Late Payments/Foreclosure

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

As I often indicate, these columns are generated by common daily problems that develop between borrowers and lenders, i.e. trustors and beneficiaries. A very, very common MISCONCEPTION is that the lender has to wait ninety days before starting a foreclosure. No such thing could be further from the truth. That comment from a borrower is usually combined with a threat to the lender along the lines of “you have no right to foreclose – if you do, I’ll sue you”. Before you get into a fight (of any kind) be sure you’re standing on FIRM GROUND and that your weapon is bigger than the lender’s. The punch line of one of my favorite jokes is “see, he’s even so stupid he even shows up to gun fights with a knife”.

There are many, many types of loans and lenders in California. FHA and VA have certain “guidelines”. Most lenders have there own internal guidelines. As a result, very few lenders will file a Notice of Default on a payment that is less than thirty days delinquent, depending on the type of loan and the payment history of the borrower. Some harsh lenders will file a Notice of Default on the 11th or 16th day of a delinquency. Although we strongly recommend against this “quick trigger” behavior, there is nothing “illegal” about it other than Fannie Mae, Freddie Mac, FHA-VA guidelines as indicated above.

The reason some people believe that a lender can’t start a foreclosure for 90 days is that they are confusing the Notice of Default filing with the actual process. The foreclosure process itself involves filing a Notice of Default, allowing three months or more to elapse, and then filing a Notice of Trustee Sale. Though the process is technically three months for the Notice of Default period and at least twenty-one days for the sale period, the total foreclosure process takes approximately four months.

If the lender is acting improperly, by all means consult with a REAL ESTATE attorney for further advice: the attorney will be able to deal with the lender. In the event the lender is on solid ground, do not get pigheaded. The costs of the foreclosure are paid for by the BORROWER. These costs are merely added to the amounts due in the foreclosure. Additionally, some income property borrowers pick fights with the lenders and immediately find that the foreclosure includes the appointment of a receiver to collect rents and take over management of the property. The court costs and attorney fees to appoint a receiver will cost somewhere between $5,000 – $20,000, and this again gets added to the cost of the foreclosure. In the event that you are really having personality conflicts with your lender, seek out a tactful third party to deal on your behalf.

In the best of all worlds, a lender will not be overly harsh and the borrower will pay promptly and will remain communicative during the life of the loan. It’s a breakdown of the communication process that necessitates attorneys and the huge costs that follow. This is indeed unfortunate. If the borrower is not on firm ground a court fight can be disastrous as the borrower ends up paying for two attorneys, i.e. the borrower’s and the lender’s. Remember that a lender usually has a legitimate reason to start a foreclosure for a myriad of reasons. A borrower may be current on payments, but behind on taxes; current on the second trust deed, but delinquent on the first, etc. etc.

Although this article sounds totally one-sided, i.e. “borrower beware”, it’s also a reminder for lenders to try to communicate and work out problems. Once in a while a lender will instruct a trustee to file a Notice of Default for vindictive reasons. Though I indicated above that lenders have MOST of the weapons, I would not want to be in the shoes of a lender who filed a Notice of Default against a recently widowed homeowner who was sixteen days late in a payment involving a property where the lender had “plenty of equity”. If I wished to paint this lender in a worse light, let me add that the widow had contacted the lender and promised to personally deliver all delinquent amounts on the seventeenth day. The lender obviously said, “Bah Hum Bug”. Obviously, this is an absurd hypothesis but, in reality, vindictive lenders shoot themselves in the foot on a daily basis.

Some private party lenders are unsophisticated and consider a late payment a personal insult. The story usually goes something like, “I pay my bills on time and I have my own monthly obligations”. Once unsophisticated lenders understands that this is merely a business decision they can look at it in a different light. For instance, if a monthly payment is $1,000, and the payment comes in 21 days late, the lender is realistically “forced” to lend the borrower $1,000 for a three week period. If the lender would have placed that money in a bank account at a GENEROUS 6% interest rate, they have lost 21 days at $.16 a day, i.e. $3.36. The borrower, on the other hand, usually has to pay a late fee of 6%, ten days, i.e. $60. Often this will not pacify a private lender who takes borrower lateness personally. Borrowers don’t usually subject themselves to late fees and pay late purposely.

Let’s keep the communication lines open. Remember, the lender usually has a loaded gun (the foreclosure process) and the note contains an attorney’s fee provision. Don’t get into that fight, it probably will be too costly.

Peter Rosenthal
VIP Trust Deed Company