In early 2019, the First Tuesday Journal estimated that the number of underwater — meaning the remaining mortgage is more valuable than the property — homes in California would continue to rise, noting that the amount of mortgaged homes with negative equity in the state rose for the first time since 2009 at the end of 2018. Falling behind on mortgage payments is never fun, but homeowners who are borrowers beholden to lenders, do have a handful of legal options, ranging from a conversation with their banker to last-resort parachutes. These methods for avoiding foreclosure aren't unique to California, but they do come with some distinct wrinkles by way of state laws.
Asking for Forbearance
After a few months of missed mortgage payments, the situation typically escalates. The mortgage lender files a public notice with the county recorder's office, and the borrower receives a notice of default. From here, it can take anywhere from a month to about four months to enter pre-foreclosure status. Fortunately, this gives borrowers an opportunity to be proactive, and one of the most proactive actions a borrower at risk of foreclosure can take is to talk to her lender as soon as possible. California's Homeowner Bill of Rights makes it clear that when homeowners in the midst of a foreclosure contact their lenders for help, the lender must provide a single point of contact, rather than bouncing them around to different servicers, upon request. Lenders must ensure that the borrower is considered for all foreclosure prevention measures and foreclosure alternatives on offer.
Borrowers may be able to work out a plan with their lenders to get their mortgages back on track. One of the simplest solutions here is forbearance, in which the lender allows the borrower to put their payments on hold for a period of a few months. One of the best-case scenarios to prevent foreclosure, forbearance is typically only available if the borrower can communicate to the lender that he has a clear plan to get back to financial stability.
Similar to forbearance, discussing a loan modification with a lender is an early-stage prevention measure for a potential foreclosure. Here, borrowers may renegotiate their mortgage loans for more favorable terms, hopefully making the payments easier to make and allowing them to get current on their mortgages. This is, of course, the most straightforward way to avoid foreclosure in California or any other state, though easier said than done. Some options for loan modifications include a reduction of the interest rate, extending the length of the loan's term or even possibly reducing the principal amount of the loan balance.
All of these options achieve what may be a key saving grace for borrowers who've fallen behind: They reduce the dollar amount of monthly mortgage payments, making catching up more manageable. In California, the Homeowner Bill of Rights makes it illegal for a lender to foreclose on a home while the borrower's application for loss mitigation, such as renegotiating the loan, is in process. The lender will be able to foreclose only if the borrower isn't eligible for loss mitigation; the appeal period for the application has expired; the borrower doesn't accept the offer within 14 days; or the borrower accepts, but breaches the agreement.
Filing for Bankruptcy
Even if the bank is so deep into the foreclosure process that a sale is set to happen in a few days' time, a borrower that files for bankruptcy can stop that sale from happening. This happens because of a provision in U.S. bankruptcy law, found in the U.S. Bankruptcy Code Section 362, known as an automatic stay. An automatic stay prevents creditors, collection agencies and even government entities from pursuing amounts owed for a period of time. That, of course, includes mortgage lenders.
However, the automatic stay's effective length can vary. The lender can file a motion to proceed with the foreclosure and, if the court grants that motion, foreclosure will continue within a few months. Here, at least, filing for bankruptcy serves as a stopgap that gives the borrower more time to figure out another solution before the home forecloses. By filing for a Chapter 13 bankruptcy, the homeowner may have the opportunity to restructure debts, allowing them to keep their homes while they're on a three- to five-year repayment plan for debts owed, including delinquent mortgage payments.
The Deed-in-Lieu Option
The deed-in-lieu option is not as favorable to the borrower as forbearance or loan modification, but it is certainly an alternative to foreclosure. In this case, the borrower turns the deed of the property over to the lender and is thus released from her mortgage obligations.
Returning ownership of the property back to the lender may make sense for borrowers who owe more money than what the property is worth. In some cases, the lender will even waive unpaid loan amounts after the property is sold. This route, however, is not usually possible if the borrower currently has an additional mortgage, and it is often subject to other strict qualifications determined by each individual lender.
Selling the House
If a borrower knows that he won't be able to make mortgage payments in the near future, he may choose to sell his home to nip foreclosure in the bud. If the home is sold before the borrower has missed payments on the mortgage loan, his credit rating won't be affected, though the house can still be put up for sale if the payments aren't current.
This last-resort option can be pretty precarious, though. The seller will have to advertise and show the house, find a buyer, negotiate a deal and allow time for the buyer to negotiate financing before the foreclosure deadline falls into place. When taking this route, hiring a licensed real estate agent or local real estate investment company to help sell the home can speed up the process and lessen that risk, though the homeowner will need to take the company's fees into account.
- Borowitz & Clark, LLP: California Foreclosure Timeline
- Zillow: What Is Foreclosure?
- First Tuesday Journal: California Underwater Homeowner Numbers to Increase
- Osborne Homes: Avoid Foreclosure in California: Options If You're Behind on Mortgage Payments
- Debt.org: Mortgage Loan Modifications and Mortgage Relief Programs
- McFarlin LLP: 3 Ways to Avoid Foreclosure in California
- Nolo: Last Minute Strategies to Stop Foreclosure
- Investopedia: Automatic Stay
- Nolo: California Foreclosure Protection: The Homeowner Bill of Rights