What Are the Bank's Responsibilities On a Foreclosure?

Foreclosure means increased legal responsibilities for a bank. Banks must undergo a series of milestones in order to take back a property from a homeowner. The steps that lead to foreclosure are influenced by both state laws and the extent of the homeowner's delinquency. However, there are general responsibilities for foreclosure proceedings that all banks must follow.

Notice of Default

Foreclosure occurs when a homeowner defaults on his mortgage agreement. Once the homeowner falls behind by two to three months, the preforeclosure process usually begins. The bank must send a Notice of Default in order to begin preforeclosure. Preforeclosure is the homeowner's final chance to catch up on his mortgage payments. The notice usually includes a deadline by which a homeowner must catch up his past due mortgage payments before the foreclosure process begins. Banks must send the notice to the homeowner via certified mail.

Foreclosure Auction

An auction is required at the conclusion of the foreclosure process. Banks are required to advertise the auction in a city or county publication in advance of the event. City and county courts usually have a set day of every month when foreclosure auctions are held. Advertising the property gives buyers the opportunity to research the home and obtain the necessary funds to purchase the property. Homeowners often have the right of redemption leading up to the time of the auction which means banks are obligated to reinstate the mortgage loan if the homeowner pays the amount of the delinquent payments.

REO

It is the fiduciary responsibility of a bank to set the starting bid at a price high enough so that the institution recoups its entire return on investment. However, if the bid price does not present a viable investment opportunity for buyers, the home will not sell. Properties that do not sell at auction are returned to the bank as an REO property. An REO, or real estate owned home, is then listed on the general market with a broker or agent. The list price usually decreases after the home is on the market for an extended time frame.

Considerations

The bank's primary responsibility to its investors is to mitigate their losses in the event a foreclosure occurs. However, legal responsibilities are also present to protect the rights of the homeowner. In judicial states, where lenders need permission from the court before foreclosure can begin, the homeowner's right of redemption is often extended beyond the auction. No matter the length of the redemption period and whether the home sells at auction, the bank must return the home to the homeowner if the redemption period has not ended. Consult with a HUD-certified foreclosure attorney to learn whether all correspondence with a bank during the foreclosure process is in accordance with your state laws.

References

• Mortgage News Daily; Foreclosure Happens, But There Are Solutions; Glenn Setzer; Aug. 2005
• "The Complete Idiot's Guide to Buying Foreclosures"; Bobbi Dempsey; 2008
• "The Beginner's Guide to Investing in Real Estate"; Gary Eldred; 2008
• Real Estate ABC; Buying Bank Owned Properties (REO); Walt Harvey; 2000

Resources

• HUD