there are not perfect answers – ones that simply allow you to continue as you have been before the housing crisis – there are choices to make.

There is also no real option for retaining the property. Think it through: If your house has a $300,000 mortgage and a sales value of $200,000 (and declining), you have a "deficiency" of $100,000. Unless the value of the property increases by 50% or the lender reduces the principal balance on the loan, you are going to be stuck in a financially untenable situation. Moreover, these two options are not going to happen - Period. A modification at all is rare, and so far, lenders have refused to reduce the principal balance. If you choose to continue to pay the mortgage for the next 15 years, you will still have a deficiency which must be paid to the lender above any sales price in order for the lender to release its security interest. The real choice is foreclosure now or later. The option of a short sale presents its own difficulties which are more problematic than a straight foreclosure.

Foreclosure in the Past:
The historical procedure for taking your home in Nevada has been by "non-judicial" foreclosures. Simply put: no court proceeding. Your note (debt on the property) is secured with the title to the property itself (Deed of Trust). This is a traditional "trust" arrangement with a "Grantor" – You; a "Beneficiary"- The Lender; and a "Trustee" – entity that pays your mortgage to the Beneficiary. As part of the trust agreement, Deed of Trust, you consent to an abbreviated process, so that if you default, the property can be sold and the proceeds given to pay the Beneficiary. This is the auction on the courthouse steps.

Until the past three years, there has been little legal activity around non-judicial foreclosures – because there have been few foreclosures at all. The reality changed when the 2009 Nevada Legislature passed a law establishing the right of homeowners to "mediate" with the lenders before a foreclosure sale could occur. The "Foreclosure Mediation Program" was established (NRS 107.086) under the Nevada Supreme Court and developed a legal procedure to manage the process. "Mediation" is a misnomer: this is a confrontation between the homeowner and the lender in which the lender wants to take your property. There may be talk of "modifications" or "non-retention alternatives" but the bottom line is that the lender wants to take your house from you.

Competent lawyers, including myself, have used the mediation process to forestall foreclosures for the past three years with significant success. I have done 98, and none have resulted in an unwanted foreclosure. Nearly all have ended with the lender needing to restart the foreclosure procedure with a new Notice of Default. The practical consequence is lengthy delays during which the homeowner stays in the property undisturbed while not paying mortgage or property taxes. The good news is that the mediation practice in the hands of a good lawyer means significant delay to remain and plan/execute; the bad news is that it means no resolution.

Foreclosures In the Present:
The 2011 Nevada Legislature has changed the foreclosure process in several crucial aspects, and in total these new laws may end the non-judicial foreclosure method of taking title from homeowners.

In AB 284 (effective October 1, 2011), the lender must disclose in the non-judicial foreclosure process all transactions involving of the note and Deed of Trust - at both the Notice of Default and the Trustee Sale. Such display of information sounds sensible and harmless; however, it is fatal to securitized loans. The reality is that lenders foreclosing are unable to find the information; they do not have adequate records of all the electronic trading of your loan. Moreover, even if this data exists, compiling it is a time-consuming task and may disclose ultimately serious flaws in title. The final problem under the new statute is that these transaction even if known and accessible must be recorded in the local Nevada Office of the County Recorder. The whole point of the securitization procedure developed by lenders using facilitating shells such as MERS (Mortgage Electronic Registration Systems, Inc.) is to avoid public recording. The technical disclosure requirements appear to have totally halted the non-judicial foreclosure process by the major lenders.

The mediation process has become more problematic for lenders. First, lenders never supported the idea; the Foreclosure Mediation Program was a consumer-protection system in which lenders were forced to participate. While lenders attempted to control the FMP in shameless power moves, the mediations only posed obstacles to the goal of the lending industry: to foreclosure on your house. Second, the Nevada Supreme Court dealt the lenders serious blows in two 2011 opinions: Pasillas v. HSBC Bank USA, 127 Nev. Adv. Op. No. 39 (July 7, 2011, and Leyva v. National Default Servicing Corp., 127 Nev. Adv. Op. No. 40 (July 7, 2011). Through these cases, the Court set a "strict compliance" standard to the documents which the lender must produce at the mediation; this impacted the lenders who often could not present the simplest of paperwork. Third, work by the homeowners' attorneys, like myself, had at least dented the banking industry's foreclosure machine. We may have been as much an annoyance as a true challenge; however, we relentlessly battled with lenders at mediations, subsequent judicial reviews and independent affirmative lawsuits.

Foreclosures in the Future:
The future is not entirely defined. Assuming lenders abandon the non-judicial foreclosure process, which includes mediation, they may turn to "judicial" foreclosures. This means that the bank holding the note or deed of trust files a lawsuit in state or District Court to take the title to your home. Frankly, not much is known about judicial foreclosures in Nevada because non-judicial process has been used for virtually all homeowner foreclosures for decades.

There are three known results:

1) There is no mediation procedure under judicial foreclosures;

2) There are more defenses and counterclaims, such as deceptive trade practices, faulty title and contract violations; and

3) There is formal legal "discovery" for the homeowner forcing disclosure of note/deed of trust transactions - the same problems that AB 284 poses to non-judicial foreclosures.

These are all positive for Nevada homeowners. Lenders will not be able to use the "short cut" of non-judicial foreclosure. Homeowners will be able to defend themselves more fully with defenses, counterclaims and discovery. Lenders will be forced to consider compromise in the face of lengthy litigation. The last consideration may be the most significant in the long-term. Lenders have steadfastly refused to negotiate the "principal balance" - the amount of the note - and the consequence has been no-win options for homeowners. The judicial foreclosure process will put additional pressure on the banking industry to reconsider its refusal to be reasonable. Banking greed may dictate new policies.