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Anatomy of a foreclosure



The numbers are staggering: More than 7 million families in the United States hold a subprime mortgage, and 14 percent of those homes are in default, according to the Center for Responsible Lending.

In Cleveland, Ohio, homeless people are squatting in foreclosed homes; in some Charlotte, N.C., neighborhoods 40 percent of the houses are being foreclosed on. And there is a ripple effect: Homes in areas with high foreclosure rates also diminish in value. For example, in Wake County, an estimated $81 million has been lost from the tax base due to foreclosures.

While the FBI is investigating Countrywide Financial, one of the nation's largest lenders, over allegations of predatory practices—at least 16 other investigations are under way—the damage has been done. And in retrospect, it was one of the largest financial schemes in American history.

The setup

Besides the borrower, there are four entities involved in loan-making: lenders, brokers, investors and servicing companies.

The recent crisis began when interest rates were low. Borrowers refinanced their mortgages to reduce their monthly payments; however, some borrowers used the savings to pay off credit card debt, and repeated the refinancing cycle until they owed more on their home than it was worth, known as "being upside down in the loan."

Meanwhile, more lenders flooded the mortgage industry, looking for new customers. With the traditional customer base tapped out, some lenders turned to subprime borrowers, people who historically couldn't afford houses.

These lenders often worked through brokers, sometimes offering them financial incentives to sell people into pricier loans. Borrowers who qualified for fixed-rate loans were sold adjustable-rate mortgages with tantalizingly low teaser rates that exploded after two or three years. (The Mortgage Bankers Association counters that many borrowers knowingly chose these loans to avoid putting money down.)

After the broker closed the deal—and earned a commission—the lender divided the mortgage into two parts: the mortgage-backed security, later sold to investors, and the servicing rights.

These investments can be found in the portfolios of pension funds, 401(k)s and money markets, among others. The riskiest investments, albeit those with the highest potential returns, were subprime mortgages. And here's the rub: The investor, not the lender or broker, owns that mortgage.

The lender sells the servicing rights to servicing companies—debt collectors that receive the monthly mortgage payments. They are paid on a percentage of those payments. The percentage is quite low, ranging from $2.50-$40 a month. So to reap larger profits, the servicing companies assess fees, of which they keep 100 percent. (See "Stung by a middleman.")

If the borrower doesn't pay the fees, which are often hidden, the mortgage is placed into a suspense account. So when the borrower mails the mortgage payment, it never gets to the lender, and instead goes into the account. The lender then forecloses on the home. And the servicing company makes even more money, as they are paid extra for taking a house into foreclosure.

The foreclosure

Foreclosure begins when the lender declares the borrower in default. The servicing company contacts an attorney, who sends the borrower a notice of hearing and notice of sale.

A hearing date is set; you may choose whether to attend, but it isn't required. The county clerk presides over the hearing and determines if the legal requirements for foreclosure have been met.You may appeal the decision to a judge, although you will be required to post a bond, the amount of which is at the discretion of the clerk. However, you cannot contest whether the loan was predatory or fraudulent. Those allegations must be addressed in a separate civil lawsuit.

If the clerk or judge determines the legal requirements for foreclosure have been met, a sale is ordered. You have 20 days until the sale date, by which time you must leave your home. If you are still in the house on the sale date, a sheriff's deputy will force you to leave.

If no one outbids the lender at the sale, there is a 10-day upset bid period during which someone may do so.

Where can I get help?

Since 2003, Legal Aid of N.C. has saved nearly 500 homes from foreclosure, often by working with the lender on behalf of the borrower. With help from the N.C. Justice Center, lawyers also investigate fraud and predatory lending cases.

"We treat every case like a pitbull with a porkchop," says George Houser, executive director of Legal Aid of N.C., which has 25 offices throughout the state. "At the end of the day, the person who has the house is the winner."


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