Contact the Owner in Pre- Foreclosure or before Auction day?

[James W.]

Hi guys  - can you analyse this scenario for me - thanks for your extremely helpful inputs!

I see a house listed for Sheriff Auction. 

The market value of house is 500K.

Owner's Equity is 200K

Judgement Amount is 300K.

1. My first question is - why is it on Auction in the first place? Instead of getting foreclosed - why cant the owner sell it for 300K - and walk away? When they foreclose him - he still has to walk away from the 200K equity. And am sure investors would gladly buy the 500K house for 300K - and pay the owner a little extra.

Btw - this is not a hypothetical example - I am seeing houses like this on the list. That are not in shambles - and are easy to bring up to mark.

Assuming theres a real answer why he cannot sell under the market - and it does land in auction. My questions are:

2 - Can I contact this owner and offer him 300K + some more, so he can pay off the Judgement and avoid foreclosure. What could be some reasons why he wont agree?

3 - Assuming he does agree - does this need lender's approval? If I paid less than Judgement - that would be Short Sale. But in this case I am paying a bit over the Judgement.

4 - Assuming both owner and lender are ok with this - can this be done once the house is already scheduled for Auction? Will they cancel the auction in that case?

5 - Can all this be done Before the Auction [ Pre-Foreclosure] - like - if I come to know the house has been served a Foreclosure Notice.

6 - Lastly - assuming its all done - will this be a normally scheduled closing, with agents and attorneys - so I get the deed and possession.

Thank you.

[Ron S.]

Originally posted by @Jason Hirko:

@Ron S. If the mortgage is current, and the lender is receiving their monthly payments on time, why would they call the note? Just because they can? And send it back into the foreclosure spiral? They have a performing asset on their books - In my experience, they've always been happy with that.

The biggest risk to me of doing subject to is that the original owner gets a home equity loan and splits - but in that case, you're only out the money it took you to catch up the mortgage.

 @Jason, good question. So, the reason is that the new owner has no obligation or liability to us and in turn, we have no obligation or liability to them so, when their loan payment goes up for lets say taxes or insurance (Just as an example), and the new owner calls in to find out why it went up, we can't tell them. Telling them would subject us to violation of a whole slew of state and federal rules about disclosing non public personal information. Let's say the borrower gives us permission to talk to the new owner? Ok, so maybe (maybe) we get away with the regulators breathing down our necks, we are subject to internal/external auditors reviewing the violation of our policies and procedures for disclosing information about a loan to a person not on the loan. I'd say that's the least of our worries. Continuing with the scenario, let's say the property gets damaged and the new owner has insurance and the insurance proceeds go to the new owner and not jointly to us. Get's $250M in a cashier's check for a burned down house. Decides, "Hey...wow...all I did was bring a loan current and now I have $250,000 in insurance proceeds to cover the loss of the home but heck, I only invested ten grand and I'm not on the loan! Heck! That's lottery money, I'm going to Vegas"! They take the money and run. We have a burned down house. The borrower has a foreclosure because the quitclaim/grant deed of whatever they did to sell the home doesn't absolve them of the liability on the loan. This scenario actually happens all the time and in that case, nothing we can do about it. Again, they have no obligation of liability to us.

You say they are going to do the right thing? The roads of the world are paved with good intentions and the reality is that money is a powerful motivator. Happens all the time.

They don't have a performing asset on their books. They have an impaired asset on their books. Potential legal issues, lender liability, regulatory issues and a whole bunch more. What the consumer thinks is a performing asset is a lot different than what a financial institution thinks is a performing asset or what a regulatory body thinks is a performing asset. Making matters worse if is the asset is investor owned (Like Fannie Mae or Freddie Mac).

That notwithstanding, what if the new owner is delinquent? I can't call to collect on the new owner. I'm subject to FDCPA rules on a Federal level and similar rules on a state level (Depending on the state). I call the borrower and he says he sold it. Now what?

Hopefully it's starting to make sense from a lender's perspective. No, we don't do it because we can. We do it to mitigate risk and loss.