During the COVID-19 pandemic, the federal government enacted a few delays in the foreclosure process. One delay was centered around the ability for federally backed mortgages, including Federal Housing Authority (FHA), Housing and Urban Development (HUD), Freddie Mac, and Fannie Mae, to foreclose on property owners due to non-payment of mortgage debt. The eviction moratorium enacted by the Center for Disease Control & Prevention (CDC) imposed another delay, preventing all landlords from evicting tenants. Finally, forbearance rules allowed property owners who could show financial hardship due to COVID-19 to pause or reduce their mortgage payments.
These moratoriums prevented bank repossession of properties due to the nonpayment of mortgage debt. In terms of real estate investing, it limited the availability of foreclosed properties as well as properties in pre-foreclosure since the process to foreclose is often costly and time-consuming — banks do not initiate the process unless they can complete it. This, in turn, contributed to an already-scarce inventory of homes in many markets.
Foreclosure Laws Vary by State
Savvy real estate investors need to understand the basics of the laws in their state to best evaluate and understand the properties available for purchase and the timing and process for making deals. This ultimately benefits distressed homeowners by helping them out of a financial situation from which they may not recover and by helping banks get rid of inventory to recoup their losses for a failed mortgage.
When the federal moratorium lifts on July 31, 2021 (the new extension date), investors may rush to find these distressed properties, but knowing the basics of the foreclosure process is essential to finding the right deals and being successful.
The 2 Processes of Foreclosure
There are two types of foreclosure processes, depending on the state where the property is located and the type of foreclosure the bank chooses.
The Judicial Path
When a homeowner can no longer pay their mortgage, some states require that a lis pendens (Latin for "suit pending") be filed. This is an official public notice from the lender that a property has a lien or pending lawsuit attached to it and must be reviewed by a judge. These filings are recorded on public record with the clerk or recorder of the jurisdiction.
The process from that point forward can take months or even years and can be costly. Some states are required to go through the process. A total of 21 states mandate lis pendens, and they include some major investment markets like Florida, New Jersey, and New York. Removing a lis pendens is also complex, time-consuming, and potentially costly. This can be done via expungement (removal) or withdrawal. However, lenders often choose not to do this and simply do not proceed to the next step of the foreclosure process.
The Non-Judicial Process
In these cases, the foreclosing party appoints a trustee to oversee and manage the foreclosure process on their behalf. Many states (currently about 17) do not publicly record the defaults. Most people will find out about these actions when a notice of trustee sale or auction is recorded with the recorder or advertised in a public publication for a specific consecutive timeframe required by state law.
The timing for this process varies greatly. The maximum amount of time to foreclose is not mandated. That means that banks must set a minimum time on foreclosure actions (when the property is put up for sale), but the exact timing is left to their own discretion.
The path to foreclosure typically involves six steps:
- Payment default: The owner misses their scheduled mortgage payment due date.
- Notice of default: The lender advises the property owner that the owner is 90 days or more delinquent on their mortgage and no resolution has been met to come current, therefore the foreclosure process will begin.
- Notice of trustee's sale: The lender now schedules the property for public auction and must advertise the property in various public media for a set amount of time (the time frame varies by state).
- Trustee's sale: The property is auctioned off at public auction to a third-party buyer or taken back (repossessed) by the lender.
- Real-estate owned (REO): If a property is not sold at an auction, it is repossessed and identified as REO (property of the lender).
- Eviction: If the property is still being occupied by the prior owner once a new owner has a title by way of public auction or bank repossession, the new owner must start the eviction process to remove the prior owner.
Due to the uncertain times right now, some lenders are waiting for the moratorium to lift before they issue a default or lis pendens notice, let alone schedule a sale date for public auction. Larger banks are especially sensitive about how and when they foreclose on properties where the owners have been financially impacted by the pandemic because they are concerned with their public image and do not want to be perceived as insensitive to their borrowers' needs and situations.
Many owners are still working with their lenders through forbearance, in which they have been able to show proof of financial hardship and are able to make lower payments or pause their mortgage payments altogether. The borrower will still have to repay any missed or reduced payments at a later date when the forbearance period ends.
The Impact of the Foreclosure Moratorium on Real Estate Investing
Part 2 of this series will explain how investors can properly identify properties in the foreclosure process or (most importantly) those that may be on the verge of defaulting.
Buying properties before or at public auction is often especially attractive to new real estate investors because they can often procure these properties at a significant discount. To learn more about how to identify and streamline these purchases, follow our blog and read more about investing and foreclosures.