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Noel and I and other professionals conduct monthly seminars in a series called "Negotiating The Real Estate Maze" at the Summit on the Park. Last night our second seminar "Foreclosure May Not be Your Only Option" drew an enthusiastic audience. All agreed there is a plethora of information on foreclosures out there on the web and elsewhere but very few could find sources containing specific details pertaining to foreclosure laws in Michigan.
Our presentation was in two parts. The first was from an article in "Today’s Buyer’s Rep" March 2007 issue titled "Anatomy of a Foreclosure". The second part of our presentation outlined the details of foreclosure law as it pertains to Michigan. For more on foreclosures click here.
Here are the two parts of the presentation:
Part 1) Anatomy of a Foreclosure – The process differs from state to state.
Stage 1: Pre-foreclosure
When homeowners default on their mortgage, their property is considered to be in a state of pre-foreclosure. Lenders are typically quick to respond to that first late payment, beginning with phone calls to the borrower.
How the foreclosure process actually proceeds from this point forward varies greatly from state to state. For example, it’s important to know how your state determines property ownership prior to foreclosure, since this largely dictates which steps will be taken and how long they will take. In lien-theory states, the deed is held in the borrower’s name, and a lender will need to place a lien on the property by means of the mortgage instrument. While specifics vary, lien-theory states tend to favor borrowers because they usually require that a judicial action be taken against borrowers, which typically requires more time.
In title-theory states, lending institutions hold title to the property, while borrowers receive a deed of trust. Until the loan is paid in full, the title remains in the lender’s name. Title theory tends to benefit lenders because it usually doesn’t require a judicial action to move towards foreclosure.
A third form, intermediate theory, combines lien and title theory, placing ownership between the borrower and the lender. The borrower’s name appears on the title as owner, as in lien theory, but upon default ownership immediately transfers to the lender.
From the Home-owner’s Perspective:
During pre-foreclosure, homeowners are very likely to feel embarrassed and threatened by the phone calls and letters they begin to receive from their lender. It is generally true, however, that lenders are more interested in devising workable solutions than continuing the foreclosure process. Troubled homeowners should be encouraged to respond to their lender-if they don’t the problem will only get worse.
Homeowners typically have many more options available to them for working out of a difficult situation if they contact their lender sooner rather than later. In fact, some remedies may only be available in the early stages of delinquency. Explaining to the lender why payments have fallen behind-whether it’s a short-term issue like a job loss, or something more permanent, like a long-term illness which prevents full-time work-will go a long way towards finding a cooperative solution with the lender. Perhaps the homeowner can make partial or interest-only payments for a while. Or maybe the loan can be reconfigured into a new program that requires a smaller monthly payment.
During the pre-foreclosure period, owners in financial distress may also receive inquiries from private investors. Because pre-foreclosure properties are publicly registered, it’s not difficult for potential buyers to identify distressed owners and make direct contact with them. Are these offers worth considering? It depends. Some offers to get out of debt are blatant fraud attempts. Owners should never feel pressured and certainly shouldn’t sign any papers without first having them reviewed by their attorney.
However, if the owner can negotiate an attractive solution with a legitimate private investor, this option is certainly better than letting the situation move into foreclosure, which generates a black mark on the defaulting owners record, seriously constricting their future access to mortgage financing or other forms of credit.
During the pre-foreclosure period, if the owner doesn’t send payments to the lender or otherwise attempt to resolve the situation, the lender will issue a formal notice of default (NOD), specifying a time period with in which the owner can reclaim the property by paying the past-due amounts in full, or the loan balance. These redemption periods vary by state, but frequently span 90 days. If the terms of the NOD aren’t met by the specified deadline, a notice of sale will be issued, which officially moves the property into the final stage of foreclosure.
