Understanding & Avoiding Foreclosure

Recent Statistics

Foreclosure has reached epidemic proportions. In 2007, 66,000 Californians lost their homes to foreclosure, and an additional 250,000 homeowners received notices of default. It appears that 2008 reflects no slowdown. As a matter of fact, in the first quarter of 2008, foreclosures rose to their highest level in 15 years. The vast majority of these loans were originated in 2005 & 2006. Notices of default (NOD's) were also up nearly 40% from the fourth quarter in 2007. Continued downward pressure on real estate values clearly played a role in the increased default activity. At the same time, the percentage of homeowners emerging from default sank to 32% from 52%.

How Foreclosure Works

Foreclosure is the process in which a lender repossesses a property in an effort to recoup money that is owed by a borrower. When a borrower stops making payments according to the terms of a loan, a lender will issue a Notice of Default. Usually, the lender will make attempts to get the borrower to bring the loan current, by either demanding all past due payments, or sometimes they will allow an alternative payment plan (see homeowner options). If a borrower is unwilling or unable to comply, the lender will issue a Notice of Trustee Sale.

In this process, the lender will ultimately force the sale of the property through an auction process. The Notice of Trustee Sale, must be published in the local newspaper, and the borrower will generally receive a notice on taped to their front door, advising them of the details of the auction. The lender will establish a minimum bid, which is typically equal to the amount that the borrower owes (including penalties and fees). A reconveyance company will hold the auction in a public place, and the winning bidder will take title to the home.

If nobody bids for the home, the lender takes title directly, and it the home becomes the property of the lender. In either case, if the former owner or tenant still occupies the home, he will be evicted.

The Effects of Foreclosure

Foreclosure generally has a far reaching impact on a borrower. Facing eviction from a home can have lasting emotional consequences for all involved. Families are forced to move, and to the extent they move far away, their children might have to change schools, and the entire family's social structure may change dramatically. A move can also be very expensive, at a time when extra money is obviously not available.

Foreclosure can have a devastating effect on a borrower's credit. Their credit score (FICO) plummets making it very difficult to obtain any credit. It may also make it very difficult and/or expensive to rent another home. Most credit applications require a truthful answer to the question "have you been in foreclosure in the last 7 years".

Foreclosure can be avoided.