Mortgage Foreclosure Seminar at DuPage County Bar Association

Last week I went to a Mortgage Foreclosure Seminar hosted by the Dupage County Bar Association. For all the media hype about the "subprime crisis" I was surprised that only a handful of people attended. The information was presented by three attorneys, each covering a different aspect or perspective on the process. The presenters were:

• Kent Gaertner – Covered the different bankruptcy options available (Chapter 7, Chapter 13)
  
• Steven Bashaw – Foreclosure defense attorney (Helps the borrower address the foreclosure)
  
• Pat Williams – Lender's attorney. Gave the lender's perspective on the foreclosure process
  

There was a lot of information covered, and several different options discussed From the conversation afterwards I think a few of the people left still scratching their heads about what would be the best approach for them. It wasn't intended to provide any specific advice, but just to give an overview of the entire process, and what the various options are. I'm going to provide some of the highlights, but none of this is intended as legal advice. If you are facing foreclosure, please seek an attorney to help you.

There are three very important things you must do as early as possible:

Don't avoid it!

The lender will have logs of every attempt to collect. You can't claim you didn't know about it just by ignoring it. It isn't a problem that is going to go away, and the earlier you address and work with your lender the easier it will be to make arrangements to correct it. Once the courts and lawyers become involved it is a much more costly and complicated process.

Create a payment plan you can afford and stick to it.

Propose a resolution as early as possible. In fact, if you just got bad news, such as being laid off, a medical crisis, or some other event that is going to impact your ability to pay your mortgage, talk to the bank before you miss any payments. Don't propose a payment plan you can't meet. If you aren't able to follow the plan, the lender is less likely to continue to work with you.

Do everything in writing and keep logs

Present any proposed payment plans in writing. Also keep logs of any contact between you and the lender. Keep track of what was discussed, any agreements made, deadlines, changes to the plan, who you spoke with, etc.

Pat Williams spoke first about the lender's view of the foreclosure process. Having to defend the "big bad bank" is no easy task. He stressed the fact that the lender doesn't want your house, they want their payments, so they'll be willing to work with the borrower. If no arrangements are made and the foreclosure is filed there is no real chance to work things out. You still have options for keeping your home, but making arranging a payment plan is no longer an option, plus you'll now face legal fees and court costs.

One of the interesting things he discussed was what the foreclosure does in legal terms:

• Bank takes title to the property
  
• Extinguishes the mortgage and any other subordinate debts (second mortgages, etc)
  
• Clears the title for any buyers
  
• Secures possession of the property to the lender
  

Another point worth noting is that the entire process takes at least 7 months from the time the foreclosure is filed. In that time, you have options to pay off the back payments and keep your home.

Reinstatement

By law in Illinois, if you pay any defaulted payments, late fees, interest, attorney's fees, and court costs within 90 days of the foreclosure being filed, your mortgage is "Reinstated" and the foreclosure process stops. Because the bank wants the payments, and not the actual property, lenders may agree to a reinstatement even after the 90 days required by law has expired.

Redemption

If the 90 days have passed the foreclosure was served, the borrower may still keep their home by paying off the entire amount owed, as well as any back payments, and other interest, fees and legal costs within 7 months of being served notice of the foreclosure. While it isn't likely someone facing foreclosure can find the money to pay off the mortgage, or to refinance the home, it can happen.

Steve Bashaw then covered the borrower's side of a foreclosure. He also stressed the importance of working with the bank as early as possible. In addition to any proposed payment plan, you should send the bank a "hardship letter" explaining what created the situation in the first place. It should cover:

• What caused the default? (job loss, medical bills, etc)
  
• Has the situation been remedied or corrected?
  
• Was it beyond your control?
  
• If payment arrangements are made, can you afford them, your other bills, and still keep your home?
  

The bank isn't looking for a "sob story" but needs to know what the situation was that forced you to face foreclosure. Also, be honest. If the bank finds out you provided any false information, or gross exaggerations, they are very unlikely to work with you at all.

A common payment plan is to pay 50% of the back payments up front, then spread the other 50% of back payments out for six to twelve months, in addition to making your regular payments. This may seem daunting to someone that cannot even pay their current mortgage payment, but it is a start. The lender will consider any other reasonable payment plan as well.

