We have all heard about the real estate foreclosure crisis affecting individuals across the nation, but the crisis has affected Ohio particularly hard. If you are facing foreclosure, or are in the process of a foreclosure proceeding, then you likely have many questions about what to do. Seeking legal advice is the best thing you can do so that you understand your rights and your options. This article will try to provide you with some basic information that will allow you to better understand the process and how you and your attorney can work towards potential resolutions with the bank / lender / creditor seeking to foreclosure upon your property.
Some Foreclosure Vocabulary
You may have seen or heard a variety of terms used in the media or elsewhere and wonder what they mean. Here are some basic terms and definitions:
Chapter 7 / 11 / 13: These are different types of bankruptcy filings an individual may file depending upon their circumstances. Bankruptcy typically is an option of last resort. When all else fails, bankruptcy may be necessary. Your attorney's advice is critical in evaluating whether or not bankruptcy is an appropriate decision for you and your family.
Credit Score: This "score" is essentially a rating that credit rating companies apply to you based upon how well you have managed debt and whether you have kept current with your various payment obligations. It does not necessarily matter how much or how little debt you have had over time. In fact some people that have avoided incurring any debt, and have been current with all of their other payments, sometimes are surprised and frustrated to learn that they may have a credit score far less than others that have incurred large amounts of debt, but have paid it off timely. Chances are, if you are currently facing foreclosure, or you are in default on your loan payments, your credit score has been negatively impacted. A bankruptcy also negatively impacts your credit score. However, people sometimes fail to understand that you can rebuild your credit score over time. When you are trying to evaluate options to save your home or stay current on other obligations, your credit score may not necessarily be your first priority, and it's probably too late to save your score.
Deed in lieu: This is a bit like a "short sale" except there is no buyer. A "deed in lieu of foreclosure" is a transaction merely between the homeowner and the bank. The homeowner agrees to simply sign a deed for the property to the bank in lieu of the bank having to file a foreclosure action. Like a short sale, the homeowner and bank should come to an agreement in writing as to whether or not the bank will forgive part or all of any deficiency. The bank then becomes the new owner of the property and may choose to auction it, list it for sale, or leave it off of the active market for a period of time believing that there may be a better opportunity to sell the property in the future. In a very creative deed in lieu, the homeowner might even be able to remain in the home and pay rent to the bank in order to continue living in the home while the homeowner searches for new living arrangements.
Deficiency: Also referred to as a "deficiency judgment," this is the difference between the amount that the bank receives when the property is sold and the amount it is owed (if the bank's remaining balance was not entirely paid off). This is the likely result when a home is "underwater" or when there is a "short sale." Depending upon the loan agreement documents, the bank likely will have the right to continue to try to collect from you this deficiency balance even after the foreclosure proceeding is completed and the house is sold. However, depending again on the situation, banks may be limited as to how long they can continue pursuing you for the deficiency, if there is one.
Loan Modification: In certain situations, the bank may agree to modify an outstanding loan. The bank has several options when considering a loan modification (also called a "loan mod"). The bank can adjust and reduce the amount of principal balance. The bank can forgive unpaid, accrued interest. The bank can extend the loan without reducing the balance owed, but by extending it over an additional period of time, it may be able to reduce the monthly payment obligation. The bank can also reduce the interest rate without reducing the principal balance. This can also effectively reduce the monthly payment obligation.
Short Sale: This term refers to the sale of a property where the homeowner and the bank agree to sell the property to a buyer that is paying a total sale price that is less than the outstanding balance owed to the bank on its loan. Banks many times may be willing to agree to a short sale knowing that the amount of the loan far exceeds the current fair market value of the home. This type of sale typically occurs when the home is "underwater." The issue that must be understood and addressed by the homeowner and the bank before the sale is whether or not the bank will release the homeowner from any obligation to pay the "deficiency." If the homeowner is not released, the bank may still try to collect the deficiency from the homeowner even after the short sale is completed. However, some banks may agree to release the homeowner from this obligation in order to avoid the costs and delays it will face if it needs to file a foreclosure.
Underwater: This term simply means that the current fair market value of the property is less than the current outstanding loan balance owed to the bank. Assuming that the homeowner continues making the required monthly payments to the bank and is current on all other obligations, a property can be underwater without the risk of a foreclosure, and without the risk of negatively impacting a credit score.