From the Buyer-Investor’s Perspective:
Buyers may find that properties that are in the pre-foreclosure period are attractive investments. While it’s unlikely that a highly discounted price can be negotiated, especially for desirable properties, there are several advantages to purchasing at this stage. First, there may be less competition from other investors before the property is put up for public sale. Secondly, if you’re sensitive to the owners situation and approach them on your buyer-client’s behalf in the right manner, you’ll improve the odds that a cooperative agreement can be reached, eliminating many of the problems and uncertainties that make purchasing foreclosure properties in auction sales such a risky business. Owners will be more receptive to win-win solutions that truly help them at a difficult time, rather than take advantage of their misfortune. If you’re able to engage their cooperation early on, you’ll also be more likely to gain access to the property for inspection purposes and be able to discover what, if any, encumbrances may exist.
Stage 2: Sale/Auction
Following a notice of sale, a lender typically lists the foreclosure property for sale at auction. The timing and procedures of these sales vary by state and, to some extent, sales terms will be determined by the lender. For example, an auction can occur through a public sheriff’s sale, or through a private party. Some lenders may even opt for a short sale, which means the property is sold for less than the amount of money owed, simply to remove a non-productive asset from the books.
From the Home-owner’s Perspective
In many states, once the notice of default has been issued, the distressed owner has run out of options. In some instances, however, the bank will still want to work something out. Also, some states call for a right of redemption period after the sale, giving the foreclosed owner up to 365 days to recover their property. In these cases, a new buyer is issued a bill of sale-not a title-and runs the risk of losing the home until the end of the redemption period, unless the lender is able to purchase the foreclosed owner’s right of redemption.
From the Buyer-Investor’s Perspective
Frequently, the best bargains in distressed properties can be found at the sheriff’s sales, although numerous pitfalls can be encountered. First, it’s fair to say that the buyer probably won’t have complete information about what they’re purchasing. Because defaulting owners frequently still occupy the home at this point, and are not likely to open their doors to show anyone around, you won’t be able to see beyond the exterior, much less bring in inspectors. In this type of sale, there are no requirements to disclose flaws: properties are sold “as is”, without any warranties.
It may also be difficult to determine if there are any old debts that could surface later as liens on the title. For example, you may become obligated to settle with the contractor who put a new roof on the home, but was never paid. And if the owners are still in the home, you’ll have to contend with the awkward business of evicting them facing the additional risk that they will damage the property before they vacate.
Another challenge can be paying for the home. Usually, public sales require cash payments, meaning that your financing will need to be in place well in advance of the auction.
Stage 3: Real-Estate Owned (REO)
If a foreclosure home does not successfully sell at auction, it moves into the lender’s inventory and is considered a real-estate owned (REO) property. Generally speaking, lenders don’ like to hold non-performing assets, especially ones that require upkeep and maintenance, so they may be motivated to sell. At the same time, lenders still want to maximize their profits and are unlikely to accept deep discounts.
From the Buyer-Investor’s Perspective
Buying foreclosure property at the REO stage is typically the easiest and most straightforward approach, especially for investor-buyers new to foreclosures. Many of the risks that are present at the auction stage have now been eliminated. However, the potential return on investment has also been reduced. On the other hand, expenses such as taxes and liens, that aren’t generally covered in an auction sale, may be covered by the lending institution in a REO sale.
If the home is held by a smaller bank, you may be able to negotiate a purchase directly with the lender. It’s more likely, however, that you’ll be working through an outside real estate representative who has been retained independently by the bank.
Part 2) Foreclosure Basics For Michigan
1) Lien Theory vs. Title Theory
Michigan is a lien theory state.
2) Judicial vs. Non Judicial
In Michigan we have both available but 99% of the time we are going to be
Non-judicial. Also known as Foreclosure by Publication or Foreclosure by Advertising.
Judicial takes more time. Mortgage gives lender the right to take over the house.
