Foreclosures

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A foreclosure is a legal process by which the lien holder (i.e. a bank or other holder of a mortgage on a piece of real property) takes possession of the property. Normally the property was used as collateral at the time of purchase to satisfy the unpaid debt of the borrower. If the borrower doesn’t pay, the lien holder gets the property. Generally  the mortgage document outlines the procedure for this.

There are two basic types of foreclosure: a judicial foreclosure, which results from a lawsuit and is carried out as a result of a court judgment, and a non-judicial foreclosure, which is sometimes called a “trustee’s sale.”  According to RealtyTrac, both are permitted by Arkansas Law and are used equally in Arkansas. These are the so-called sales of properties on the courthouse steps.

The trustee sale can occur if the mortgage document is a deed of trust with a power-of-sale clause. The latter allows the lien holder to initiate foreclosure proceedings without going to court, thus this process is generally less time-consuming and costly. If a mortgage document doesn’t have this power-of-sale clause, the lien holder must go to court to initiate foreclosure if attempts to satisfy the defaulted mortgage are unsuccessful.

The Foreclosure Process

There is a process to foreclosure which, according to the Mortgage Bankers Association, may take approximately one year from the time of the first missed payment to the foreclosure sale.

The following are typical steps in the process:

1. Pre-Foreclosure Period—begins when the borrower notifies the lender that he cannot make his mortgage payment. The lender may suggest remedies to bring the borrower up to date on payments. If the borrower cannot pay or bring his account out of default, the short sale process may begin, whereby the borrower puts the home on the market. This phase may last for several weeks as long as something positive is happening and is the window of opportunity for implementing prevention of foreclosure techniques, including short sales.

2. Default in Payment—when a borrower is 14-30 days late, a late notice from the lender is delivered and a late fee is assessed.

3. Notice of Default—when a borrower is 30-45 days late, a letter is delivered, which basically says, “Pay or else within 30 days.”

4. Loan Referred for Collection—when the borrower is 60-90 days late, a local attorney or the foreclosure department of the financial institution begins the foreclosure process. At this point the financial institution may no longer be willing to work directly with the borrower and will refer them to the Trustee or Attorney.

5. Public Notification—notice of the pending sale or auction is posted. The location and time, as well as the terms of the sale are generally stated in the announcement. The norm is for the purchaser to place a deposit of approximately 10% and close within 30 days or forfeit the deposit.

6. Trustee’s or Sheriff’s Sale or Auction—90-120 days after the borrower first notifies his lender that he cannot make his payment. The sale is made or the the lien holder takes possession of the property. The latter occurs if there are no bidders or if the bids are not sufficient. When the lien holder takes possession of the property, it is said to be Real Estate Owned (REO) and becomes a part of the liabilities of the financial institution.

7. Property Listed with Realtor—potential buyers may find such properties in the local Multiple Listing Service (MLS).

The person within the financial institution, who is responsible for the property and for getting the property listed and sold, is called the Asset Manager.

Factors Contributing to the Rise in Foreclosures


There have always been some foreclosures, but the large number now is due to a number of factors relating to the current economic recession and to the housing boom of recent years.

The recession has caused many people to lose their jobs, and because the real estate market is directly tied to the job market, a rise in unemployment has had an adverse effect on the housing market. New jobs are needed to create the need for new homes, and if people are losing their jobs, the need for housing diminishes. It is estimated that 1-2 new jobs are needed to create the need for one more house. People who lose their jobs may not have savings or other sources of income to be able to continue paying their mortgage.

Increased debt including credit card debt and installment loan debt has been continually increasing for a number of years, as have interest rates on those loans. With increasing indebtedness, it becomes more difficult to pay one’s mortgage in addition to credit cards, etc.

Predatory lending during the recent housing boom has also had an effect. What happened was that lending standards loosened significantly so that loans were approved for borrowers that didn’t have the necessary financial resources to meet the obligations of the debt. There were “zero down” lowns,” “no-doc” loans, and other loans issued to people who should never have been approved for a mortgage because of their bad credit.

In addition, because of their uncreditworthiness, many lenders approved them for adjustable-rate mortgages (ARMs) which had low initial rates, but after a few years increased to significantly higher interest rates that the people could not afford. The result was that people who got those loans could no longer make their house payments.

Because the housing bubble burst, there are now millions of homes nationwide which are now worth less than the loan amount owed on the home. This is also true in NW Arkansas. Here the market turned in 2006 generally, so that people who purchased at the peak of the market just before then are now “upside down.” Particularly in cases where people must move for one reason or another, it is difficult, if not impossible to sell their home without coming to the closing table with additional funds (i.e. they have to pay to sell their home). Most people cannot do that and are forced either to rent out their home or walk away from it and let it be foreclosed upon. Unfortunately, most of the competing homes on the market are foreclosed homes, which are typically sold “below market” thus driving prices down even further.

Adding to the problem is a high inventory of homes for sale (i.e. there are many homes on the market). During the boom, lots and lots of new homes were built and then the market “turned.” About the same time the recession hit, and banks quit lending money as freely as they had in the past. These two factors caused a decrease in the number of buyers, so in many areas, home sales came to a screeching halt or slowed significantly.

The situation now is that there is a so-called “buyer’s market,” where in the boom years there was a “seller’s market.” The National Association of Realtors® estimates that 6 months of inventory of homes creates a neutral market, meaning that there is a more or less equal number of buyers and sellers, which causes the price of real estate to remain static.

A buyer’s market occurs when the inventory exceeds six months, which causes prices to go down, making it more favorable for buyers than sellers.

A seller’s market is when the inventory of unsold properties is less than 6 months’ worth, creating competition among buyers for the same properties and causing prices to rise. A seller’s market usually occurs when the economy is growing and there are more jobs than applicants.

The current buyer’s market is bad news for sellers who are upside down and need to sell their home quickly because of some of the factors described above. There are fewer buyers out looking for homes, and prices have declined.