What is a Foreclosure and who can file it?
A foreclosure is a legal proceeding whereby a person or entity that has a lien (pronounced "leen") upon property can ask a court to sell the property in order to collect money owed. Currently, the vast majority of foreclosures are associated with mortgage loans made in the last 15 years. Banks gave large loans to people in exchange for a mortgage on their homes. Once those people could no longer afford to keep paying their monthly payments, the banks declared the loans to be in default and file foreclosures in order to sell the property and collect the outstanding loan balance still owed.
Many people may not realize that banks are not the only entities that can file foreclosures. Any person or entity that is owed money, sued to collect that money, and obtained a court judgment, can file a judgment lien. This is like a mortgage in that it allows the judgment lien holder to initiate a foreclosure action to sell property owned by the person that owes the money.
Government agencies also can file a foreclosure. If the homeowner has failed to pay income taxes, property taxes, or has some other obligation to pay the government (state, local, or federal), the government will place a lien upon the property and may then file a foreclosure to collect what is owed.
Now that a foreclosure is filed, is it too late to resolve this?
Absolutely not. In fact, once the foreclosure is filed, there are several opportunities to resolve it, and the bank may be even more willing to negotiate with you.
It is commonly known that banks will not negotiate with you when you are keeping your payment current. If the bank is getting paid, why would they agree to reduce your obligation? Banks are out to make money. Negotiating with you to reduce the amount of money they will get is against every bank's instinct.
Should you strategically stop paying the bank? If you do, your credit score will plummet. You may also risk the bank taking very swift action to grab any bank accounts you have at that bank, initiate legal proceedings, or take other action against you. Therefore, you have to very carefully consider this decision, and you should only do so after seeking professional advice.
Should you decide to stop your payments to the bank, you will definitely have their attention. Once the bank is not getting paid, they will send you threatening letters and collection agents will call you at home to try to get you to start paying them. If you continue not paying the bank, they will file a foreclosure action.
The worst thing you can do if you are trying to negotiate with the bank is to ignore the foreclosure action. In Ohio, if a foreclosure is filed in court, you have only 28 days from the day you are served with the foreclosure complaint to file an "Answer" to the complaint. Get a lawyer! An "Answer" is a legal document that requires certain allegations and defenses to be made or you risk waiving those defenses. Unless you are a lawyer, you probably have no idea how to draft and file an answer with the court in such a way as to preserve all of your defenses.
If you do not file an answer, the bank will obtain its foreclosure almost immediately because the court will issue a default judgment against you and quickly order the property sold at auction. Therefore, to hold off the foreclosure process, and to engage in meaningful negotiations with the bank, an answer must be filed.
Once an "answer" is filed, most counties in Ohio have a foreclosure mediation program that homeowners can request. This mediation typically involves a court-appointed, neutral person (the mediator) that will try to assist both the homeowner and the bank to reach an agreed resolution. This might result in a short sale, a deed in lieu, a loan modification, or some other settlement that both the homeowner and the bank agree to in writing. A successful mediation results in the bank's dismissal of the foreclosure.
I tried mediation, but the bank won't agree to settle. Can I do anything?
Absolutely. Due to some very sloppy loan processing practices in the last 15 years, there has been increasing press attention to courts refusing to allow some foreclosures to proceed. Homeowners and their lawyers can effectively halt foreclosure proceedings if there is a problem with the bank's paperwork. Examples of this are:
- Is the bank that initiates the foreclosure the current holder of the loan and the mortgage? If not, the bank may not actually have legal standing to bring the action, resulting in its dismissal.
- Is the bank using "robo-signers" in its foreclosure documents? If so, then the documents may be invalid because they were not properly executed or reviewed prior to filing.
- Are the amounts set forth in the foreclosure case accurate? If not, or if the bank cannot verify their accuracy or properly demonstrate the application of your payments to principal and interest, then a court may dismiss the foreclosure.
There can be many other types of technical defenses that grind a foreclosure to a halt. An attorney with experience in foreclosures can identify those potential issues and work with you to try to reach a proper resolution of the dispute. The key is to involve a professional advisor at the earliest stages to navigate the process and protect your rights.
