Defaults and Foreclosures

Question 1

Name three common types of default

Answer 1

Failure to meet an installment payment of the interest and principal.
Failure to pay taxes when they are due.
Neglecting to pay hazard insurance premiums.

Question 2

What does the Housing Act of 1964 require?

Answer 2

Requires that lenders provide relief in circumstances where the default is beyond the borrower’s control.

Question 3

What is a moratorium?

Answer 3

A temporary or permanent, partial or full waiver of mortgage payments that the lender grants to the defaulting borrower.

Question 4

Define recasting.

Answer 4

A redesign of a loan by changing the terms, either temporarily or permanently. Lenders can change terms such as interest rate, amortization period or payment amount.

Question 5

Describe the difference between equity of redemption and statutory redemption.

Answer 5

The right to redeem property between the time of the default and the foreclosure sale is equity of redemption.
The right to redeem the property after the foreclosure sale has taken place is statutory redemption.

Question 6

What is a deficiency judgment?

Answer 6

Any outstanding debt remaining after foreclosure and sale of a property.

Question 7

With a judicial foreclosure, when is the Deed of Conveyance issued and who issues it?

Answer 7

The sheriff will issue a Deed of Conveyance if the debtor does not redeem the property within the redemption period.

Question 8

What does the FHA expect a lender to do at the foreclosure sale for an FHA-insured property if the bids are less than the loan balance?

Answer 8

FHA expects the lender to bid on the debt, take the title, and present it to the FHA along with a claim for insurance.

Question 9

What kind of redemption rights does a defaulted borrower have under a power-of-sale foreclosure?

Answer 9

The borrower has the right to redeem the property between the notice of sale and the actual sale (equity of redemption). But there is no statutory redemption period with a power-of-sale foreclosure.

Question 10

In a non-judicial foreclosure sale, the new purchaser will receive a trustee’s deed to the property. But what potential problem exists?

Answer 10

There is no guarantee that the title is clear. There may be some outstanding liens still in effect, such as a federal tax lien, real property taxes or assessments, or a valid mechanic’s lien.

Question 11

What is the disadvantage of a strict foreclosure?

Answer 11

There is no clearly established value for the property because there is no public auction. The lender’s losses cannot be established and there are no deficiency judgments with strict foreclosures.

Question 12

Which form of bankruptcy is the least favorable to a lender?

Answer 12

Chapter 11 bankruptcy is the least favorable because the lender may find that the security is tied up for years during the reorganization process.

Question 13

A default is

Answer 13

a failure to carry out a contract, agreement, or other obligation, especially a financial obligation such as a note. A mortgage default can result from any breach of the mortgage contract.

Question 14

The most common default is

Answer 14

the failure to meet an installment payment of the interest and principal on the note

Question 15

Other defaults include:

Answer 15

Failure to pay taxes when they are due.

Neglecting to pay hazard insurance premiums.

Question 16

Failure to pay taxes or insurance premiums

Answer 16

could cause the lender to state that the full amount of the loan is due and payable (acceleration). If the borrower can’t meet the requirement for full payment, the lender can bring an action for foreclosure.

Question 17

Some loans also have stipulations regarding property upkeep

Answer 17

In some cases, failure to keep the collateral in repair may constitute what is called a technical default.

Question 18

The term workout is used to describe

Answer 18

the activities that a lender will undertake to deal with a borrower who is in financial trouble.

Question 19

There are a number of alternatives that a lender can consider in a workout. They include:

Answer 19

Forbearance or moratorium
Restructuring the mortgage loan
Transferring the mortgage to a new owner
Deed in lieu of foreclosure
Friendly foreclosure
Prearranged bankruptcy

Question 20

Forbearance or moratorium

Answer 20

The lender may choose to waive mortgage payments temporarily or even forgive all or some of the payments. A moratorium is usually one of these four types: waiver of principal payments, deferred interest, partial payments or prepayments.

Question 21

Restructuring the mortgage loan

Answer 21

The lender can redesign the loan through recasting (changing the terms such as interest rate or payment amount) or extension agreement (extending the amortization period for the remaining principal).

Question 22

Transferring the mortgage to a new owner

Answer 22

The defaulted borrower may be able to find someone who can purchase the property and either assume the mortgage or take the property “subject to” the existing mortgage.

Question 23

Deed in lieu of foreclosure

Answer 23

The lender may make or accept an offer to take the title to the property back from the borrower (also called voluntary conveyance).

Question 24

Friendly Foreclosure

Answer 24

The borrower accepts the jurisdiction of the court, gives up any right to declare any defenses and claims, relinquishes the right to appeal or argue with any judgment that is given, and otherwise agrees to cooperate with the lender in the litigation.

Question 25

Prearranged Bankruptcy

Answer 25

The borrowers and all their creditors agree in advance to the terms on which they will turn the assets over to the creditors in exchange for the release from the liability.

Question 26

A foreclosure is

Answer 26

a legal procedure in which the property that is used as security for a debt is sold to satisfy the debt in the event of a default.

Question 27

During the period after a default and before a foreclosure sale, the borrower has a right to

Answer 27

reclaim the property that was forfeited due to the mortgage default. The borrower can claim the property by paying the full debt, plus any interest and costs. The right to redeem property between the time of the default and the foreclosure sale is called the equity of redemption right.

Question 28

Once the foreclosure sale has taken place

Answer 28

any right to redeem the property is known as the right of statutory redemption.

Question 29

A judicial foreclosure allows a property to be

Answer 29

sold by court order after sufficient public notice. Most lenders will seek a judicial foreclosure when they want to get a deficiency judgment, which is any outstanding debt remaining after the foreclosure and sale of a property.

Question 30

A non-judicial foreclosure is also known as

Answer 30

a power of sale. With this type of foreclosure, a lender or a trustee has the right to sell the property without spending the time, effort and money involved in a court foreclosure. This form of foreclosure eliminates the statutory redemption period that is allowed in the judicial foreclosure process.

Question 31

Using the strict foreclosure method, a lender could get

Answer 31

ownership to a property that has a value above the loan balance. The problem with strict foreclosure, however, is that there is no clearly established value for the property because there is no public auction. In this case, the lender’s losses cannot be established. There are no deficiency judgments with strict foreclosures.

Question 32

Many people believe that if they lose their home in a foreclosure, they will owe no taxes

Answer 32

This is not necessarily true. As far as the IRS is concerned, a foreclosure is considered a sale. If the amount of the defaulted loan exceeds the tax basis of the property, the IRS considers that there has been a gain.

Question 33

The potential for bankruptcy under Chapters 7, 11 and 13 of the Bankruptcy Code affects

Answer 33

the value of real estate as collateral.

Question 34

The objective of a Chapter 7 bankruptcy is to

Answer 34

liquidate the debtor’s assets and distribute the proceeds among the various creditors. A lender will normally be paid in full if the value of the property is more than the balance due under the mortgage.

Question 35

A Chapter 11 bankruptcy is available to

Answer 35

owners of a business and looks to safeguard the debtor’s assets while putting together a plan of reorganization. Chapter 11 bankruptcy proceedings should be a great concern to lenders who may find that their security is tied up for years during the reorganization process.

Question 36

A Chapter 13 bankruptcy is known as a

Answer 36

“wage earner proceeding.” This plan is designed for the rehabilitation of the debtor. The funding of the plan is designed to come from future wages and earnings of the debtor. During the period covered by the plan, creditors must accept payments as they are provided in the plan and may not seek to collect their debts by other means.