Foreclosure, Responsibility and Redemption

Properties sometimes go into foreclosure. The property is in disarray. All parties need some resolution, borrower, lender, servicer and investor, among others. This deficiency will resolve one way or another. The question is “How clean?”, “How Long?”, and “How effectively?”.

This is about foreclosure as a problem to solve, as well as an opportunity to invest. We discuss typical pitfalls and a means to navigate best options.

You can gain experience by taking the scars yourself. You could reverse engineer what someone else did. Or learn from someone who is doing it.

I have seen far too many people take more scars than necessary to gain wisdom. A misinformed choice can, and often does, take a lifetime to recover.

The appropriate strategy makes a giant difference in results obtained for effort spent.

Standard options, simplified

There are two ways a foreclosure action will resolve.

-You figure out a way to get ahead and reinstate the property expenses. This could include selling to resolve equity balances. You could quitclaim the property to the lender. With lender cooperation, you could assign your mortgage interest to a qualified borrower.

-The lender forecloses. You deal with the financial impact beyond the loss of property. If the net sales proceeds exceed all court and sale expenses, you will receive some funds. If the court issues a deficiency judgment, you will owe debt beyond the mortgage.

A very small percentage of cases result in an overage paid back to the borrower. As you can see, in all cases it is best to work with lender cooperation. This is both practical and fiscal. Without experience, you are hoping to get a phone call returned. Much less, have them agree to a valuable exit plan that can benefit you both.

Information

A little background on foreclosure activity

After the Coronavirus moratorium, the courts have now opened up again. 2023 is on track to be the highest volume since Covid-19, by over 10%.

Most current foreclosure claims stem from agreements initiated between 2006 and 2009. You likely did not take advantage of favorable interest rates occurring before 2021. You may have missed the boat, although interest rates are back on the decline.

Judicial foreclosures take anywhere from 12 months to 12 years to resolve. Each case driven by its specific factors.

A brief history of foreclosure law in Hawaii

There are three means for lenders to foreclosure under Hawaii Law. Two forms of less formal non-judicial methods, and the more formal judicial method. Association foreclosures are generally filed under the swifter non-judicial process. Most lenders, whether first or junior, now file under the judicial method, for speed and cost. The well-intended latest version of the non-judicial method proved too cumbersome for lenders. The first version is out of date.

Historical interest rates (Freddie Mac, Conventional loans)

Interest rates are starting to lower, with Federal reserve predictions to reduce three more times in 2024. See USA Today article in links section.

A little-known law: HRS 480E and Distressed property consultants

There are two major Hawaii Revised Statutes, Laws, that pertain to real estate and the foreclosure action. They get updated all the time but refer to HRS (Hawaii Revised Statutes) 467 and HRS 480E. Links and references to the latter are included in this article.

In summary, in 2009, a new law was created to protect people from mortgage rescue plans. Some say this was a good thing, others not. Certain parties are excluded from the law. Real estate agents are listed as exempt; however, the actual performance of duties dictate application of the law or not. Most people make the mistake of assuming that they are clear when they are not. Electing to engage with someone as a distressed property consultant is certainly possible, but not necessarily the best way to approach the solution. How you choose to solve a problem is more important than the option selected. Suffice it to say, if you are under foreclosure and someone is promising to help you out in any form, make sure they are in compliance with HRS 480E, and give you proper disclosures. If you are an investor offering to help in any form, make sure you have read the law, and reviewed it with legal counsel to ensure you are in compliance as well.

Avoiding typical pitfalls

Don’t try to personify or generalize the situation

We try to put the things we don’t understand in a box. Similar to the real estate market, foreclosure is a complex issue, with nuance in every case, and one specific item can change the course or direction of each experience. I sympathize and encourage the borrower to navigate the situation to the best of their ability, however, most times, it is admittedly an unfair contest, as the borrower (or investor) has little knowledge of the legal and financial aspects that may apply to their situation.

Beware the domino effect of junior liens

For brevity, I will illustrate a typical example of a junior lien taking property rights away. The borrower may be struggling to make all their bills. Prioritizing what expense to pay by seniority, size, or urgency. So, the first mortgage gets paid. A junior lien default, like a second mortgage or association fee can close the door for small dollars.

