Making Sense of the Foreclosure Process

Five critical considerations and why they matter.

Homeownership has many advantages, and it remains deeply engrained in our psyche as an indispensable part of the American dream, which is made possible for most by obtaining a mortgage to finance the purchase. Of course, throughout the mortgage term, homeowners will face normal economic downturns, leaving many behind in their payments and facing a default or foreclosure.

A dizzying mosaic of state and federal codes, statutes, rules, and regulations govern mortgage defaults and foreclosures. However, the foreclosure process remains relatively simple, and successfully curing a mortgage in default or foreclosure may be distilled to five easily understood, instructive considerations.

The Foreclosure Process

Falling behind on a mortgage doesn’t have to turn the dream of homeownership into a nightmare, which is how receiving a notice of default may feel. On the contrary, that is precisely the opposite reaction it is intended to evoke. Lenders are not evil institutions out to steal your home to auction or sell. Instead, they are financial institutions in the business of earning a return on money loaned to qualified borrowers to purchase real property that serves as security for the loan. Therefore, the lender and the borrower become parties to a transaction that serves mutually beneficial interests.

When a lender sends a notice of default to a borrower, it is simply one party seeking the cooperation of the other to have a meeting of the minds to ensure the continued beneficial returns of the shared investment. The notice, which is required, is inherently an act of good faith that warrants reciprocation and starts a rational, fair, and accountable process primarily intended to keep borrowers in their homes. Understanding the process in this context places both parties in a position to reach a successful outcome, so be sure to see it for what it is:  an opportunity.

How Foreclosures End

All foreclosures end in one of two ways:

• A transfer of ownership to satisfy the mortgage or

• A mortgage modification.

That’s it. However, they may end voluntarily or by force, such as satisfaction of the mortgage by a deed instead of foreclosure, short sale, traditional sale, or forced judicial sale or by a mortgage modification agreement reached in arms-length negotiations during the pre-foreclosure period or a stay in pending foreclosure case after submitting a complete loss mitigation file. But, again, all roads lead to one of two outcomes: a transfer of ownership to satisfy the note or a mortgage modification. The challenge thus becomes how to remain in control of the process to attain an optimal outcome.

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5 Critical Considerations & Why They Matter

Now that the foreclosure process and how all foreclosures end have been demystified,  what matters to borrowers facing default or foreclosure? The following five considerations are born from sweeping Congressional legislation that enabled substantial financial regulatory reforms following the 2008 economic crash primarily caused by mortgage-backed securities.

The Dodd-Frank financial reforms ushered in new regulations that brought lenders and borrowers together to explore foreclosure mitigation options in good faith and without the pressures of litigation by staying any pending foreclosure action if it had progressed that far. The length of a stay depends upon when, in the foreclosure process, the lender receives what it deems a “complete loss mitigation file.”

Consulting the controlling federal regulations or an experienced foreclosure attorney will provide more guidance regarding the length of any given stay related to each borrower's specific facts and circumstances. However, all anyone must know is that the earlier you submit a complete loss mitigation file, the better. Throughout this process, though, be mindful of the following considerations to ensure all foreclosure mitigation options remain available:

1. Communicate with your lender. This is the first and most straightforward action a homeowner will take throughout the process and the most overlooked or ignored. Nothing puts a borrower at a more significant disadvantage than failing to inform the lender why payments are late. Any information, whether good or bad, is better than no information, and often, borrowers will find their initial call falls the first domino toward resolving a default. Remember, though, that was just the first call. Be sure to treat your lender as the business partner it is and maintain consistent communication throughout the process.

2. Be honest and clear about what you want. Borrowers and their attorneys often face skeptical lenders who must determine whether they genuinely seek solutions to retain their homes or whether their actions amount to disingenuous delay tactics meant to secure free places to stay where they risk dissipating the assets securing the notes. First, nobody can fault a lender for harboring this perception because we all have heard horror stories validating their concerns. Borrowers can assuage those concerns by telling the truth, being honest with their intentions, and remaining considerate and genuine throughout the process. It’s that simple, and lenders will notice.

3. Submit an evidence-based hardship letter. Borrowers often brush this aside as they prioritize submitting a complete lost mitigation file, but this must not be overlooked. Here’s why. By law, the lender must read a hardship letter, which means a homeowner can state a case for a loss mitigation solution and prove it with supporting evidence. In other words, this is your chance to convince them not to say “no.” This is one area where experienced foreclosure attorneys will prove their value because they know how to pitch fair resolutions to mortgage defaults caused by hardships and support them with convincing evidence.

4. Submit a “complete loss mitigation file.” A “complete loss mitigation file” isn’t just a clever string of industry terms; it is a legal term of art for the submission of a lender’s required documentation that, once submitted in full and deemed complete by the lender, automatically triggers a period where the parties may resolve the foreclosure without the pressures of pending litigation affecting the outcome. This is a fundamental requirement for borrowers who are behind on their mortgages, face foreclosure, and wish to stay in their homes or be afforded an appropriate time to sell their houses for maximum value.F

5. Actively cooperate with the lender.

Once you’ve established a good rapport with the lender’s loss mitigation specialist, submitted a hardship letter, and received confirmation that the lender received a complete loss mitigation file, all of the distractions stop, and the parties are free to negotiate a solution to the default by exploring all loss mitigation options available at that time. Again, how long this period lasts depends on how soon the lender receives a complete loss mitigation file.

Finally, while these considerations matter, so does common sense, e.g., the manner and spirit in which you engage the lender. Remember, this is not a zero-sum game or contact sport but a process to determine why a borrower has fallen behind and identify options to continue a mutually beneficial business relationship. The measure of success depends on the extent to which the parties share the same values and goals throughout the process.

Of course, not all foreclosures are this simple, and the parties may find themselves negotiating in an unfortunate and unavoidable adversarial environment. In the unlikely event this occurs, the parties’ best option is to put the matter in the hands of experienced foreclosure attorneys uniquely trained to resolve the conflict by applying the applicable state and federal laws and regulations guided by well-established protocols governing the profession.

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Final Thoughts

Defaulting on a mortgage or facing foreclosure will likely require both the borrower and lender to make some difficult decisions. However, when both parties approach a default with timely, consistent, and honest communications and the borrower remains responsive throughout the foreclosure process by treating the lender as the investment partner it is, a fair outcome will always be within reach.

The Consumer Financial Protection Bureau offers resources for borrowers and ensures lending compliance with federal regulations. It investigate complaints and is required by law to compensate whistleblowers 10-30% of any sanctions collected.