3) Possible Options for Homeowners / Borrowers
a) Work Out Plan or Forbearance
Lender forgives or relieves borrower of payments for a number of months (usually 3). This is a temporary measure to try to get borrowers back on their feet. There is no standard among lenders. Sometimes they tack on the payments to the back end of the mortgage. Sometimes they add it to the principle
b) Deed-in-lieu (of foreclosure)
Instead of foreclosure. Borrower gives the lender the deed so they don’t have to waste time with foreclosure process. In this case borrower gives up their redemption period. Careful…lender may forgive the mortgage but not the note (promise to pay). Usually lender requires history of property being on the market. Borrower will usually get a 1099 for the forgiven debt. Lenders don’t have to disclose this to client and many times it comes as a surprise. The best way to accomplish this is to find the lender’s “Loss Mitigation Specialist” (almost every lender has one). Talking to other lender departments can be very frustrating. The typical lender has many departments that don’t often talk to each other so borrower gets churned through their system.
c) Cash for keys/deed
Sometimes the lender will make a money offer to shorten the redemption period. This will reduce their carrying costs. Borrower usually gets 1099 in this case. Similar to Deed-in-lieu. Lender may not offer this but you can offer it to lender.
d) Short Sale
Lender forgives a portion of the debt if sale price is less than what is owed, otherwise known as an upside down situation. Sometimes sale price is less than what property is worth. Can do short sale anytime before end of redemption period. Borrower usually gets 1099 for forgiven debt. Short sale can happen any time. You don’t have to be in the redemption period. Every lender is different as to what they will allow. Sometimes you can negotiate with them if you have missed a few payments and you can establish you will have a hard time making them up. Usually have to prove hardship to the lender.
Contact your attorney and/or financial advisor to learn which option (Deed-in-lieu, Cash for Keys, or Short Sale) is the best.
e) Foreclosure
Borrower just gives up the house and lender takes it back and puts it on the market for sale. Lenders can’t start redemption period until 30 days after borrower fails to make payments. In reality lenders usually take more than 30 days to give notice of default ( NOD ). In many cases they have taken 60 to 90 days or more.
Foreclosure Steps and Other Options After NOD
1) Public Notice – For the purpose of informing the borrower. Has to be done in the county where the property is located. Have to put in newspaper once per week for 4 consecutive weeks prior to Sheriff’s Sale. Usually posted in Detroit Legal News, Oakland Press. Also published in County Sale Website. Within 15 days of publication the property must also have a posting attached to it with all information regarding Sheriff’s Sale.
2) Sheriff’s Sale – Before the redemption period. When the lender forecloses they take it to court for sale. Usually happens in court or on courthouse steps. Anyone can participate in these sales. Lender decides on minimum bid price which usually includes all their costs and fees. Highest bidder gets Sheriff’s Deed. Deed will not go into effect until after the redemption period is over and borrower fails to redeem property. Can’t get a mortgage on these. Cash sale only. No disclosures required. No inspections allowed after the sale. You buy as-is and buyer pays for certificate of occupancy and any city requirements to bring property up to code. Title may not be clear. Do homework before executing this sale. Sheriff’s Deed will include interest that will be paid to winning bidder if borrower redeems property. A word of advice – attend a Sheriff’s sale before you get involved.
3) Redemption Period – After the Sheriff’s sale the borrower is granted a period of time to redeem property by making the back payments. If not sale goes to highest bidder.
i) 15 Days – for abandonment only. Vacant is not the same thing as abandonment. If there is a for sale sign on the property it could be vacant and not abandoned. Lender has to post property, send notice to last known address of borrower. If borrower does not respond within 15 days the redemption period expires.
ii) 6 months – If borrower has paid less than 1/3 on their note at time of default.
iii) 1 Year – If borrower has paid more than 1/3 on their note at the time of default or if the property is more than 3 acres in size.
4) Tenant’s rights – Tenants must move out at Sheriff’s Sale. Mortgage and note takes precedence over tenant’s rights. Lender is first lien holder. Tenant should contact their attorney to find out what to do with regards to rental payments. Some landlords pocket the money and don’t pay the mortgage so the lenders want the tenants out immediately.
By Lee Bittinger