Understanding Foreclosure

• Foreclosure is a legal process where a mortgagor or borrower loses rights to a mortgaged property due to failure to pay or meet bond/mortgage obligations.
• The process begins when the lender applies to a court for authority to sell the property, with money from the sale going towards debts, including lender payments.
• Foreclosure costs can be high for families and communities, resulting in impaired credit, restricted loan access, and financial losses.
• Foreclosure has negative social and emotional effects on families, as well as impacts on neighboring areas, neighborhood property values decrease.
• Vacant properties from foreclosure can attract criminal activity, significantly impacting local communities.
• Wisconsin and the U.S. have recently seen depreciating home prices, tighter underwriting guidelines, record houses for sale, and increases of foreclosed homes not occupied by homeowners as well as adjustable-rate mortgages resetting at record numbers.
• This information underlines the need for homeownership preservation education to help homeowners understand risks and avoid foreclosure.
• Default can happen to anyone, so a general background on the foreclosure process is helpful.
• Chapter goals include giving background on why default/foreclosure occur, outlining default outcomes, and giving insight to the legal process of foreclosure.
• Key Takeaways: Understand foreclosure options, decide whether to stay and repay the loan (or consider selling), talk to your lender, and seek help, but avoid quick fixes.

Understanding Default

• Default occurs when a homeowner violates their mortgage contract by failing to make payments.
• Default lasts until the loan is current or an arrangement with the lender is made.
• There are many reasons a borrower may be late on a mortgage loan, budgeting is a challenge and certain bills are a priority, or a payment can't be made by the due date.
• Paying after the due date results in late fees, and repeated missed payments make catching up harder.
• Lenders consider a loan in default after 2 missed payments, but it may happen faster.
• Important questions to ask: What caused default? Expected income? Payment history? Loan terms? Home value?

Outcomes of Default

• Lenders will contact borrowers as soon as a payment is missed, often starting with phone calls and letters.
• After two unpaid payments, borrower situation is more difficult and lender outreach increases.
• The worst case scenario is foreclosure, eliminating the homeowner's property rights.
• Borrowers have at least 60 days from the first missed payment to act and avoid foreclosure, though the process varies by state.
• Foreclosure ends when the loan is paid off, the home is signed over, or the lender sells the home at auction.
• Lenders want to avoid taking possession or selling at auction, as homes in foreclosure sell below market value.
• Lenders offer options to borrowers before starting the foreclosure process.
• A key first step is Foreclosure Prevention Counseling at 1-888-995-HOPE or www.995HOPE.org.
• Wisconsin Housing Counselors can also help connect borrowers with lenders, but be patient.
• When contacting lenders, gather open mail, your account number, and hardship information.
• Documents needed include pay stubs, award letters for income, tax returns, bank statements, and bills.
• "Rescue" scams to beware: Phantom Help, Bailout Scheme, Bait and Switch.

Short term Problems (less than 2 years)

• Options: Repayment agreement, Modification, Forbearance, Partial/advance claim, Reverse equity mortgage, Refinance.
• Mortgage mediation: Negotiating an alternative with a lender when there is a dispute, using a third party "mediator" or facilitator.
• Mortgage mediation occurs before cases are referred to the courts.
• Agreement to pre-foreclosure resolution is a must between the mortgage lender and borrower.
• Mediation seeks to negotiate the schedule of future mortgage payments, based on the borrower's financial situation.

Payment Options

• Repayment agreement: A temporary change in mortgage terms to allow you to pay back owed money while continuing regular payments.
• Modification: Refinancing to obtain a more affordable mortgage payment.
• Forbearance: Servicer agrees to allow a loan to remain delinquent long term due to a clear hardship.
• Partial Claim or Advance Claim: Mortgage insurance company forwards a homeowner the money that they owe in delinquent payments.
• Reverse Equity Mortgage: For homeowners 62 or older with substantial equity.
• Refinance: Arrearage is added to the new loan.

Long term problems and outcomes

• Long term problems and outcomes include Sale of property, Hardship assumption, Pre-foreclosure sale/Short sale, Deed-in-lieu, Foreclosure.
• Sale of Property: If the home value covers the loan, it may be wise to sell and start fresh.
• Hardship Assumption: Family or someone else can "assume" the mortgage if they qualify.

Pre-foreclosure sale or short sale

• If the home value is insufficient to satisfy the loan balance, creditor may agree to take less without pursuing a court judgment for the difference.
• Deed-in-lieu (DIL): Servicer agrees to take the deed in exchange for release from mortgage obligations.
• Foreclosure: Final option when no others are viable.

The Legal Process of Foreclosure

• In Wisconsin, begins when the lender files documents with the court, and delivers notice to the borrower.
• The court may order sums paid by the lender for taxes, repairs etc. to be added to the amount owned.
• Lenders usually warn borrowers before filing with the court.
• Following a foreclosure judgment, the borrower has a reinstatement period to stop foreclosure by paying what is owed.
• Local sheriffs must give notice of the time and place of sale via law or court ruling.
• Foreclosure sales can only occur after the owner's reinstatement, which is published within the 12-month period.
• Any party with 10% of their max bid may bid at the foreclosure sale.
• Within 10 days, the sheriff files a sale report and deposits proceeds with the court clerk.
• The court clerk transfers deed ownership to the highest bidder and pays parties upon sale confirmation.
• If the buyer doesn't pay within 10 days, the deposit is lost, and a resale happens.
• With any surplus, affected lien holders may file a notice with the court clerk, and the court determines who gets what part of the surplus.
• If the property sells for less than the default amount and sale costs, no sale is confirmed.
• See also: http://www.wisconsinforeclosureresource.com/ and http://www.wisconsinforeclosurekit.org/

Supplemental Materials

• A number of worksheets, activities, handouts and other resources are helpful.
• Handouts available: The Homeowner Affordability and Stability Plan (summary of benefits) and Additional Resources (helpful links).
• The Homeowner Affordability and Stability Plan, is a program designed to prevent up to nine million American homeowners avoid foreclosure.
• This initiative is aimed at home owner-occupants "at risk of imminent default," it can help to lower interest rates to 2%.
• Borrowers will have to sign affidavits attesting to their financial hardships to avoid giving help to 'undeserving' borrowers.
• The Homeowner Stability Modifications are designed to bring a homeowner's monthly payments to 31% of their income.
• Loan servicers will receive $1,000 up front for each qualified loan modification.
• There will be an insurance fund for lenders against losses if home prices decline.

Additional Resources

• Center for Responsible Lending (CRL): Supports anti-predatory lending laws and reform efforts.
• Homeowners Emergency Mortgage Assistance Program (HEMAP): Program for Pennsylvania residents facing foreclosure.
• Homeownership Preservation Foundation: Helps families overcome obstacles to prevent home loss.
• National Consumer Law Center (NCLC): Helps build financial security and ensure justice.
• NeighborWorks America: Works to revitalize communities through affordable housing and the Center for Foreclosure Solutions.
• The Reinvestment Fund: Finances neighborhood revitalization and foreclosure filing studies.