Some Foreclosure Issues Between Landlords and Tenants – Part 2
Some Foreclosure Issues – Part 2
In Part 1, we briefly discussed some issues related to foreclosures, including the effect on the foreclosed owner’s credit record and two possible ways to avoid completing a foreclosure; a short sale and a deed in lieu of foreclosure. In this Part 2 we will cover some issues related to delayed completion of the foreclosure process.
One must also be concerned regarding what happens to a property when the foreclosed owner moves out or otherwise relinquishes control of the property during the term of the foreclosure process, and the completion of the foreclosure process is delayed.
In such a case the property can become a “zombie” property. A foreclosed owner does himself/herself a disservice by not trying to avoid having a zombie property and not attempting to reverse a developing zombie property.
The owner must understand that he/she is still legally responsible for the foreclosed property during the period of the foreclosure process and is liable for ongoing costs such as:
Property taxes
HOA monthly fees and any violation penalties from failing to properly maintain the property
Fines for building code or municipal property maintenance violations
Judgments resulting from lawsuits for injuries occurring on the property
The owner can also be plagued by other problems such as mosquito-infested swimming pools, natural gas leaks, and squatters.
While mosquitos can result in complaints from neighbors and actions by municipal agencies and gas leaks can result in serious property damage and even injury if gas service is not formally discontinued, squatters can be even more troublesome. This is because squatters may engage in criminal and/or dangerous activities, some of which can be detrimental to the owner and/or lender. For example, a meth lab could result in explosion or fire damage or in chemical contamination, or quite likely both damage and contamination.
Accordingly, owners in foreclosure should continue both hazard and liability insurance during the foreclosure period, as certain events could result in lawsuits ending with liability for injury or death. There is a risk that the insurance company will cancel the existing policy if the owner hasn’t arranged for a rider covering a permanently vacant property (if such coverage is available). Cancellation of the policy will result in the lender obtaining hazard insurance. Such coverage will likely only provide hazard coverage equal to the loan value rather than replacement value and not provide liability coverage that protects the foreclosed owner. The policy premium, usually from a lender related company at a significantly higher premium, will be added to what the owner owes the lender.
There are possible other events that would significantly reduce the price at which the lender can later sell the property, potentially resulting in a larger deficiency judgment against the owner being awarded to the lender.
Lenders typically aren’t required to notify the property owner when completion of a foreclosure is significantly delayed. That’s problematic for the owner, as he/she might not realize that he is still responsible for a property while the title is still in his/her name.
Foreclosed owners may not even know that they are still owners, but the public records are very clear that they still own the property. Although they are unaware that they still own the property, they can still be held responsible for numerous types of expenses related to that property. Accordingly it is important that the owner in foreclosure not ignore a property during the foreclosure process.
While the lender will likely send various notices to the owner at the last provided address, the owner should not expect the lender to try to find him/her if the owner has moved during the foreclosure period and left no forwarding address. Even if the owner is easily found, the lender might not make the effort. This means that foreclosed owners shouldn’t just call it quits.
Owners must both stay in contact with the lender and personally follow the status of the foreclosure until it is completed. Owners can and should research public records via the county recorder’s website to monitor the home’s ownership status.
Foreclosed owners who have moved since the commencement of foreclosure should be proactive and make sure they’re going to get information from the lender and anybody else who might want to contact them regarding the foreclosure by providing the information directly to those parties.
Foreclosed owners should also put some effort into preventing the property from falling into disrepair, particularly regarding things visible from the outside such as landscaping. Even if not increasing the chance of a sale during the foreclosure period, certain maintenance may reduce chances of damages or theft of components when the property is obviously abandoned. This will in turn reduce the size of the potential judgment awarded the lender from a lender lawsuit.
Why do lenders decline to complete foreclosures? One reason is that because they’re not on title and don’t want to be.
For the lender, foreclosure usually isn’t making a profit; it’s about minimizing a loss. It’s hard to get the (investors) who own the notes excited about spending more money to execute a foreclosure. Lenders have to navigate the maze of rules and regulations in each state. This results in there being other reasons why a lender may drag its feet such as:
One lender may need to raise cash to meet regulatory guidelines, while another may have too much inventory of unsold real estate on its books.
Corporate cultures and high staff turnover contribute to slow decision-making.
Lenders don’t want to take on the legal and financial responsibilities of owning more properties. As soon as the foreclosure is completed, the lender immediately assumes liability and carrying costs, such as property taxes, casualty insurance, repairs and maintenance, and homeowner association dues.
Lenders are loath to write off losses on unpaid loans.
The process can take a year or longer. By then, the house might have little value. So the lender doesn’t complete the foreclosure, keeping the title in the owner’s hands and creating a zombie house.
By the time the lender is able to get close to having a foreclosure sale done and might actually be able to get the property, the house is worth almost nothing, and the lender may not want it, If the property is in disrepair, it will cost more to get it up to code and otherwise make it saleable than the lender will ever make off it.
Some cities have set up registries of foreclosed or abandoned properties or enacted local laws that require lenders to perform basic maintenance, but enforcement may be minimal or ineffective, leaving the homeowner with few options.
Lenders can take a very long time to complete the foreclosure process on some properties. The entire foreclosure process can take many months, even more than a year. Why do foreclosures take so long?
There are many factors, some the fault of the lender and others the fault of various non-lender parties.
First, delays that are controlled by the lender include not wanting to sell the property in the current market because there are a lot of foreclosures in the area.
Lenders don’t want to overwhelm the market in a particular area with numerous foreclosure sales because foreclosed properties generally sell for less than the current market value. By letting fewer properties go in a certain area at one time, the lender can sell each property for a little more.
Second, the lenders still have a large inventory of foreclosed properties. The lender must handle each property from the default to the foreclosure stage. There are only so many employees and hours in the day to process each and every property.
Third, sometimes properties just get ignored. The paperwork disappears; the lenders weren’t set up for the foreclosure crisis. In some cases, a property was originally funded by a bank or finance company that doesn’t exist anymore. If paperwork gets lost, it can take months or even years for the current lender to learn of the property.
Delays not controlled by the lender can include:
The Courts – Some states use a judicial process. The causes of delays in judicial foreclosure states include backlogged courts due to antiquated systems and judges’ schedules. Or when the foreclosed owner first appears in court for the scheduled hearing, the judge might say that the case is being moved to a different judge and that the earliest hearing date he has is months in the future.
Other Government Agencies – Government officials and agencies cause delays through temporary moratoriums, mandatory mediation sessions, and loan modification or assistance programs for which the owner or the property may not qualify after time has been wasted trying.
The Mortgage Servicers – The foreclosed loan may be serviced by a company unrelated to the lender, adding further to delay. The servicing company that processes monthly payments may be ill-equipped to handle the large volume of foreclosures.
Eventually, the county will receive a deed with the new owner’s name on it and the foreclosed owner will no longer appear in county records as owner of the property.
While foreclosed owners can’t force the lender or any other party that might be causing delays to speed up the foreclosure process on a property, foreclosed owners can and should monitor the process to make sure their names eventually come off the deeds.