LESSON 10: DEFAULTS & FORECLOSURES Flashcards
What is a default in a mortgage contract?
A default is any breach in a contract. Most defaults in mortgage contracts are on the side of the borrower, and they can include nonpayment of taxes, lack of required insurance, or improper use or damage to the property.
What is an acceleration clause in a mortgage contract?
An acceleration clause allows the lender to make the entire loan amount due immediately if there is a breach of contract by the borrower, such as delinquency on payments or failure to maintain the collateral.
What does a tax clause in a real estate loan state?
The tax clause obligates the borrower to pay property taxes in full when they become due. Most loans use escrow accounts to collect taxes month by month, ensuring payment, especially to protect the lender’s lien position.
Why are taxes and insurance important to lenders in a mortgage agreement?
Taxes and insurance are important because if the borrower fails to make the required tax payments, the government could foreclose on the property, and the lender may only receive the sale price minus the taxes owed. Insurance also protects the lender’s collateral in case of damage.
What is a moratorium in the context of mortgage payments?
A moratorium is a delay in payments for borrowers facing a temporary setback, such as job loss or illness. It allows borrowers to pause principal and interest payments for a certain period.
What is forbearance?
Forbearance occurs when the lender chooses not to foreclose due to default, allowing the borrower to work out a plan to catch up on missed payments.
What is recasting a loan?
Recasting a loan involves adjusting the loan terms, such as increasing the monthly payment, extending the loan term, or allowing a balloon payment, to help the borrower manage missed payments.
What is a short sale in mortgage terms?
A short sale occurs when the lender agrees to accept less than what is owed on the mortgage before foreclosure, either forgiving the debt or requiring the borrower to repay the difference through a note.
What is a deed in lieu of foreclosure?
A deed in lieu of foreclosure is when the borrower voluntarily transfers property title to the lender to avoid foreclosure, often with the benefit of avoiding a deficiency judgment. However, it does not eliminate junior lien holders.
What is a distressed property?
A distressed property is one in poor physical or financial condition. It may need repairs, have environmental liabilities, or be running at a loss, and it often requires management to improve its viability.
When should a distressed property be liquidated?
A distressed property should be liquidated when operating it would result in a loss. The property can be sold as-is or after improvements, depending on the expected sale price versus the cost of improvement.
What is the role of an asset manager in managing distressed properties?
Asset managers maximize returns on investment properties, often handling decisions related to the purchase, sale, and financing of distressed properties, such as those received through foreclosure.
Why should market conditions be considered when investing in rental property?
Market conditions like demand, vacancy rates, and inflation affect the profitability of rental property investments. Improvements should only be made after conducting a market study.
What may a market study indicate about property improvements?
A market study may indicate that converting a property for a different use could be more valuable than improving it.
Can improvements make a property profitable even if it doesn’t generate enough net operating income (NOI)?
Improvements may not always generate enough NOI for financing, even if they make the property more valuable.
What is risk-driven remediation in the context of property improvement?
Risk-driven remediation refers to reducing hazards, such as asbestos or lead-based paint, to safe levels for residential use, or converting the property to non-residential use if remediation costs are too high.
When should a distressed property be held?
A distressed property should be held if the net present value of future cash flows exceeds the net present value of alternative investments.
What conditions might make holding a distressed property undesirable?
Conditions like upset tenants or the desire to diversify the investment portfolio may make holding the property undesirable.
What should a lender do if they foreclose on a property?
A lender may not have the managerial experience to run a property and may hire a property manager, who handles day-to-day operations, unlike an asset manager who makes decisions on the sale or financing of the property.
What is foreclosure?
Foreclosure is the legal process where a lender takes control of a defaulting borrower’s property and sells it to recover losses.
When does foreclosure typically happen?
Foreclosure typically happens when borrowers have been delinquent for three to four months and have not worked out a repayment plan.
What is the Notice of Default and Intent to Foreclose?
It is a notice issued by a lender when a borrower defaults, informing them of the intent to foreclose. It is recorded in the public registry, and all parties with a lien on the property must be notified.
What happens in a judicial foreclosure?
In a judicial foreclosure, creditors present their claims in court, and the court orders a public sale of the property.
What is a non-judicial foreclosure?
