Foreclosure 101

Bankruptcy may be the solution to mortgage foreclosures. A bankruptcy lawyer can assist a debtor in understanding to foreclosure issues, or negotiate with a lending institution.

The volume of foreclosures is still great. Certain foreclosure procedures are not followed as a shortcut to taking back the home from debtors. Mortgage loans used to be done locally, letting parties work out difficulties in person. Now some lenders do not originate the loan and hold it. Some banks distribute loans by selling the note and the mortgage that secures it to another lender.

Many lenders are using note sales as a way of getting rid of distressed loans secured by real estate. The note is sold at a discount to a buyer who gets the note at the reduced price or wants to acquire the real estate securing the note.

In a distressed note sale, the lender sells the note and mortgage covering the real estate as opposed to foreclosing the mortgage after default and selling the real estate. The note sale lets the lender to get back losses without the time and expense of foreclosure and resale of the real estate in an auction. The buyer takes over the lender’s shoes under the loan, and after closing, can exercise the lender’s remedies under the loan documents for a borrower default, including real property foreclosure.

The lender sells the note to the buyer “as-is”. The buyer gets whatever is there. There are few representations and warranties and without the buyer cannot sue the lender if the borrower fails to pay the note. The buyer will conduct due diligence on the loan documentation and financial ability of the borrower and any guarantors to perform on the loan. The buyer will conduct due diligence on the real estate. The buyer may ask the borrower to execute an estoppel certificate to confirm agreement on the loan balance and payment obligations.

On the real property, the note buyer will review updated title work to make sure no liens have been filed against the real property. The buyer will determine the environmental condition of the real property.

In the foreclosure process, the first lender ensures the mortgage is recorded in the county real estate records. When the loan and mortgage are sold, there may not be a record in the real estate records. The loan and mortgage will be registered with an entity called MERS, a tracking system. The buying and selling of loans and mortgages create chaos when a debtor behind in payments may not get to the right party to negotiate a refinance or loan modification. Bankruptcy may be the answer to save a person from losing a house because, in bankruptcy, foreclosure proceedings are stopped by the automatic stay, and who the creditors are get clarified.

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