At this time of year, many individuals are engrossed in three hotly debated topics. First, who is going to win the Super Bowl, the Green Bay Packers or the Pittsburgh Steelers; second, are the Cardinals going to sign Albert Pujols this off season; and third, what are the facts regarding home foreclosure. Hopefully, you are more concerned about the first two rather than the last one. In any event, it may be beneficial for all homeowners to be knowledgeable of their rights regarding home foreclosures.
There are multiple myths surrounding the laws on home foreclosure. Many of these myths are derived from a basic misunderstanding of the underlying law. Before discussing the intricacies of home foreclosure, we must first provide definitions to some important terms. Generally, the homeowner is called the “mortgagor” and is the individual who takes out a loan secured by a mortgage from a lending institution. This lending institution or bank is called the “mortgagee” or lender. Never mind that in Missouri, the use of a deed of trust is used instead of a “mortgage” instrument.
Power of Sale / Non-Judicial Foreclosure
Now that we know the parties involved, we must distinguish the two types of foreclosure. Under Missouri law, the lender-preferred method of foreclosure is the power of sale or non-judicial foreclosure. This type of foreclosure does not require court intervention or a judge’s approval for the lender to foreclose. A power of sale foreclosure places all control in the hands of the lender as soon as the mortgagor defaults in making one or more monthly payments on their mortgage or for some other default, such as failure to insure. As you can imagine, this type of foreclosure occurs fairly quickly after the foreclosing party provides notice to the mortgagor.
Under Illinois law, the lender is required to follow a judicial foreclosure. Under this type of foreclosure, the foreclosing party is required to foreclose through the court system. Judicial foreclosure requires a judge’s approval to foreclose and generally occurs over multiple months, making it more expensive for the foreclosing party.
Options for the Home Owner in Default
Each type of foreclosure allows the mortgagor certain options to retain their home. Under the power of sale (a/k/a non-judicial) foreclosure, a mortgagor in default can redeem their property as long as they provide notice of their intention to redeem the property. Under Missouri law, the mortgagor’s notice must be provided to the mortgagee within ten (10) days before the foreclosure sale. After notice is given, the mortgagor must provide a bond which is set by the court. The redemptive bond typically requires security for:
- the interest accrued on debt secured by the foreclosure;
- legal charges of sale;
- interest on prior encumbrances;
- any taxes or interest accrued from said taxes; and
- interest at a rate at 6 percent for any costs incurred by purchaser in the sale.
The court weighing all these factors will set the bond amount which must be paid by the mortgagor within twenty (20) days of the sale. The last step in redeeming the property, and probably the most difficult, is the requirement that the mortgagor pay the purchase amount paid at the foreclosure sale within one year of the sale.
Under a judicial foreclosure, the mortgagor is in a better position to defend against home foreclosure. Illinois law allows for redemption thirty (30) to ninety (90) days prior to the foreclosure sale. The redemption requirements are similar to Missouri; however, there is no period of redemption after the sale. Thus all foreclosure sales in Illinois are final. Because of the court’s involvement in a judicial foreclosure, the foreclosure process requires more time and money, leaving more options to defend and contest for the homeowner.
Separating Fact From Fiction
Now that we have an understanding of how foreclosure laws work and differ, we can now separate fact from fiction.
FICTION: The mortgagor must stop paying their mortgage in order for the lender to discuss modification of the loan.
FACT: Multiple lending institutions, who will remain nameless, informed multiple mortgagors that the only way that their home loan would be considered for modification is if they were in default, and thus they should withhold payment. The truth is, once a mortgagor is late on a payment, regardless of what state they reside in, they are considered to be in default. Once in default, the lender can choose whether to discuss loan modification, but the lender cannot be forced to modify the loan. Therefore, a homeowner should never willingly withhold a mortgage payment, as their rights are greatly diminished.
FICTION: Once the mortgagor is in default, the lender is required to modify the home loan under the Federal Making Homes Affordable Modification Program.
FACT: In order to be considered for the Federal Making Homes Affordable Modification Program:
- the loan must be owned or guaranteed by Fannie Mae or Freddie Mac;
- the mortgagor is the owner-occupant of a one- to four-unit residence;
- at the time the mortgagor applies for the modification, he/she is current on the mortgage;
- the amount the mortgagor owes on the first mortgage does not exceed 125 percent of the current market value; and
- the mortgagor has a reasonable ability to pay the new mortgage payments.
Homeowners who are in default or delinquent for more than thirty (30) days in the last twelve (12) months generally do not qualify for the federal modification.
FICTION: The mortgagor is powerless once they are in default.
FACT: While it may be true that once a mortgagor is in default the mortgagor cannot force the lender to modify the loan, there are options the mortgagor can take to attempt to keep their home. There are laws that ensure that your rights are upheld, such as the Fair Debt Collection Practices Act and the Real Estate Settlement and Procedures Act. Other possible options include, but are not limited to, document requests, demand letters or declaring bankruptcy.
Although the foreclosure process can seem daunting, there are many resources available online, including Beyond Housing at www.beyondhousing.org