The Homeowner Bill of Rights was part of California's response to the foreclosure crisis. This set of state laws contains several key provisions, including a prohibition on dual tracking and requiring the servicer to appoint a single point of contact for borrowers. It also requires the lender or servicer to contact (or attempt to contact) the borrower to discuss foreclosure alternatives before starting a foreclosure.
The Homeowner Bill of Rights requires the lender or servicer to contact or attempt to contact the borrower to discuss foreclosure alternatives before starting a foreclosure.
Specifically, a servicer has to hold off for 30 days after contacting the borrower (or meeting the contact attempt requirements) regarding foreclosure alternatives before recording a notice of default, which is the first official step in a California foreclosure. (Cal. Civ. Code § 2923.5.)
Falling behind on mortgage payments is never fun, but homeowners who are borrowers beholden to lenders do have a handful of legal options, ranging from a conversation with their lender to last-resort parachutes. These methods for avoiding foreclosure aren't unique to California, but they do come with some distinct wrinkles by way of state laws. Listed below are 5 alternatives to foreclosure:
After a few months of missed mortgage payments, the situation typically escalates. The mortgage lender files a public notice with the county recorder's office, and the borrower receives a notice of default. From here, it can take anywhere from a month to about four months to enter pre-foreclosure status. Fortunately, this gives borrowers an opportunity to be proactive, and one of the most proactive actions a borrower at risk of foreclosure can take is to talk to their lender as soon as possible.
California's Homeowner Bill of Rights makes it clear that when homeowners in the midst of a foreclosure contact their lenders for help, the lender must provide a single point of contact, rather than bouncing them around to different servicers, upon request. Lenders must ensure that the borrower is considered for all foreclosure prevention measures and foreclosure alternatives on offer.
Borrowers may be able to work out a plan with their lenders to get their mortgages back on track. One of the simplest solutions here is forbearance, in which the lender allows the borrower to put their payments on hold for a period of time. One of the best-case scenarios to prevent foreclosure, forbearance is typically only available if the borrower can communicate to the lender that he has a clear plan to get back to financial stability.
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Even if the bank is so deep into the foreclosure process that a sale is set to happen in a few days' time, a borrower that files for bankruptcy can stop that sale from happening. This happens because of a provision in U.S. bankruptcy law, found in the U.S. Bankruptcy Code Section 362, known as an automatic stay. An automatic stay prevents creditors, collection agencies and even government entities from pursuing amounts owed for a period of time. That, of course, includes mortgage lenders.
However, the automatic stay's effective length can vary. The lender can file a motion to proceed with the foreclosure and, if the court grants that motion, foreclosure will continue within a few months. Here, at least, filing for bankruptcy serves as a stopgap that gives the borrower more time to figure out another solution before the home forecloses. By filing for a Chapter 13 bankruptcy, the homeowner may have the opportunity to restructure debts, allowing them to keep their homes while they're on a three- to five-year repayment plan for debts owed, including delinquent mortgage payments.
The deed-in-lieu option is not as favorable to the borrower as forbearance or loan modification, but it is certainly an alternative to foreclosure. In this case, the borrower turns the deed of the property over to the lender and is thus released from her mortgage obligations.
Returning ownership of the property back to the lender may make sense for borrowers who owe more money than what the property is worth. In some cases, the lender will even waive unpaid loan amounts after the property is sold. This route, however, is not usually possible if the borrower currently has an additional mortgage, and it is often subject to other strict qualifications determined by each individual lender.
If a borrower knows that he/she won't be able to make mortgage payments in the near future, they may choose to sell his home to nip foreclosure in the bud. If the home is sold before the borrower has missed payments on the mortgage loan, his credit rating won't be affected, though the house can still be put up for sale if the payments aren't current.
This last-resort option can be pretty precarious, though. The seller will have to advertise and show the house, find a buyer, negotiate a deal and allow time for the buyer to negotiate financing before the foreclosure deadline falls into place. When taking this route, hiring a licensed real estate agent to help sell the home can speed up the process and lessen that risk, though the homeowner will need to take the company's fees into account.
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