When the foreclosure sale looms large, filing for bankruptcy protection prior to the sale date is probably the only smart move. It avoids the unpleasant post-foreclosure sale tax hit, and frees you from owing the bank anything.
Those of you who have followed these posts for a while know that I have predicted a new wave of residential and commercial foreclosures. I stand by that prediction, the residential portion of which has just been bolstered by a recent article by Don Lee in the Los Angeles Times:
[B]anks are stepping up efforts to foreclose on borrowers in default. In the three months that ended Sept. 30, notices of default, the first formal step in the foreclosure process, jumped nearly 26% from the previous quarter, according to DataQuick, a San Diego real estate information service. Additionally, a likely national settlement over complaints about banks filing faulty paperwork to take back homes should clear the way for an additional 400,000 foreclosures in coming months, according to Moody’s Analytics, an economics research firm. Moody’s predicts that foreclosures will rise next year to a record 1.5 million, or a hefty 30% of all sales of previously owned homes. The new crush of distressed properties will further dampen home values, especially in hard-hit Florida, California and Nevada, inflicting more damage on the broader economy and job growth.
To understand the significance of Mr. Lee’s statement regarding notices of default it helps to know what happens during a residential foreclosure. After you’ve missed enough payments, the lender will record a notice of default (NOD) with the county recorder, and send you a copy. The content of the NOD is mandated by California real estate law, and includes the statement: “No sale date may be set until three months from the date this notice of default is recorded, which date of recordation appears on this notice.”
Once the three months have elapsed, the lender can (but doesn’t have to if it decides not to move ahead with the sale) record the notice of trustee sale, which will have the date, time, and location of the foreclosure sale. The sale date is supposed to be at least three weeks after the lender records the notice of trustee sale. Thus, the soonest the house can be sold after the NOD is recorded is three months and three weeks.
Therefore, Mr. Lee’s observation that NOD filings increased by 26% over the previous quarter means that in a few months we should start to see the next wave of foreclosure sales.
One datum that may slow things down a bit is the fact that if the banks suddenly dump a lot of real estate on the market, the prices will plummet even further. Therefore, they may spread the sales out a bit to maximize their recovery, or more accurately, minimize their losses.
You might wonder why a bank would issue such a large number of NODs if they intend to spread the sales out. Filing the NOD preserves the bank’s right to move ahead with the sale when the time is right. Thus, once the three months are up the bank can file the notice of trustee sale any time, and then only have to wait three weeks before selling the property.
You might also wonder why a bank would foreclose on a property that is way underwater, when selling the property means taking a loss. Sometimes the bank needs a loss to offset a profit in another of its divisions, to reduce its total tax liability. Sometimes the bank simply needs cash on hand to satisfy the needs of its depositors and comply with certain federal regulations.
Finally, you might wonder what “missed enough payments” means. I was purposely vague because it depends on several factors, the most important of which are: Is there any equity? Are houses in that neighborhood moving?
If you have a lot of equity – it’s rare these days, but it does occasionally happen – the bank will move with great rapidity because it will be paid in full. And if houses in the neighborhood are selling pretty quickly, then the bank has reason to believe it won’t have difficulty selling the property right away.
If you’re one of the folks who recently received NODs, run – don’t walk – to a good bankruptcy attorney. Don’t put it off, because if you wait until the last minute, you might not be able to file in time to avoid the horrendous problems associated with losing the house in a foreclosure sale prior to filing.