What’s in it for a lender to make them want to foreclose on your property? Is it greed? Do they want to stockpile properties? It’s certainly won’t garner them positive publicity. I have worked for several different lenders over my 30 year real estate career and haven’t come across a lender who wants to foreclose on properties.
The main reason for initiating a foreclosure usually come down to a violation of the real estate note, deed of trust or CCR’s, if applicable, that is tied to a property. Many homeowners have not ever read their note, deed of trust (in California) or CCR’s (on planned unit developments where H.O.A. monthly dues are paid) You would be amazed at what nuggets are hidden in these documents that give lenders the authority to initiate a foreclosure. Do yourself a favor and locate these documents and read them.
In short, lenders initiate a foreclosure action to protect , in their eyes, their interest in the property from a perceived threat. Recently USA Today published an article on reverse mortgages that made reverse mortgage lenders sound like outright predators by foreclosing on vulnerable elderly people’s property. The article pointed out some reverse mortgage foreclosure statistics but neglected to explain some of the foreclosures were voluntary, and how others could have been avoided making the article one sided and skewed.
In light of this foreclosure article, I thought I would mention a few of the more common reasons that a lender would initiate a foreclosure on a property.
1. Non payment of the mortgage payment principle, interest and private mortgage insurance. This one is captain obvious. However it is important to note on a reverse mortgage, there are not monthly payments required so this wouldn’t be a reason to initiate a foreclosure for this reason. For conventional loans, it’s the number one reason.
2. Non payment of property taxes. This was one of the reasons pointed out in the USA Today article. Here’s a fact you may not know. Property taxes are the senior lien in the land. If the county in which the property is located decides to initiate a foreclosure action because of past due property taxes, they may give the lender who has a lien on that same property, short notice that they are filing a foreclosure action. What does that mean? If the county tax collector is first to complete the foreclosure action, they do not have to give any lienholder a dime when they sell the property , the county gets all sale proceeds. The lender(s) lose their entire balance. This is a why lenders are so aggressive to start foreclosure proceedings due to non payment of property taxes. By filing a foreclosure action before the county files theirs, they are in a better position to get all or a portion of their loan paid off. So the question begs, why doesn’t the first mortgage pay the property taxes on behalf of the homeowner and tack it onto the balance. The short answer is some mortgage notes do not allow for this.
Important note, USA Today did not properly research and report. Non payment of property taxes can cause not just a reverse mortgage lender to initiate a foreclosure but also a lender who does Conventional loans (forward mortgages) will initiate a foreclosure for non payment of property taxes as well, the USA article does not explain this. Another important note is that reverse mortgages now have a financial assessment process where reverse mortgage applicants need to demonstrate that they are able to make their property tax payments on time. If they can not they may either be denied a reverse mortgage altogether, or the reverse mortgage lender will collect a number of years (calculated by an actuary table) of property taxes, set the funds aside and pay all or a portion of the property tax installments as they come due for the balance of the calculated life of the borrower(s). Loans that were originated prior to 2015 do not have this feature making those borrowers at greater risk, but either way the USA Today article did not mention that the financial assessment is now part of the reverse mortgage qualification process. Revisions to allow non-senior citizen spouses to stay in the property and limits on how much cash in hand a borrower can have upfront were not covered in the USA Today article either. These revisions further protect senior citizens and spouses and have curtailed reverse mortgage foreclosure figures. To be fair, this should have been researched and mentioned in the article.
3. Non payment of homeowners insurance premiums. If you have not paid your homeowners insurance and wildfire destroys your home, you won’t have funds to rebuild your home and will be forced to walk away which also means the lender loses their balance as well. Lenders can add forced place insurance to your loan in the event they find out you do not have homeowners insurance in force and they have methods to monitor your homeowner insurance to make sure it stays in force. However, the forced place coverage is limited, expensive and it is not designed to be long term, therefore giving lenders the right to initiate foreclosure action if standard fire insurance coverage isn’t purchased by the homeowner at some point in time.
4. A planned foreclosure can occur when the borrower’s family decides it’s best to let the lender take the property in lieu of them selling it. This type of transaction bloats the foreclosure statistics since it’s included with all other foreclosure numbers. The planned foreclosure is more of an amicable agreement between the borrower(s) and the lender, and may be in the best interest of both. For example, on a reverse mortgage, when all borrowers on title have passed away and the mortgage balance is greater than the property value, the heirs or estate may not want to go through the process of selling the home with a negative value, so they can execute a deed in lieu of foreclosure document, or allow the lender to foreclose to get title to the property so they can sell it and payoff the mortgage balance. This type of necessary foreclosure happens more often on a property with a reverse mortgage and was not explained in the USA Today article.
There are several other reasons why a lender may initiate foreclosure actions on properties, read your note, deed of trust (in California) and if applicable CCR’s for more information. But just keep in mind due to attorney fees, loss of interest income and negative publicity, not to mention the havoc it causes on borrower families, a lender doesn’t really want to foreclose on a property unless it’s their last option.