Defaulting on your mortgage is one thing, but ending up in foreclosure is an entirely different feeling of loss, hurt, frustration and embarrassment.
Most residential lenders will tell you that consumers will do everything in their power to keep from losing their homes (the only aberration would be calloused investors who walk away from mortgages when their would-be, short-term goldmines turn into a bust). The prime reasons for default typically are unexpected–loss of job, death, divorce–situations that never can be predicated by a credit report or a loan application.
A disturbing trend has begun to compound the emotional stress at the foreclosure sale. Some companies and private individuals are offering recently foreclosed former owners “to get a fresh start” by paying them a deeply discounted cash amount for an assignment of the owner’s rights to surplus funds.
“It’s a terrible thing for a person who probably needs all the funds they can get their hands on after they have been through a foreclosure,” said attorney Joshua Sundt, a member of a group of Bellevue, Wash.-based lawyers who comprise the Sound Legal Center. “Most of these people are not well organized and they don’t really know what to expect from the process.”
Typically, when a lender forecloses on a homeowner, the lender bids the amount owed, plus attorney’s costs and other fees, at the foreclosure sale. If no other bidder offers a higher price, the bank takes the house back at the price the bank is owed. However, escalating prices have brought higher bids at foreclosure sales, resulting in a difference between what the bank is owed and the actual foreclosure price.
For example, let’s say I fall behind on my $100,000 mortgage. I’m given notices of default and eventually a notice that my home is being foreclosed on by the Kelly Bank. The foreclosure date is set and the Kelly Bank bids $100,000 to $105,000 for the debt owed and $5,000 for taxes and attorney’s fees. However, other individual investors who have heard about the sale show up. The winning bid is $135,000. If no other liens are in place, I am entitled to the difference–$30,000.
Right after the sale is final, enter the surplus fund shark. He tells me that getting my money (since most owners do not attend the foreclosure sale, they are not aware of the total amount until later) will be a long and tedious process. He offers me a speedy resolution for 25 percent to 50 percent of “anything that’s left over.”
Some offerings have called for a flat fee while others a “sliding scale” depending upon the amount of the return. The total amount often includes subjective, open-ended middleman fees. For example, some assignment forms indicate the middleman would be entitled to “attorneys fees incurred, costs for filing, service, delivering, recording, downloading or obtain any documents, title examination documents and all other fees and costs incurred in obtaining and retrieving the surplus funds.”
“The truth is the former owner would have access to the funds just as fast as any middleman,” said attorney Patricia Armey of the Northwest law firm of Routh Crabtree Olsen, P.S. “In some cases, these people have told clients that getting the money could take from six months up to a year when it’s often available in 20 days, maybe sooner.
“The other piece of this is that we believe some of these players are bidding up the property at the sale–or have ‘straw’ bidders who are bidding up the properties–thereby netting them more money,” Armey said.
Although there is nothing inherently wrong with purchasing an assignment of rights, Sundt believes to do so in a foreclosure situation smacks of poor business practices at the very least.
“It’s clear that these people are approaching the unsophisticated consumer at a very difficult time,” Sundt said.
Tom Kelly’s new book, “Real Estate for Boomers and Beyond: Exploring the Costs, Choices and Changes for Your Next Move,” (Kaplan Publishing) is available in retail stores, on Amazon.com, and in local libraries. Tom can be reached at firstname.lastname@example.org.