County of Los Angeles
Department of Consumer Affairs
Defaulted Loans And Foreclosure
Adjustable rate mortgages are the main cause.
Help is available
for homeowners and taking early action can save a home.
Foreclosures are on the rise in Los Angeles County. The main cause is the rise in adjustable mortgage rates for homeowners who purchased in the past two years.
A slowing market =
a growing problem
As home sales slow down and prices flatten out, more homeowners are defaulting on their mortgage loans. And they might not have the equity to refinance or sell their homes to avoid foreclosure.
As recently as 2005, if someone couldn’t afford a home they could easily sell it at a profit and avoid any problems.
But the market started cooling in the fall of 2005, making selling difficult. By mid-2006, the number of Notices of Default, the first step of the foreclosure process, began to rise greatly.
There are other reasons too. Sometimes bills just pile up. It could be because of unexpected emergencies or loss of a job. Perhaps you delay paying something to pay something else. Eventually it catches up and you might not have enough money for everything.
THE ROAD TO FORECLOSURE: There are four main steps in the foreclosure process. The links make it easy to understand how it works:
You're behind in your payments
TIGHTEN EXPENSES: The first thing to do is review your finances. Make a budget; go over every dollar you spend in a month. Identify expenses on things you don’t need and then cut them out.
Priorities should include:
You’d better be ready
As prices rose, many people did whatever they could to get into a home. To qualify and to keep early payments low, more than 20% of recent buyers took an Adjustable Rate Mortgage (ARM).
But with interest rates rising, an ARM can cause big trouble. Many people who took Adjustable Rate Mortgages over the last few years can no longer make the payments.
Some of those loans wind up in foreclosure.
Most ARMs are subprime loans. Interest rates for subprime loans are higher than the best available rates. The Center for Responsible Lending, a nonprofit research organization, recently reported that the risk of foreclosure is larger for people with subprime loans. Their research showed:
- 2.2 million recent subprime home loans have already failed or will end in foreclosure. This will cost homeowners up to $164 billion.
- One of five (19.4%) subprime mortgages opened in the past two years will end in foreclosure.
- The resulting loss of equity will hurt many Latino and African American homeowners. These communities get a disproportionate share of subprime home loans.
Other debts, while important, may have to be eliminated or reduced. These include:
- Cable TV
- Dining out
- Some telephone services
- Expensive cars (and their high insurance costs)
GO BIGGER: If cost-cutting is not enough, you may need to make even harder choices. Some things to consider are:
- Refinancing the home
- Selling the home
- Renting out the home and moving to a less expensive apartment
- Even filing for bankruptcy
WHAT YOU CAN DO:
- Talk to your lender – If the problem is temporary, the bank may be willing to reduce or suspend payments and add them to the loan amount. They may be willing to allow you time to make up any missed payments. They may even be willing to change the terms of your loan. Refinancing to lower your payments is a good option if the house if worth more than you owe. Selling your home is a good option if you owe more than it’s worth.
- Talk to an accountant, an attorney, or a debt counselor as soon as possible – Refinancing or selling your home could come with penalties. Check with knowledgeable people before you act. The U.S. Department of Housing and Urban Development (HUD) has a list of approved counselors. They can be found on their website or by calling (800) 569-4287.
PAY ON TIME: If you miss even one payment, your lender may file a Notice of Default, which begins the foreclosure process.
Notice of Default
A countywide epidemic
In December 2007, there were 6,236 Notices of Default mailed to Los Angeles County homeowners.
That number is about twice as many as those sent in January 2007 (3,193) and four times as many as sent in January 2006 (1,680).
DON’T DELAY: You missed a payment or two and the bank has filed a Notice of Default. This officially starts the foreclosure process, and you need to act quickly to avoid the forced sale of your home.
THE CLOCK IS TICKING: You now have three months from the date the Notice of Default is recorded to pay back payments and fees to the bank. If you pay before the time expires, your home won’t be sold.
TALK TO YOUR LENDER: If you can’t make up the payments, you still have options. Talk to your lender. Ask them to work with you on a plan to save the loan and your home. The bank doesn’t want to sell your home, but you have to talk to them to work something out.
There are no magic solutions to your problem.
If something sounds too good to be true, it probably is.
BEWARE OF SCAMS: Many unscrupulous people target homeowners in default. They know you are desperate to save your home and look to take advantage. They may ask you to transfer your property to them or a third party, offering to rent it back until you can make up the payments. They may offer refinancing at extremely high costs and take whatever equity you have. Either way, you lose your home.
