Because of the skyrocketing number of foreclosed homes, the Michigan Legislature has added extra protections for homeowners who are in default of the mortgages on their principal residences. (The law does not apply to investors in residential property or owners of commercial property).

Foreclosure Prevention

The first step requires the lender to send the borrower a written notice with certain key information. The notice must be published in a local newspaper and must be sent by regular and certified mail to the borrower’s last known address. It is important to keep your lender notified if you have a new address. If a borrower has already moved out of the property, and has not left a forwarding address order on file with the post office, he may never receive this very important notice.

The notice must include a list of state or federally approved housing counselors. Most importantly, the notice must inform the borrower that within 14 days after the notice is sent, the borrower may request a meeting to discuss a possible loan modification. If the borrower requests the meeting, then the actual foreclosure process cannot begin until 90 days after the date of the notice.

During that 90-day period, the borrower and the lender may agree to a loan modification and then the mortgage will not be foreclosed at all. Even if the borrower and the lender cannot agree on a modification of the terms of the loan, if the borrower meets certain criteria, the lender may be prohibited from foreclosing “by advertisement” and may be required to start a court proceeding instead.

Foreclosure By Advertisement

If the borrower was not eligible for a loan modification, or if the lender acted in good faith in negotiating a loan modification and the borrower did not accept it, then the lender may foreclose by advertisement. To start this process, the lender publishes a foreclosure notice for four consecutive weeks in the newspaper that serves the county where the property is located. The sheriff also posts the same notice on the door of the home. The notice says when the foreclosure sale will occur and lists that amount that is due from the borrower.

At the foreclosure sale, the sheriff will take bids for the property from any interested parties. In reality, it is usually just the lender that makes a bid for the property.

Redemption

After the foreclosure sale, the borrower usually has 6 months to “redeem”, or buy back the house, for the amount that was bid at the foreclosure sale (plus any costs incurred by the lender after the sale, such as the payment of property taxes or insurance). The redemption period is 12 months if the property is more than 3 acres in size or if the balance due on the mortgage is less than two-thirds of the amount originally borrowed. The redemption period can be as short as 1 month if the property has already been abandoned by the owner.

If the borrower does not redeem the house by paying the lender the amount of the bid (plus any costs incurred after the sale), then the lender becomes the legal owner of the property. If the borrower is still living in the house after the redemption period expires, then the lender has to start an eviction proceeding with the court to get the property back – just like a landlord must do to evict a tenant.

Caution

The process described above is meant to provide general information only. In the event that the borrower has filed for bankruptcy or is on active military duty, different rules may apply. Similarly, if there are I.R.S. liens on the property, or the mortgage has been sold from one lender to another, then there may be additional roadblocks that prevent the lender from using foreclosure by advertisement. If you are personally facing any of these issues, it is best to consult with an attorney to make sure that all of your rights are protected.

Deficiencies

There appears to be a lot of confusion by borrowers about whether the foreclosure sale ends the borrower’s financial obligations to the lender or not. As noted above, at most foreclosure sales, the only bidder is the lender. If the lender’s bid is for the full amount that is owed by the borrower, then the lender is agreeing that the property is worth the amount of the debt. If the owner does not redeem the property and the lender gets that property back, the debt will be satisfied in full.

However, if the lender bids at the foreclosure sale for LESS than is owed by the borrower, then the lender is saying that the property is not worth as much as the debt. The lender is reserving its right to chase the borrower for the amount of the deficiency – the difference between the amount due from the borrower and the value of the house. If a borrower is sued for a deficiency, he is entitled to challenge the amount that the lender bid at the foreclosure sale. If the borrower can prove that the bid was below the fair market value of the property, he may be able to defeat the deficiency judgment, in whole or in some part.

Other Remedies

Many times, after the foreclosure sale, the borrower will receive a letter from the lender with other options for resolving the foreclosure. One or more of these options may be appealing to the borrower.

"Cash For Keys"

In some cases, the lender will offer to pay the borrower to move out of the house before the redemption period expires. The lender will inspect the home to make sure that it is in good condition. The borrower will agree to waive the remaining time left in the redemption period. The borrower will sign a deed giving the property back to the lender before the redemption period expires and the lender will give the borrower a check. This process may also be called a “deed in lieu of foreclosure” although that is technically a slightly different process.

Short Sales 101

When a borrower is faced with a possible forclosure, a lender may suggest that the borrower attempt to find a buyer for the property, even if the sale price will need to be less than the amount the borrower owes on the property. Sometimes, the lender will agree to take less than the amount owed on the property in order to find a buyer for it.

There are many issues to consider with a short sale. First is whether the “shortage” will be forgiven or not. Most borrowers do not understand that there are really two parts to a mortgage. The first part is the mortgage NOTE – which is basically an “IOU” in which the borrower agrees to repay the lender the amount of the loan. The second piece is the actual mortgage, which allows the lender to put a lien on the borrower’s home.

In a short sale, the lender may agree only to release the mortgage, i.e., to take the lien off the house so it can be sold to a new buyer. The lender may retain its right to collect on the mortgage NOTE. In other cases, the lender may agree to release both the mortgage and the mortgage NOTE.

If there is a second mortgage on the property, the borrower also needs to negotiate with the second mortgage holder. The second mortgage holder may or may not offer the same terms for a short sale that are acceptable to the first mortgage holder.

The borrower needs to be absolutely certain which offer is being made by which lenders, so that the borrower is not mistaken about the amount of the debt he still owes. A lender has 6 years to file a suit for a breach of contract and attempt to collect the shortage, so a borrower may not realize he misunderstood the terms of the deal until many years later. It is advisable to have an attorney assist you with short sale negotiations and review of the documents.

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