A non-judicial foreclosure occurs when a lender bypasses the court system, using a power-of-sale clause in the mortgage to take possession and sell the property without a lawsuit.
What are the benefits of non-judicial foreclosures?
Non-judicial foreclosures are faster, simpler, and less costly than judicial foreclosures.
How does strict foreclosure differ from other types of foreclosure?
In strict foreclosure, the lender takes control of the property and sells it without an auction, and the borrower loses both equitable and statutory redemption rights.
What is required for a property to be foreclosed in Texas?
Texas allows both power-of-sale foreclosures and strict foreclosures, but some title insurance companies may require judicial foreclosure before issuing a policy.
What happens if a lender cannot recover the full amount owed in a strict foreclosure?
In a strict foreclosure, the lender cannot seek a deficiency judgment against the borrower if the sale does not cover the full loan balance.
What happens in a foreclosure auction?
In a foreclosure auction, the lender bids the amount of the loan balance and any accrued costs. If no one bids higher, the lender takes ownership of the property.
How are proceeds from a foreclosure auction distributed?
Proceeds are distributed first to the first lienholder, then to second lienholders, and so on, with junior lienholders bidding to recover their claims.
What is a deficiency judgment?
A deficiency judgment is a legal action sought by a lender against a defaulted borrower, guarantor, or endorser when a foreclosure sale does not generate enough money to cover the loan balance and foreclosure costs. It requires the borrower to pay any remaining balance owed to the lender.
What limits deficiency judgments in Texas?
In Texas, deficiency judgments must be brought within two years of the foreclosure sale. The borrower can request the court to determine the fair-market value of the property as of the foreclosure date, and if it’s higher than the sale price, the deficiency claim may be reduced.
What is non-recourse financing?
Non-recourse financing is a type of loan where the borrower is not personally liable for the debt. If the borrower defaults, the lender can only collect the remaining balance through foreclosure. A reverse mortgage is an example of non-recourse financing.
What happens when deficiency judgments are not allowed?
When deficiency judgments are not allowed, the borrower is not personally liable for the remaining balance. In such cases, the loan is considered non-recourse, and the lender can only recover the debt through foreclosure.
What is the difference between equitable redemption and statutory redemption?
Equitable redemption allows a borrower to reinstate a loan by paying the defaulted amount before the auction (foreclosure sale), while statutory redemption allows a borrower to reclaim the property after the foreclosure sale. Texas allows equitable redemption but not statutory redemption for mortgage foreclosures.
What is equitable redemption?
Equitable redemption allows a defaulting borrower or any interested party to pay the defaulted debt (plus any lender costs) before the foreclosure auction to reinstate the loan and prevent the sale. If the debt is accelerated, the full loan amount must be paid.
What is statutory redemption?
Statutory redemption allows a borrower to redeem their property after the foreclosure sale, within a set time period. During this period, the purchaser at the foreclosure sale can collect rents from the property. However, Texas does not allow statutory redemption for mortgage foreclosures, but it does for tax foreclosures.
What happens when there is no statutory redemption period in Texas?
If there is no statutory redemption period or the debtor does not redeem the property during the period, the purchaser at the foreclosure sale receives a deed to the property, free from the debt, but the title transfers as-is. This deed is called a trustee’s deed in Texas.
What is a trustee’s deed in Texas?
A trustee’s deed is the deed a purchaser receives after a foreclosure sale in Texas, indicating they now own the property, free of the original debt. The title transfers as-is, and the trustee, not a sheriff, typically conducts the auction for mortgage foreclosures.
Is debt forgiveness taxable?
Yes, the IRS may consider canceled or forgiven debt as taxable income. However, relief was provided from 2008-2017 for debt forgiveness on primary residences. This relief expired at the end of 2017, so now all debt forgiveness may be taxable unless further relief is granted.
What was the Mortgage Debt Relief Act of 2007?
The Mortgage Debt Relief Act of 2007 allowed homeowners to exclude income from the discharge of debt on their principal residence, including mortgage restructuring or forgiveness due to foreclosure. However, this relief expired at the end of 2017.
Should individuals facing foreclosure consult a professional?
Yes, individuals facing foreclosure should consult an attorney and tax consultant to structure the event in the best possible way, including understanding potential tax implications from debt forgiveness.
