Foreclosures

First, let’s talk about how a house ends up in foreclosure. Next week we can talk about how you can take advantage of a foreclosure situation or a tax lien.

In an incredibly timely and kismet-like fashion, this article appeared in my news feed this morning on an impending foreclosure.

I was irritated by the headline which positioned the homeowner as a victim of an impossible situation; this is more dramatic storytelling than actual news. Potential investors and future homeowners should not decide to not buy real estate because the bank can just take the house away on a whim, which is the implication of the headline. It is not as simple as they missed one payment and therefore the bank gets their house.

Based on the tax records, this house was purchased in 2003 for $470,000. Before the big market crash in 2008, one could make real estate magic. You could buy with no money down, stated income and borrow more than the purchase price, walking away with a little extra money in your pocket.

The house is now in contract at more than double the original purchase price. Likely that the sellers didn’t qualify to refinance when interest rates were dirt cheap in 2013 or even last year when they dropped below 3%. In theory, they should have plenty of equity.

If you dig deeper into the article and the lawsuit, you’ll find that they didn’t just miss one payment and then make it up, they stopped paying altogether while attempting to get loan modification and ended up with $150,000 in fees. They took the advice of the customer service representative they were talking to, and didn’t get it in writing. This is akin to getting into a dispute with your credit card company and not paying while you try to sort it out, and maybe the $18/hr customer service rep on the other end of the phone or that guy at the offshore call center said not paying was a good idea, but you may wish to seek actual expert advice. Ask a few people, talk to a lawyer or another expert.

This mortgage company has a reputation for shady & disorganized dealings, and I don’t doubt that there is plenty of blame to go around as to how it ended up in foreclosure.

In conclusion- as with anything: buyer beware, even when getting a mortgage. In this case their mortgage was bought out by a disorganized company with shady practices. You should always make all the payments and if you miss one and can’t afford to make it up, it might be your moment to get a second job and figure it out, hustle to get your credit up so you can refinance or prepare to sell your house.

So you want to buy a house, but the idea of foreclosure gives you the heebeegeebees? This is what you need to know:

Direct from Investopedia:

1. Under normal circumstances, the number of payments you can miss on your mortgage is four before the foreclosure process begins, but this also depends on several factors, including your lender's particular policies and the housing market.

2. During the COVID-19 pandemic, the federal government has protected mortgages insured by the Federal Housing Authority (FHA) or backed by Fannie Mae or Freddie Mac against foreclosure for 60 days.12

3. Your Lender's Policies

Your Lender’s Policies: The practices and policies of your specific lender will affect how long you can go without paying before being forced into foreclosure. If your lender has a large portfolio of low-risk loans, it may be more lenient regarding missed payments or might make allowances to individual borrowers. Often, such a lender will forgive an occasional missed payment and may not refer your situation to the housing authorities until you continue to miss more payments.

If the lender has a portfolio of high-risk loans, the possibility of foreclosure proceedings beginning even after just two missed payments is higher. Even if you are a low-risk borrower, the proceedings may be triggered by standards due to the overall default risk of the mortgage pool owned by the lender.

All that aside, the best plan is to not get into this situation in the first place. Don’t use your house like an ATM. Don’t overextend or get crazy leveraging your real estate asset(s). And live within your means, always. Prioritize your bills and keep your expenses reasonable and always get a second opinion. I know things happen, things can go wrong, so save for a rainy day when you can, like now, because you never know what tomorrow will bring. The fear of investing in a home is legitimate and real, but homeownership is a much safer bet than planning to be a life-long renter and paying down someone else’s debt. Statistically speaking, you are far more likely to be evicted than foreclosed on.

Want more expertise?

Meghan Deihl, one of my favorite East Bay Realtors, was there when it all went down. She earned her real estate license in 2001, watched it all happen first hand and is an expert in the foreclosure crisis.

Meghan had this to say about the foreclosure crisis from 2008-2012:

I met these people- hundreds of people - during the foreclosure crisis. Some of them were exactly what you’d think, and they just really got screwed by the mortgage industry- they really did, they tried everything they could; loan modification, refinancing, short sales- but they couldn’t get approved and were eventually foreclosed on. But some people played the system. They lived in beautiful homes without paying a dime for 16 to 18 months - or even longer - and drove away with “cash for keys” payments in the Hummer that they bought with the money they got from a HELOC they got at closing table when they bought the house, and were towing the trailer with the jets skis that they also bought with the HELOC that they never made a single payment on. They drove away laughing. Laughing that they played it. Laughing that they played the system and won. They lived for free and bought fun toys on an equity line they never paid. And the final play of the game was cash for keys.

This is an extreme example, but not uncommon. It happened. I saw all the different variety of emotions and all the things that led up to foreclosure. Yes, in many cases banks took advantage, but in other cases, people gained from the foreclosure crisis. People got stated income loans with 103% financing and were able to get an equity line of credit on the house too. Some borrowed up to 110% of the home value if not more.

But back to our victimized dancers in Oakland. How did they get from there to here?

Chris Mason, a lender with Freedom Mortgage, had this to say about it:

There's a *lot* more to the story.

People with loans serviced by SPS tend to have very convoluted/complicated stories (no value judgements here, I'm not saying "bad," merely "complicated"), I've spoken to an unusually high number of folks with loans serviced by SPS since March 2020, and I don't necessarily think I was aware that SPS even existed prior to that. I think SPS buys up a lot of "alternative documentation" type loans, often from the pre-2008 vintage (presumably they are paying a discounted price for these loans, characterized by a) lots of equity and b) people who can't refinance the higher old-school rate for a lower current rate), judging from those conversations. I have absolutely no insight into this particular case, but based on that pattern with SPS, I know the story is likely to be highly convoluted.

Another characteristic of SPS is that, when it comes to forbearance relief and existing forbearance, they tend to offer the bare minimum required by law. They aren't offering all the above/beyond/extra stuff that all the big banks and more normal loan servicers have been (to their credit) voluntarily offering.

I think maybe 1 or 2 people, out of the whole bucket of them, that I've spoken with, actually qualified for the refinance. A lot of them had been struggling even pre-COVID, that was the final nail.

Next week we will talk about how to find foreclosures & tax liens in the Bay Area.