BEFORE SIGNING ANYTHING: Talk to an attorney or a HUD counselor at (800) 569-4287. Do not sign over your property until talking to a counselor. Be aware that many available programs to assist homeowners in default are only for owner-occupied homes. If you sign over your property or move out, you may not qualify for some programs.
SALE TIME: If you did not pay the bank the amount of money due under the Notice of Default on time, the lender will next record a Notice of Sale.
Notice of Sale
FOR SALE: If you did not make up payments, the lender will next record a Notice of Sale. This notice will include the time, place, and date your home will be sold. It must be mailed to you at least 20 days before the date of sale. If you rent out the home to someone else, the renter will also receive a second notice which announces the foreclosure and explains their rights.
IT’S NOT TOO LATE: Even at this stage of the foreclosure process, you have options.
- You can pay the amount due plus any fees up to 15 days before the date of sale.
- If you wait until the last 5 days before the sale, your lender can require you to pay the entire loan amount.
Short Sale is another option
A short sale occurs when a lender allows a home to be sold for less than the total amount due. Banks often forgive the rest of the debt.
A recent report in The Wall Street Journal stated that Bank of America has seen the number of short sales increase 25% since last year.
A short sale allows homeowners to keep a foreclosure off their credit report.
However, there can be significant tax issues with short sales. Consult an attorney if you are considering a short sale.
GET ADVICE: As soon as possible, talk to an attorney or a HUD counselor at (800) 569-4287. Some HUD counselors also are familiar with bankruptcy. Arrangements can still be made to keep your home. You can find an attorney by calling the Los Angeles County Bar Association at (213) 243-1525
WE CAN HELP: Our counselors are available to answer your questions. To contact a DCA real estate representative, call (800) 973-3370.
CANCELLED: If you pay what’s owed, the lender must file a Notice of Rescission. This proves the sale has been cancelled. Once this is filed, if you fall behind again, the lender must start the process again.
BEWARE OF SCAMS: Thieves look for desperate homeowners. They may claim a transfer to them will stop the sale. They may claim that it will save your credit. What it usually means is they will charge you a fee (maybe thousands of dollars), take title to your home, collect rent from you for a month or more, and not pay your lender. After the sale, if there is any equity left, it will go to them as titleholder and not you.
AFTER SALE: You still have rights if your home is sold in a foreclosure sale.
NEW OWNERSHIP: Once a home is sold, the new owner usually will want to take possession. Sometimes they do not mind having a tenant and may want to work things out. What needs to be done next depends on if you are the previous owner or just a tenant.
If you are the previous owner:
- The new owner of the home only needs to give you a Three Day Notice to move. If the prior owner does not move by then, the new owner can begin the Unlawful Detainer process.
If you are a tenant:
- If you are under a lease created prior to the recording of the Deed of Trust that was the subject of the foreclosure, it may still be valid. The new owner may have to honor the lease or work out an arrangement with you. You are responsible to the new owner for rent from the date of sale, and in some cases may have to pay rent again and then attempt to recover the overpayment from the previous owner.
- If you entered into a rental agreement after the recording of the Deed of Trust involved in the foreclosure, the existing lease will usually be terminated by the foreclosure sale. The new owner can begin the eviction process by giving notice to vacate within 60 days, and in some cases as little as three days.
EXCEPTIONS: There are many exceptions and conditions that can apply in these cases based on both California Code of Civil Procedure and case law, so if you find yourself facing this situation, it is very important to get legal advice for your particular case. To speak to an attorney, you can call the Los Angeles County Bar Association Attorney Referral at (213) 243-1525.
YOU STILL HAVE RIGHTS: In any case, without going through the formal eviction process, the new owner can not:
- Throw you into the street
- Cut off utilities
- Change your locks
Also, foreclosure usually does not forgive the previous owner for any security deposits or advance rent payments made by the tenant. If the landlord did not declare bankruptcy, the tenant can still sue the previous owner, and in some cases the new owner, for damages.
Contact us for more information or speak with one of our counselors at (800) 973-3370. If you live outside of Southern California, call us at (213) 974-1450.
Updated July 8, 2008
For more information:
County of Los Angeles Department of Consumer Affairs
B-96 Kenneth Hahn Hall of Administration
500 W. Temple Street *
Los Angeles, CA 90012-2706
Telephone (800) 593-8222 (within LA County)
web site: dca.lacounty.gov