What are the Two Most Common Misconceptions About Foreclosure

By: Dave Dinkel

There are many misconceptions about foreclosure. The people that lose their homes by foreclosure don't want the public to know about their personal tragedy, so the misinformation usually comes from those who hear second-hand or hearsay information. The following are a couple or examples that we hear frequently:

The comment we hear most frequently is "The bank is trying to steal my home through foreclosure". This is the most common belief of foreclosure victims and is usually reinforced by the lender's unwillingness to cooperate with the homeowners to resolve their crisis. People involved in the banking industry will explain that their wanting the homeowner's home is simply not true. The lenders go on to say that banks are in the business to lend money, not own real estate and will further explain that the Federal Reserve has strict cash reserve requirements for foreclosure properties that can be crippling to a bank's financial statement. All of this is true to an extent, but let's analyze the reality of the situation.

The reality is that banks are happy to take homeowner's property by foreclosure if they can make a profit reselling it. This is painfully obvious when a person in foreclosure asks their lender to take back a deed "in lieu of foreclosure". If the bank feels they can make a profit, they will happily take the deed and with it the home. However, if they get an appraisal or Broker's Price Opinion (BPO) for less than is owed, the only reason to consider taking the deed is to save money on the foreclosure proceeding. If there are other liens or mortgages on the property, the lender will have to go through the foreclosure process to have these junior loans extinguished. Consequently, accepting the deed actually complicates the process of getting clear title to the property, so the prudent decision by the lender will always be to continue the foreclosure in this case.

Another comment we hear frequently is "I have to pay off my mortgage to keep my home". This is what most homeowners believe initially because the default notice says it! When the lender "accelerates" the mortgage or deed of trust because the homeowner stopped making payments, the foreclosure filings call for the entire balance to become immediately "due and payable". This does not mean that the default can't be cured by other means such as reinstatement or mitigation, but the language of the default notice doesn't stipulate any other solutions. In certain types of foreclosures this time period to cure the default can be as much as 90 days and in other types, as little as a week. The "grace period" to cure a default is clearly outlined in the actual clauses in the loan agreement and may be in the court filings, depending on the state where the homeowner lives.

So banks may or may not want your home depending on its equity and the financial decision of whether they can make a profit. The banks have a legal obligation to their shareholders to foreclose on delinquent loans and the bank's officers can be prosecuted if action isn't taken timely. The acceleration or default notice could include language in a separate document about the actual requirements to reinstate or cure the delinquent loan, but that is not the case currently. As a homeowner in default, your best course of initial action is to read your loan agreement, your default notice, and call you lender's representative for options they are offering to fix your foreclosure.

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