As if foreclosure weren’t bad enough
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 callous investors who walk away from mortgages when their would-be short-term gold mines 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 is compounding the emotional stress at the foreclosure sale. Some companies and individuals are offering recently foreclosed former owners a chance “to get a fresh start” by paying them a deeply discounted cash amount for assignment of the owners’ rights to surplus funds. What are surplus funds?
Typically, when a lender forecloses on a homeowner, the lender bids the amount owed, plus attorney 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 home 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 $105,000 -- $100,000 for the debt owed and $5,000 for taxes and attorney 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, the surplus-fund shark enters. 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% to 50% of “anything that’s left over.”
Some call for a flat fee while others seek a “sliding scale” depending upon the amount of the return. The total 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 obtaining 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 Seattle attorney Patricia Armey. “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.”
Although there is nothing inherently wrong with purchasing an assignment of rights, lawyer Joshua Sundt, a member of the Bellevue, Wash.-based Sound Legal Center, 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 is “Real Estate for Boomers and Beyond: Exploring the Costs, Choices and Changes for Your Next Move.”
