Subprime Foreclosures: A Lengthy Process

by Paul Sunndin

Subprime lending is defined as lending that involves elevated credit risk. Prime loans are typically made to borrowers who have a good credit history and have demonstrated to the lender that they have the capacity to repay their loan obligations. However, subprime loans are often made to borrowers who are perceived by the lender as deficient on one or both of these grounds.

There are a couple of questions that are often asked:

1)How have subprime mortgages contributed to increased foreclosure rates?

2)What is the foreclosure process for a subprime mortgage?

With all the teaser rates given to borrowers over the last several years, the question is really whether or not we will witness substantial foreclosures as these teaser rates increase. Lenders and note holders are not terribly excited to foreclose. As a result, it is common for loan payments to be several months delinquent prior to the start of the foreclosure process.

But when lenders proceed with the foreclosure process, the timeline can be quite lengthy. When foreclosing a trust deed, all amount owed and secured by the trust deed are accelerated and immediately become due and payable regardless of the maturity date specified in the note, provided that an acceleration clause is included in the promissory note and/or deed of trust. There are generally two methods used to foreclose deeds of trust: judicial foreclosure and non-judicial foreclosure.

In certain circumstances, a lawsuit is filed in superior court to foreclose on the property (judicial foreclosure). When the beneficiary files a lawsuit against the trustor in superior court, the property (unless the default is remedied) will be ordered sold. The judicial action to foreclose is generally more costly and will often take more time to complete than the non-judicial foreclosure.

In a non-judicial foreclosure, the trustee (under the power of sale clause contained in the deed of trust) may move forward with a foreclosure at the lender’s request and sell the property without court supervision. This privately held public sale will take at least four months to complete. If the deed of trust does not contain a power of sale clause, the only option is to foreclose judicially. However, most deeds of trust include a power of sale clause.

With the large amount of adjustable rate mortgages re-setting in the coming year, we should definitely witness increased foreclosure rates. But hopefully these foreclosures occur in markets with healthy local economies and adequate job growth. This would allow any sales of foreclosed properties to occur in a reasonable amount of time and at a reasonable price.

In the end, this would hopefully mitigate any substantial price decreases. Time will tell. All the questions should be answered in the coming year.


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