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Afraid of foreclosure? Here’s what really happens

Denver Business JournalOn the Money
From the July 6, 2007 print edition

Rating company Standard & Poor’s recently pointed to a sharp rise in late payments and defaults on “Alt-A” home-mortgage loans, a category between prime and sub-prime. S&P found that 4.21 percent of Alt-A loans bundled into mortgage-backed securities last year were 90 or more days overdue after 14 months.

That was up sharply from 1.59 percent for loans from 2005 and 0.91 percent for loans from 2004.

More borrowers are distressed, facing foreclosure, and could possibly lose their homes. Many may be wondering what that means, how long they have and what they can do. In other words, “How long before we have to get a U-Haul?”

Here’s a closer look at the foreclosure process in Colorado, including the timing of major events.

Delinquency and default — Technically, a loan is delinquent one day after a payment is due. When no payment has been received for more than 30 days, the loan is in default.

However, foreclosure can’t be initiated against FHA loans until at least three payments are due and unpaid. Conventional (non-government insured) loans can be put in foreclosure immediately upon default.

However, most lenders will choose not to begin foreclosure until three payments are due and unpaid.

For the borrower that stopped making payments Jan. 1, it will be April 1 before the lender decides to initiate foreclosure proceedings.

1. – Initiating foreclosure — In Colorado, the governor appoints a public trustee for each county in the state. The trustee must act as an impartial party when handling a foreclosure. The lender (usually through an attorney), files a Notice of Election and Demand for Sale with the public trustee of the appropriate county.

Other supporting documents are required. Complete details regarding the documents and procedures may be found in the Colorado Revised Statutes, Title 38-38-101.

2. – Sale process — After receiving the documents from the lender, the public trustee then notifies the county clerk and recorder. The foreclosure sale must take place between 45 and 60 days after the recording of the Notice of Election and Demand for Sale.

If the 60 days is used to set the sale date, the hypothetical borrower now has until June 1 to attempt a remedy. In other words, five months from the time the borrower stopped making payments.

3. – Publication and notification — Once recorded, the notice must be published in a newspaper of general circulation within the county where the property is located for a period of five consecutive weeks.

The public trustee also must mail other notices, which are more fully described in the statutes.

4. – Stopping the sale — The property owner may stop the foreclosure proceedings by filing an Intent to Cure with the public trustee’s office at least 15 days prior to the foreclosure sale date, then paying the necessary amount to bring the loan current by noon the day before the foreclosure sale is scheduled.

5. – Another chance to stop the sale — The lender’s attorneys must schedule a Rule 120 Hearing to take place before the sale date.

The purpose of the hearing is to legally establish whether the lender has the right to foreclose on the property and have it sold at the public auction. This might be an opportunity for the borrower to delay the foreclosure process.

6. – One last chance — When the property is sold (using auction bidding) by the public trustee, the successful bidder receives a certificate of purchase. That entitles the holder to a deed for property at the expiration of the redemption period.

Certificates of purchase are negotiable instruments. That is, they may be bought and sold, usually at very deep discounts. There’s a small market (similar to the over-the-counter stock market), for these certificates.

If a home is sold at the public auction, a 75-day (six months if the property is agricultural) redemption period commences. During this time, the homeowner can retain ownership in the property by paying off the amount bid at auction plus “allowable fees.”

In order to redeem, an “intent to redeem” notice must be filed at the county public trustee’s office at least 15 calendar days prior to the end of the redemption period.

In our example, the sale was held June 1. Therefore, the borrower has until Aug. 15 to save their property.

As with any legal process, foreclosure can be far more complex than described here. If borrowers have a foreboding feeling of foreclosure, they should consult with a qualified attorney.

Ironically, and although very expensive and stressful, the foreclosure process actually can provide the borrower with 7 1/2 months of additional financing for their property.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.