Yes, the “F” word is back in style and ramping up. We, of course, mean “foreclosure.” It is not quickly ramping up as many people might have thought. However, the numbers are slowly but surely growing. We, at our firm, see more commercial properties coming into our foreclosure division from the banks where, in our servicing division, we are seeing not only the commercial properties struggling but more and more returned checks on our 1-4 properties so foreclosures are on the horizon. If you see your portfolio beginning to have higher delinquencies, you are not alone. This article deals with simply the beginning of the process and the thoughts behind starting a foreclosure. Most think that the question is “when should a foreclosure be commenced?” But, the question should be “should a foreclosure be commenced?” Making the decision to commence a foreclosure should not be taken lightly or as a matter of procedure. Each file must be reviewed individually in order to be sure the best decision is made, considering all factors: borrower, lender, property type, other tangibles and non-tangibles. The first things to be reviewed before
initiating a foreclosure:

Recovery Potential

After reviewing all of the costs involved, what is the recovery potential? If it is a first deed of trust, typically recovery shall be made whether or not it is in full or partial. A review to see if there is a personal guarantee that may assist with collection is important. The use of this personal guarantee is an entire article in and of itself.

Other Options

Options to review before foreclosure: Forbearance, modification, deed in lieu, taking the loss without putting forth further funds, doing nothing except continuing to send collection letters (you do not want to “zombieize” the loan), then, of course, judicial
foreclosure or non-judicial foreclosure.

Timing

If multiple properties are secured, reviewing each property and timing need reviewing.

Receivership

On a commercial property (including ag land) or multi-family, should a receiver be obtained? The next major review should be the file. Once the decision is made to commence
the foreclosure, the file must be reviewed
for the ability to commence the foreclosure:

  1. If this is a CFPB file, is the loan 120 days delinquent, have the required calls been made, has the required 45-day letter(s) been sent?
  2. Should steps be taken if a senior lien, taxes, or insurance are delinquent on a CFPB loan and the subject loan is not 120 days delinquent?
  3. If this loan is a HOBR loan, have the required call(s) been made, has the proper waiting period been performed, has the 30-day letter been sent, have the 30 days expired?
  4. If an attempt has been made for a forbearance or modification under HOBR or CFPB, have all proper steps been taken and have the proper timelines been followed?
  5. If a Notice of Intent has been sent, has it expired?
  6. If there was a conversation with the borrower giving a date to cure, has it expired?
  7. Does the deed of trust or note contain any special language about notice? Typically, if calling a loan due because of alienation, there could be a 30-day notice requirement
  8. If the loan matured, if a Balloon Payment Notice was required, was it sent timely and properly?
  9. Has your lender insinuated themselves directly and corresponded with the borrower? What has been told to
    the borrower?

Once it has been decided to commence a foreclosure, of course, all information going over to the trustee must be correct but it is important to not include any fees that were not allowed for under the note, deed of trust or California Civil Code. Many times we see fees such as “forwarding fee,” “foreclosure document preparation fee,” “delinquency oversight fee,” etc. being shown on foreclosure instructions as a fee the servicer wants collected. If these fees were not disclosed in your loan documents as allowable charges under the loan, it would be unwise to include them in the notice of default. Default interest is another issue that is routinely seen. This is a hot topic which this author will not delve into in this article.

The last little tidbit to mention is to not tell a borrower that a foreclosure WILL BE commenced, if there is not an intention to commence the foreclosure. Words like ‘NOTICE OF SEVERELY DELINQUENT ACCOUNT’ versus ‘NOTICE OF INTENT TO FORECLOSE’; “We will be reviewing your account for further collection action,” versus “Your account will be placed in foreclosure if we do not received the required funds.”

Foreclosure is not a procedure to be taken lightly. Remember that a foreclosure is a logical step but it must done wisely and
all steps must be performed precisely. Be sure that the person reviewing the file for foreclosure or whichever option chosen is knowledgeable. A discussion with the lender(s) is always important since it is their investment. Typically, the lender(s) will look to the servicer/broker, for guidance. It is important to be able to discuss all options with them. It is their investment, after all, and they have to live with the decisions and consequences that are made.