It has been almost a decade since the market was flooded with foreclosures. Though the effect of the recent widespread job loss and accompanying bear market may look very differently than the ’08-’10 “Great Recession”, it is best to be prepared for clients that may be either facing a foreclosure or interested in purchasing one.
Counseling a Client Facing a Foreclosure
If a past client is having trouble making mortgage payments, counsel your client to reach out to their lender. Many lenders are offering mortgage relief or forbearance in light of the COVID-19 crisis. In addition, the CARES Act, a federal coronavirus relief measure, entitles borrowers suffering from financial hardship to forbear mortgage payments for up to a year. Your client should still contact their lender to understand what relief options are available. Some lenders are informing borrowers that they may postpone three months of mortgage payments, but the lender is then requiring the borrower to pay the postponed payments in a lump sum payment at the end of the three months. This route may certainly set your client up for failure. Your client should know that servicers of federally backed loans are required under the CARES Aact to provide several options to pay back missed mortgage payments, including spreading payments over time or tacking on the missed payments at the end of the loan term. Because mortgage servicers may only be able to forbear payments for a 90-day period, it is possible your client may have to contact their lender again after the initial 90 days to extend the forbearance period.
The CARES act only applies to borrowers of federally backed loans. Though this applies to most residential loans, if your client’s loan does not fall under this category, they are not necessarily out of luck. Your client’s deed of trust, or mortgage instrument, identifies all of the hoops that a lender must jump through before initiating foreclosure proceedings. Typically, these “hoops” include allowing the borrower to modify their loan in the event of financial hardship, or paying back missed payments in a lump sum payment. If your client needs any assistance navigating their deed of trust, counsel your client to call a lawyer for assistance.
Know that in the event the lender has already initiated or concluded foreclosure proceedings, your client may still have grounds upon which to challenge the foreclosure. As mentioned above, the deed of trust spells out the procedure that a foreclosure firm must follow to perform a valid foreclosure, including the terms under which the foreclosure firm must provide notice to the borrower of default, the terms under which the foreclosure firm must advertise the pending auction in a local newspaper, and the terms under which the foreclosure firm may handle the auction itself. The process is rife with human error, and with the assistance of an attorney, your client may find grounds upon which to challenge the validity of the foreclosure.
Counseling a Client Purchasing a Foreclosure
If your client is in the process of purchasing a foreclosure property, counsel your client to purchase title insurance. (Always counsel your client to purchase title insurance, but especially in the event that they are purchasing a foreclosure). As stated above, the foreclosure process is rife with human error, which means that your client purchasing a foreclosure property is vulnerable to purchasing a property that they are not entitled to own. In addition, there is much confusion in the industry regarding what types of mortgage relief to which borrowers are entitled. The uncertainty among mortgage borrowers, servicers, and regulators renders title insurance a more valuable purchase than ever.