Let’s use the association as an example. This could be a homeowner’s association dues of $39 a quarter to begin with. Before you know it, 12 months have passed. Late fees and penalties add up, then attorney fees. Now the bill for the junior liens is already $12,000. Nasty effects can occur from here. They can foreclose on a fast track, take title and take possession. Then they can put in a renter to pay ongoing maintenance. Even a third-party investor can take that title position for as little as $5,000. The borrower still owes on the first mortgage but loses access to use of the property. An ounce of prevention is worth a pound of cure.

Do not make light of any of your property expense related responsibilities. Either you can handle them, or you cannot. If you cannot, it is important to move faster than slower to resolve your circumstances. I am a fan of individual responsibility. Be aware of forced placed insurance coverage.

When payments fall short, if your account includes an impound to pay for property tax and insurance. When you fall below the escrow amount, insurance gets cancelled. The lender, usually with some affiliate insurance provider will provide “force placed” insurance. This can be a multiple of your normal policy. You have the right to get insurance back into place and are not required to have dual coverage.

Due diligence simplicity for the investor

Investing in foreclosed homes can be a smart move, but it requires careful navigation to avoid pitfalls. The first step is to pull a title report, which is crucial in determining the legal standing of the property. This report will reveal any liens, encumbrances, or legal issues attached to the property that could complicate your investment. Ensuring that the property is insurable for title and lendable is equally important, as this affects both the security of your investment and your ability to finance the purchase.

While condition and repair issues of a property are often visible and quantifiable, issues like bad title, unresolved evictions, or other legal encumbrances can be hidden traps. These issues can lead to significant unanticipated expenses in both time and money. Therefore, it's essential to address these concerns upfront.

The key to a successful purchase lies in asking the right questions to the right people. Engage with knowledgeable professionals, such as real estate attorneys and agents experienced in foreclosures. They can provide invaluable advice and help you navigate through the complexities of buying a foreclosed home. Their expertise can be the difference between a profitable investment and a costly mistake. Remember, in real estate investment, especially with foreclosures, being well-informed and cautious is the pathway to success.

Supercharging the approach

Approaching a transaction with a successful attitude is crucial when investing in foreclosed homes. This mindset is not just about being optimistic; it involves a strategic and proactive approach to every aspect of the deal. Successful investors often exhibit a blend of patience, diligence, and decisiveness. Patience is key in waiting for the right opportunity and not rushing into a deal without thorough due diligence. Diligence is necessary in researching the property’s history, understanding market trends, and consulting with experts. Decisiveness, on the other hand, is critical when it comes time to act. The market for foreclosed homes can be competitive, and once a good opportunity is identified, moving swiftly and confidently is essential.

Moreover, a successful attitude includes being prepared for challenges and setbacks. Foreclosure investments can sometimes present unexpected hurdles, whether in the form of additional repairs, legal issues, or market shifts. A successful investor maintains a problem-solving mindset, viewing these challenges as opportunities to learn and improve their investment strategy. This adaptability not only helps in navigating current transactions but also in building expertise for future investments.

Summary in closing

Everyone deserves respect and dignity. But we make the choices based on our exposure. When we don’t have all the information, we have limited options. What I have covered in this article touches on our experiences, but I am sure there are questions I did not include. Reach out direct or comment here, and I will reply either here or with another article. We want to be valuable in this area for you. We look forward to seeing your perspective while we share ours.

Resources and links

HUD housing counseling agencies https://hud4.my.site.com/housingcounseling/s/?language=en_US

Foreclosure avoidance counseling https://apps.hud.gov/offices/hsg/sfh/hcc/fc/index.cfm?&webListAction=search&searchstate=HI&filterSvc=dfc

Chapter 480E Mortgage Rescue Fraud Prevention Act. https://www.capitol.hawaii.gov/hrscurrent/Vol11_Ch0476-0490/HRS0480E/HRS_0480E-.htm

Freddie Mac conventional loan history https://www.freddiemac.com/pmms

Judicial Foreclosure case statistics https://www.courts.state.hi.us/self-help/foreclosure/judicial_foreclosure_cases_filed

Fed holds rates steady as inflation eases, forecasts 3 cuts in 2024 https://www.usatoday.com/story/money/2023/12/13/fed-interest-rate-hike-live-updates/71896343007/