What are the Origins of Foreclosure Anyway? Here’s What You Should Know About the Process
Forclosure. You hear the word a lot. And if you were around (and a homeowner) in 2008, you not only heard about it, but it possibly pounded on your door. So, let’s talk about what it means, how it happens, and where it came from.
This is the “f-word” of the housing industry. In 2008, it found its way into thousands of headlines as Americans across the country lost their homes. We understand it to be bad news. As the pandemic wanes and relief is removed, many people have wondered whether we are entering another bubble. While we maintain that foreclosures are not something to worry about just yet, we thought we’d discuss the origin of the foreclosure process and how it’s changed. After the housing bubble of 2008, the housing industry looked a lot different. Hard lessons learned altered the real estate industry, arguably for good.
So, whether you are renting, a homeowner, a prospective homebuyer, or thinking about selling your home, here’s a short lesson in the world of foreclosure.
The English Origin of the Mortgage Concept — A Lesson from the Brits
The concept of a mortgage emerged from Great Britain. So why does it matter? Understanding the origins of mortgage laws in the United States provides a clue to their structure. Early mortgages in England were structured in a way where the borrower had very little rights over the property. The owner of the loan could enter the property at any time, the borrower could not lease the property, and the borrower could lose the entire property if the amount was not paid. In other words, the borrower seemed to be nothing but a placeholder until the entire debt was paid. And if that debt wasn’t paid, they were out.
Today’s mortgages are set up so that the borrower owns the property even while there is a mortgage—provided payments are current. The house acts as collateral if the debt is not paid, but it is still your home. It is a major difference and a huge advancement from medieval England.
The Housing Bubble and the Hard Lessons Learned
The housing bubble of 2008 created a seismic shift in the way lenders handle mortgages and loans. If you ask people that were around in the industry during that time, they might each have different answers about the fundamental lessons to be learned. The bubble taught people some valuable lessons about homeownership.
Important lessons from the housing crash of 2008 might include:
- Be vigilant and crunch some numbers. Since 2008, lenders have become a lot stricter about who they approve mortgage loans for. The requirements are rather stringent and it has eliminated some of the risks created in the early 2000s. Those predatory lenders have a lot to say for themselves, but individual homeowners should also look at their own finances and be vigilant about how much home they can realistically afford. The rule of thumb is to avoid purchasing a home where the mortgage takes out more than 30% of your take-home pay. This number has now become a common starting point for people interested in borrowing.
- Do some digging. Always do some shopping around when it comes to mortgage loans. Do some research on the potential lender and be cautious about promises that sound too good to be true.
- The Rainy Fund is a must. As the world learned in 2020 after a virus swept across the globe and shut down economies, we never know what lies ahead. The rainy fund is there as a cushion in the event of unprecedented circumstances.
- Home prices fluctuate. One of the common assumptions is that home prices rise over time. And while this is true most of the time, it is also true that counties and cities often take an economic downturn. This means that your home may go down in value temporarily, so buying a home and assuming it will produce a profitable sale in one or two years might not always be the case.
That is not to say that there is not plenty to discuss regarding the mishandling of the loans by the servicers. That is a story for another day.
The Foreclosure Process – What to Know as a Homeowner
Despite new regulations and stopgaps the housing industry has implemented to avoid giving bad loans, unprecedented circumstances still happen. The pandemic is a perfect example. And it’s why many people are worried about foreclosures, although the circumstances surrounding this economic downturn and 2008 are very different.
Foreclosure is a legal process that a lender takes against a borrower when they have failed to come through with their payment obligations. The bank or mortgage lender will then acquire possession of the property.
I Received a Foreclosure Notice in the Mail — What Should I Do?
What’s the worst thing you can do when you receive a foreclosure notice? Ignore it. You don’t want to run away from the notices or throw them in the trash hoping something magical will happen. Out of sight out of mind right? Not really. Take initiative and get to work in working something out.
The good news? Mortgage lenders will often work with you. They might often offer loan modifications that work out a lower payment so that it becomes more affordable for you.
The Foreclosure Process in Motion
The process begins rather quickly after a missed payment. Most lenders will usually offer a grace period of 15 days. If the payment does not arrive within that grace period, your lender might implement a late fee. The details of foreclosure laws do vary by state. In Texas, there are three ways that someone could face foreclosure including judicial foreclosure, non-judicial foreclosure, and expedited foreclosure.
Then you enter the default stage. This may vary by lender, some will put you in default as soon as the 15 day grace period is up. Others will give you 30 days.
The next step might depend on whether you have a judicial or non-judicial foreclosure. So there will either be a lawsuit or a notice that the homeowner is now in default.
- Judicial: This involves the lender filing a lawsuit.
- Non-Judicial: These take the court out of the equation because they rely on the power-of-sale clauses in the original deal.
During the process, the borrower does have the ability to stop the foreclosure process by providing payment. There is still time before eviction happens to do this.
The notice of sale process begins when no payment is received and there is no arrangement with the lender. The lender will move on to creating this notice of sale, which means they are preparing to put the property up for sale. Once the property is sold, you vacate.
Ask Questions, Work With People You Trust
Here, at Brian Burds Home Selling Team, we are passionate about educating people regarding homeownership, selling their El Paso home, and learning to make responsible financial decisions. The housing market involves many working pieces and the more you educate yourself, the better.
Do you have questions about selling your home in El Paso? Connect with a home selling team that has answers, insights, and expertise. Call Brian Burds today!