What to Expect When You Let the Bank Take Back the Property. Print E-mail
Written by Kerry S. Doolittle   
Monday, 09 January 2012

The facts of life in this depressed economic times force many of us to face a circumstance never imagined, losing property in a foreclosure.  Through loss of job, diminishment of income, property devaluation, inability to sell property, many are forced to face losing property.  It may be your home, a rental property, a business property, a vacation condominium.  What to expect when that happens?  How to deal with your bank?  

Whether losing the property is a choice made to stop paying when you realize that you simply cannot pay the loan and meet your other financial needs, or losing the property snuck up on you with a late payment here, a missed payment there, always slipping a little while you tried to keep up, the circumstances in which you find yourself will be similar to what others experience.

When you miss a payment, you will usually receive a form notice that the payment was not received, please pay the installment and late fee.  After that, the letters may escalate in the urgency of their tone, but all are form letters basically saying the same thing, pay up or dire consequences may result, i.e. foreclosure. 

The dunning calls typically follow as the first official collection effort.  This is where the Bank uses person to person contact to encourage you to pay something on the loan.  The collector may ask for payment, demand payment, offer easy ways to pay now over the phone, cajole, harass, make you feel guilty, and even threaten.  These practices are similar for collecting any type of debt.  What you need to remember is that you are not required to speak to collectors and they generally need to comply with the Fair Debt Collection Practices Act (FDCPA), which means for example they should not use abusive or foul language toward you.  The FDCPA is the subject of another article.  The best way to handle these dunning calls is to end them as quickly as possible by insisting that all communication be done in writing and to a specific address.  You can insist on mailed communication or you might offer email if you dare.  If the collectors keep calling, then send a drop dead letter to the lender.  See the related article.

To better understand how circumstances will progress from that first missed payment to foreclosure and beyond, it helps to know a little about how Banks think.  Banks follow procedures and policies.  The first concern of a Bank is federal regulators.  A bank must maintain a fiscal balance or the regulators kick in with bad consequences for the Bank’s bottom line.  To keep this simple, a good asset is a secured loan in good standing with adequate collateral and excellent prospects of being paid back over time.  A bad asset is a loan where the security is impaired or absent, with in default standing, and poor prospects of being paid back.  The Bank is trying to keep as many good assets as possible and avoid bad assets whenever possible.

When a loan goes into default, the Bank’s first intent to collect payments and keep the loan from going bad.  The Bank does not want to move that loan out of the good column and into the bad column.  Once the Bank realizes that the loan is genuinely in distress, not just a missed payment or a temporary problem, then the Bank’s second intent is to modify or work out the loan to change it from a bad loan to a good loan.  In the end, if the borrower simply cannot pay anything to work out the loan (long term job lost, disability, serious medical condition, etc.), the Bank’s last intent is to take the property and charge off the loan.  If it is a home loan guaranteed by Fannie Mae or Freddie Mac, then those agencies may dictate when the Bank must foreclose a bad loan.

Also remember, you may be contacted by different people in different departments within the lender.  Each department has its own agenda, i.e. collections department wants to get money paid in, the distressed loan department want to get a modification worked out to improve the bank's books and satisfy governmental regulatory agencies, the legal department wants to foreclose properly.  Frequently, each of these people have absolutely no idea what the others are doing at the very same time.  Often when I do evictions after a foreclosure I hear the former owner/resident say "I was talking to the lender about a modification," right up to the day of foreclosure.

Banks will often send a letter offering modification or work out solutions (if you qualify).  These letters will ask for pay stubs, tax returns and other documentation and explanation of why your loan went into distress.  If you are attempting to save your property by negotiating a lower interest rate, a longer amortization, or the like, you will need to comply with the requests, keep careful documentation of all communications, and make sure you get any agreement in writing signed by somebody with authority at the Bank.  If you decide that a workout will not succeed in your circumstances, then you really do not need to comply with these requests.  Also, keep in mind that complying with these requests is giving your Bank a lot of information which might be used to pursue future collection efforts. 

Any written response should be short and to the point, you cannot afford to pay the mortgage, you are willing to negotiate a deed in lieu of foreclosure if they are interested, otherwise they can foreclose the property when they choose.

You do not want to volunteer much information.  You do not want to send them the financial information they are requesting.  They could use that to decide you have enough assets or income to pursue a deficiency claim against you.

As to phrasing the refusal to comply with the request for financials, my response would be, "I am not asking for a modification or workout of the loan.  I already determined that I cannot pay this loan.  I regret the circumstances, but I see no point in providing all that documentation.  I offered a deed in lieu to save the lender the time and expense of a foreclosure if the lender is interested.  That is all I can do."

You can offer a deed in lieu of foreclosure, but understand the Bank may prefer to foreclose for any number of reasons.  In Georgia we are a non-judicial foreclosure state.  The foreclosure process is comparatively quick and easy because no court gets involved in the process prior to the sale.  Other states require a judicial foreclosure, which means the lender has to initiate a legal proceeding and obtain a court order to sell the property, thus adding to the time, trouble and expense of foreclosure.  Some states offer a right of redemption for some period after the foreclosure sale, which gives a Bank more incentive to accept a deed in lieu of foreclosure.  That does not exist in Georgia. 

The last big question is the deficiency.  In today’s climate, with property values declined, the amount of the debt frequently exceeds the value of the property.  If the Bank forecloses on the property or accepts a deed in lieu of foreclosure, can the Bank still pursue collection of the deficiency, the amount still owed after applying the property value in reduction of the debt?  The answer to that question varies greatly from state to state.  In Georgia, in order to be able to pursue you for the deficiency after a foreclosure sale, the Bank must “report” the sale to the local Superior Court judge within thirty days and pursue a “confirmation action”.  A confirmation action is a legal proceeding in which the Bank seeks an order from the judge confirming that the foreclosure sale was conducted properly, the correct procedures were followed, nothing happened to “chill” the bidding, and the property sold for a reasonable fair market value.  The judge’s order can confirm the sale, refuse to confirm the sale, or require the Bank to go through the foreclosure process again.  If the sale is confirmed, then the Bank can pursue a deficiency judgment.  If confirmation is refused, or the sale is not reported timely, then the Bank cannot pursue a deficiency judgment.

If you negotiate to give a deed in lieu of foreclosure, you must be vigilant to make sure the Bank is accepting the property and agreeing not to sue you for any deficiency.  In some cases borrowers have signed a deed in lieu of foreclosure only to find the Bank suing them afterwards for the deficiency because the deed in lieu preserved the Bank’s right to do so.  You cannot rely on assumptions.

There is no legal requirement for you to cooperate with the lender's collection efforts (except in court proceedings, but that is an entirely different matter).

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