Someone asked me recently about the subprime foreclosure process. In reality, the process of the subprime foreclosure is no different than any other foreclosure.

Subprime lending can be defined simply as lending that involves elevated credit risk. Whereas prime loans are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans, subprime loans are typically made to borrowers who are perceived as deficient on either or both of these grounds.

So why all the discussion about the subprime foreclosure? In addition, will we see increases in subprime foreclosure rates?

With all the teaser rates given to borrowers, the question is really whether or not we will witness substantial foreclosures as these teaser rates adjust upward. Lenders and note holders are not always anxious to foreclose. As a result, it is not uncommon for loan payments to be several months delinquent prior to the commencement of a foreclosure.

But once lenders decide to proceed with the foreclosure, the process can be quite lengthy. When foreclosing a deed of trust, all sums owing and secured by the deed of trust are accelerated and immediately become due regardless of the maturity date identified in the promissory note, provided that an acceleration clause is included in the promissory note and/or deed of trust. Two methods are generally used to foreclose deeds of trust: judicial foreclosure and non-judicial foreclosure.

In certain instances, a lawsuit is filed in a local superior court to foreclose on the property (judicial subprime foreclosure). When the beneficiary files a lawsuit against the trustor in a local superior court to judicially foreclose, the property, unless the default is remedied (cured), will be ordered sold at a publicly held sale supervised by the court. The judicial action to foreclose is often more costly and will typically take more time to complete than the second method, which is a privately held public sale (non-judicial subprime foreclosure).

In a non-judicial subprime foreclosure, the trustee (under the power of sale clause contained in the deed of trust) may proceed with the foreclosure at the lender's request and, unless the default is cured, sell the property without court supervision. This privately held public sale procedure will usually take at least four months to complete. If the deed of trust does not contain a power of sale clause, your only option is to foreclose judicially. Most deeds of trust do include a power of sale clause.

With the large quantity of teaser rate loans re-setting within the coming year, we should definitely see increases in subprime foreclosure rates. But fortunately these foreclosures should occur in markets with generally healthy local economies and adequate job growth. Hopefully, this will allow any sales of foreclosed properties to occur in a reasonable amount of time at a reasonable price.

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