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A Good Guide to Forclosures

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It’s a sad reflection of the times that we need to bone up on such matters, but this post at Calculated Risk goes into some detail on the terminology and process of foreclosures. It’s titled “Foreclosure Sales and REO For UberNerds.” I didn’t find it nerdy (my threshold is papers that have more formulas than English), and I discovered that I didn’t understand the procedures as well as I thought I did.

This is the first couple of paragraphs of the meat of the post:

First of all, we need to understand what a foreclosure really is. We talk about lenders “taking back” a property at a foreclosure sale, but that’s misleading. Foreclosure is the forced sale of a property owned by the debtor in order to satisfy the debt(s) secured by the property. The owner of the property, on or before the date the mortgage loan is made, is the borrower. The borrower continues to be the owner of the property until that property is sold one way or another. As long as there is a valid mortgage on the property, that borrower/owner may not receive proceeds from selling it until the indebtedness to the mortgage-holder is satisfied.

What a security instrument (better known as a “mortgage” or “deed of trust” or a “security deed” to you weirdos in Georgia) does is to pledge the property the borrower owns, or is about to buy with the proceeds of a loan, as security for that loan. The document gives the lender the right to force the borrower to sell that property in order to satisfy the debt if the borrower does not repay. The lender, therefore, does not end up with REO (Real Estate Owned) because it owned the property before the mortgage default; it ends up owning RE if and only if it bought the property at the foreclosure sale. What it “owned” before the foreclosure sale was only a lien: the right to force that sale to take place, and to be paid first out of the proceeds of it in order to satisfy the debt.

The post continues here.

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