The foreclosure process can oftentimes be drawn out and difficult, and is especially hard on the families it effects. Foreclosure is the legal procedure that occurs when a borrower fails to satisfy the terms of the loan. When a borrower cannot make payments to service the loan, the lender will begin the legal process of terminating the right of redemption. Entities outside of the primary lender can enter into foreclosure against the borrower as well if the latter fails to pay taxes, homeowner dues, contractor expenses, or other liens on the property.
When a borrower is delinquent payments on a loan for a period of time (usually around 3-5 months), they are informed via a notice of default by the lender that the property may be subject to foreclosure. Foreclosure by judicial sale and foreclosure by power of sale are the primary procedures a lender will pursue at this point. A lender will accept a short sale – a payment for less than the value of the mortgage – in cases where they do not wish to carry the asset on their books, the sale results in a small loss, and to avoid auction where it is likely they will not receive full value of the asset.
If the lender and borrower cannot renegotiate the terms of the loan, or if a short sale cannot be executed, the foreclosure process concludes, from the lender's perspective, with a foreclosure auction after the property has been repossessed.
To facilitate the sale of the distressed property, lenders will oftentimes remove most, if not all, of the liens on the asset that would make it less attractive to a prospective bidder. The initial price of a foreclosed upon property at auction is typically the balance that is left on the note. If the property is still unable to be sold, it will be classified REO.
After losing their mortgagor's right of redemption as a result of the foreclosure process, the borrower may still be required to make payments such as Private Mortgage Insurance or other loans taken out against the property.
