Housing: Foreclosure (FAQs)

Foreclosure is a legal process where a lender seeks to take property when the owner/borrower is behind in payments. The lender may actually take ownership of the property and usually they sell it to pay off the debt. In a foreclosure, the owner/borrower loses whatever rights he or she had in the property.

In North Carolina, most of the foreclosures are controlled by language in the loan documents. The deed of trust is the loan document that gives the lender power to sell the property if the owner/borrower defaults, or stops making payments. These are called non-judicial foreclosures since they do not require a court lawsuit or a court order. In North Carolina, the foreclosure process goes through the court if there are title problems. In these cases, a lawsuit is filed to obtain a court ordered foreclosure.

North Carolina generally uses a deed of trust. The owner/borrower gives the lender a deed to the property called the deed of trust. The lender can only sell the property if the owner/borrower does not meet the loan terms. For example, if the owner/borrower fails to make payments or maintain insurance on the property, the lender can foreclose.

With a traditional mortgage, the borrower owns the property but gives the lender a lien on the property. If the owner does not make the mortgage payments, the lender can foreclosure on the property.

In a deed of trust, the owner/borrower transfers the property to an independent third party, which is the trustee. The trustee holds the title on behalf of the lender. The trustee does not represent the owner/borrower or the lender.

The deed of trust gives the trustee authority to sell the property for the beneficiary (lender) without taking the owner/borrower to court first in the event the owner/borrower fails to make monthly payments. This is called a Power of Sale. Because the sale can occur without a court order, it is referred to as a "non-judicial power of sale".

The deed of trust identifies the following:

• Parties to the loan (the borrowers(s), lender, and trustee);
• Original loan amount
• Legal description of the property being used as security;
• Beginning date of the loan and maturity date;
• Late fees;
• Acceleration; and
• Legal procedures in case the borrower defaults.

The promissory note is a promise by the owner/borrower to pay back the amount he borrowed from the lender to buy the property. The promissory note is signed by the owner/borrower.

When the loan is paid, the promissory note is marked "paid in full" and returned to the owner/borrower. The lender keeps the original promissory note until it is paid in full. Often a lender will sell the loan to another company or entity. When this happens, the note is assigned to a new party. When a loan is assigned to a new part, the owner/borrower has to deal with the new lender. This new lender can foreclose in cases of default.

(1) Payments are delinquent

Payments are typically due on the first of the month. If payment is not made within the grace period it is considered delinquent.

(2) Notice of delinquency

A late fee is charged if the payment is late. When this happens, the owner/borrower may start getting phone calls demanding payment. The lender sends a notice of delinquency.

(3) Second Notice of Default/Delinquency

If the loan continues in default after 30 days, the lender may send a second notice of delinquency or default. This notice may show up in your credit report and the account will be considered delinquent.

(4) Demand letter

The lender or service agency may send a demand letter. At this time the lender may only accept the total amount due with late fees and interest. This means all the missed monthly payments together with all fees and interest that have built up.

(5) Acceleration

When a loan is 60 days or more past due, the lender may initiate the acceleration process. Acceleration of the loan means that the lender does not accept partial payments or even all of what is past due. The lender will then require that the entire amount of the loan is due in full, and the lender will not take anything less.

(6) Foreclosure process

Once the loan is accelerated, the service agent or lender refers the loan to the foreclosure department. An attorney or law firm becomes involved. This is significant because when this happens, attorney fees become part of the fees due. The average fee that will be added to the total amount due is $2,000.00. At this point, the foreclosure process starts.

Before the foreclosure sale takes place, a hearing is held in front of the county clerk of court.

At least 10 days before the hearing, the lender must a notice of hearing to the owner/borrower. The notice provides the owner/borrower with information about the total amount owed plus expenses. It also lists the date and place of the hearing and the date and place of the sale, if a sale is to occur.

The clerk determines if a sale will take place. The lender has to present evidence to the clerk that 1) there was a debt; 2) that the owner/borrower is in default; 3) that the deed of trust provides for a non-judicial power of sale; and 4) that proper notice has been given to the parties who are entitled to receive notice of foreclosure.

The Deed of Trust contains the place of the sale and the process that must be followed.

The notice of sale must be mailed at least 20 days before the sale date. The notice of sale is published in a local newspaper once a week for two weeks and the last publication cannot be more than 10 days before the sale.

The notice of sale is also posted in a public place at the county courthouse for at least 20 days before the sale.

After all the notice requirements are met, the sale is conducted at the courthouse.

The property is sold to the highest bidder. If the sale is postponed a new notice is posted in the court house with the new date.

The owner/borrower has a 10-day right of redemption. During the 10-day period, the owner/borrower can pay what is owed to the lender plus any sale costs; this means the entire amount of the loan, not just the late payments.

Anyone may upset the highest bidder during the 10-day period. To upset a bid, the new bid must be higher than the highest bid. Plus, the upset bid must exceed the highest bid by 5% or $750.00, whichever is greater.

A "short sale" is when the lender accepts less than the full amount due on the loan to avoid a possible foreclosure. For example, an owner/borrower who is facing foreclosure has an existing loan of $300,000. The lender accepts an offer of $250,000 as full payment of the loan. This is a short sale.

Typically, the process takes 3-4 months.

After the sale is final, the county clerk of court can issue a 10-day notice to the occupants to vacate the property and surrender possession. At the end of the 10-day period if the occupants have not moved out, the sheriff will padlock the property.

Equity in the house is the difference between what the property is worth and how much the owner/borrower owes. When figuring out the equity, all the mortgages, liens and costs of foreclosure are subtracted from what the property is worth.

An owner/borrower can offer to give the lender a deed to the property instead of having the lender foreclose. This approach is generally advisable when the owner has no equity and cannot refinance or sell the property.

If the bank/lender accepts the deed, the house will not be foreclosed and it will not show as a foreclosure in the credit report. The owner/borrower that gives the deed in lieu also will avoid a deficiency judgment (See #17. What is a deficiency judgment?).

A deficiency judgment is the amount owed to the lender/bank after the sale. When the lender sells the property, those proceeds are applied to the balance of the loan. If the sale brings less money than what is owed to the lender, then the borrower owes the difference. For example, if you owe $100,000 on the home, and the lender sells it for $75,000, you still owe the lender $25,000. This amount is the deficiency. The lender may sue the owner/borrower for the deficiency, if any.

The proceeds of the sale are applied to the balance of the loan, expenses of the sale, attorney fees and any other liens on the property. If there is any money left, the owner/borrower has the right to claim it. To find out if there is any balance left after the sale, the owner/borrower should review the trustee’s report filed with the clerk of court.

The servicing agent is a company that services the loan – this means they take the payments, pay the property taxes, charge late fees and generally manage the loan. It is not necessarily the same as the lender but it can be the lender. The servicing agent manages loan applications through every stage from origination to full service, collection, foreclosure, etc.