Another topic, one that I think can be very scary and confusing, is the timeframe and stages of a foreclosure. If you received a notice of foreclosure, the sheriff won't be knocking on your door the next day to kick you out. You have at least seven months for the process to wind its way through the courts.

If you are past due 90 days or more, the lender will go to the court, file a complaint and begin the foreclosure process. The borrower is notified via summons (served). If the court is unable to serve you with the summons, the legal notice filed in the newspaper counts as notification. The foreclosure clock starts the day you are served with the summons.

You have 30 days after being served to file an appearance in court. There are court fees (approx $150), but the judge can waive this if he sees fit. The day you appear in court starts the "redemption timer", the seven months you have to pay off the entire debt and costs to keep your home. If you don't appear in court within 30 days of being served, the redemption timer begins the day you were served. If a court judgment of foreclosure is made, you have 90 days after that for redemption, or the seven months from the date you served, whichever is longer.

If you don't redeem the house in time it will be sold at a sheriff's sale (auction). The bank will put a minimum bid on the property to ensure they retain possession if no one else makes a bid on the house. Terms are generally 10-15% due the day of the auction, and the rest (in full) within 24 hours. Bidders are often unable to inspect the properties beforehand.

If the property sells for less than what is owed at auction, the bank can file for a deficiency judgment against the borrower for any remaining amount owed. If the house sells for more, any remaining money after all court costs or other liens will go back to the borrower.

Once the court confirms the sale at auction, usually one to two weeks, anyone still living at the home has 30 days to vacate. If they don't, the sheriff may forcibly evict them. Some buyers of foreclosed properties, and even the bank, may offer "cash for keys" which is money to help the residents of the property to move.

Finally, Kent Gaertner spoke about the option of declaring bankruptcy if facing foreclosure. I'm not going to go into much detail since this can be a very complex process.

Some important things to remember though are that bankruptcy is federal law. Foreclosure is state law. Therefore a bankruptcy will trump any foreclosure proceeding causing an "automatic stay" of the foreclosure process. It doesn't necessarily wipe out the foreclosure altogether though.

There are two main options for bankruptcy when facing foreclosure:

Chapter 13

Most often used when facing a foreclosure. Chapter 13 can be filed when you can make payments. You may get up to 60 months to correct any defaults. You need to show you'll be able to pay your current bills and any arrears over 60 months. Any unsecured debtors (credit cards, etc) will get as much as they would had you filed a Chapter 7. A Chapter 13 must be filed before a sheriff's sale of the property. You may be able to file a Chapter 13 and put your house on the market, if you agree to lower your listing price according to a defined schedule.

Chapter 7

If you have a lot of general debt, Chapter 7 may be an option. This is used when you cannot stay current with your payments, or have very little or no equity in the home. It wipes out the debts, protecting any assets that can be exempted, such as the homestead exemption in Illinois. The lender may ask the bankruptcy court to continue foreclosure proceedings, but the borrower still has the right of reinstatement or redemption.

Some of the other topics discussed were short sales and a deed in lieu of foreclosure. Which option the bank will except will depend entirely on the situation.

A "short sale" is selling your home before the foreclosure process, and having the lender agree to accept a price lower than what is owed, and to forgive the difference. You should work with a Realtor to justify the list price of the home according to the market.

A "deed in lieu of foreclosure" is giving the title of the house to the bank in exchange for forgiveness of any back payments. This allows the bank to get possession of the property without needing to go through the foreclose process.

Something else that came up in relation to short sales was the taxability of any forgiven debt. In the past, a bank could issue a 1099, treating forgiven debt as taxable income. Each of the three attorneys that spoke raised this as being an issue with a short sale or deed in lieu, but the Mortgage Debt Cancellation Relief - H.R. 3648 act may mean that, in certain circumstances, the forgiven debt is no longer taxable.

Bottom line is that I found this seminar very informative. I would highly recommend anyone that is in or facing foreclosure to attend an upcoming event like this. It won't provide any specific advice for your situation, but should give you a better understanding of the process and the options you may have.

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