NOTE ACADEMY
Knowing Where You Stand With Homeowners: Foreclosure and Arrears
Fuquan Bilal
This is a business! Once you have acknowledged
that note buying is indeed a business you can then
proceed to a well written plan of action and successfully begin cash-flowing. However,
iIf you cannot grasp the concept,
your cash flow will suffer, to say
the least. Simply admiring the
shiny object is not going to get you
anywhere.
If you want to keep your money
moving, you have to stay focused
on the real objectives and goals.
As a note buyer, it is your job to
help homeowners find a solution
to their financial mortgage crisis,
yet the buyer shouldn’t forget to
help themselves in the process.
Can the homeowner afford to pay?
Who says they can only pay that
much? You can’t be sure unless
you do a financial assessment.
Every note buyer should create a
plan to communicate and request
documentation from homeowners,
and come to a mutual agreement
on a financial plan which will then
be sent to management for approval. Documentation from the
homeowners should include two
(2) pay stubs, two (2) checking
account statements, tax returns,
and some savings account statements.
Sometimes it may seem difficult to tell what a homeowner’s affordability really is. However, in such cases, take the time to step back, re-analyze and thoroughly review all documentation like financial statements, supporting documents, etc. It is normal to
want to give the homeowner the benefit of the doubt,
but it should be within reason.
In the second mortgage space, a note buyer should
always check the senior lien status on both performing and nonperforming notes. In this instance, never
ever take the borrower’s word that they are current;
in this business you must trust and verify.
What if the note holder is ignored after continuous attempts at making contact by telephone and sending notices by mail? This will then trigger the legal process
with a demand letter, which initiates foreclosure. The end goal, of
course, is not to foreclose. However, when the homeowner disregards any form of contact, it is a
good idea to begin the process
sooner rather than later. By initiating foreclosure, you are reinforcing to the homeowner that the lien
is binding and enforceable. Just
because you took that step,
doesn’t mean the property will get
foreclosed. Less than 10% of
deals actually go through the entire process, even though foreclosure is initiated on over half. This
means that oftentimes, after coming to the realization that the note
holder is enforcing the lien, the
homeowner will pull through and
the property won’t actually foreclose.
Therefore, make sure you know
where you, the note buyer,
stands. Know the homeowner’s
income versus expenses. Ever
hear of “arrears?” It is the legal
term for the part of a debt that is
overdue because of failure to
meet payments in addition to late fees. One can only
foreclose on a property if the payment due is at least
three months in arrears. Some note holders prefer not to
put arrears at the end of the loan on a modified payment
plan, in order for the loan to be categorized as a delinquency. When you agree to put the arrears payment on
the back end of the loan, you cannot foreclose because
effectively the homeowner is current. And at that point,
there is nothing to do but wait for an entire three months
of delinquency, as opposed to one, to begin the legal
process.