JoEllen Smith

FORECLOSURES

Foreclosure is the legal process of selling property to satisfy a defaulting borrower’s debt secured by that property. Most foreclosures in California are private trustee’s sales, rather than judicial foreclosures. A trustee’s sale is a public auction for selling property to the highest bidder-a quick and cost-effective process for the lender. However, if the foreclosure sales price is not enough to pay off the loan being foreclosed upon, the foreclosing lender cannot recover the shortage (also known as a deficiency judgment) from the borrower.

SHORT SALES

A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan. A short sale may or may not involve a property in foreclosure.

Properties are more likely to become short sales when the market is soft and the rate of home prices appreciation is low. However, the loan is generally the main instigator for a short sale. The loan in a short sale is often sub-prime highly leveraged, negatively amortizing, includes a prepayment penalty, or all of the above.

SUBPRIME LOANS

Subprime loans are generally loans made available to borrowers who do not qualify for conventional, mainstream financing because they have low credit score and a history of payment delinquencies, charge offs or bankruptcy. A subprime loan also tends to involve loose underwriting requirements, such as a minimal down payment and the option to provide a “stated income” without documentation. Because subprime loans are highly risky, lenders expect a lot in return. They typically charge higher interest rates, points and fees. 

Delinquencies and defaults are more common among subprime borrowers than among homeowners who have traditional financing. Yet, during the first half of this decade, California’s real estate market was robust and subprime borrowers experiencing financial difficulty could simply refinance their loans to cash out their built-up equity, or sell their homes for a profit. Absent that robust market, however, subprime borrowers may not have the option of refinancing or selling, subprime borrowers in financial trouble are falling into default.