Walking away in Illinois

[HopingtoFind]

I am trying to help my parents who are strugling with a decision to walk away from the property they own. Their situation is as follows: My father is retired so his income has been reduced, my mother is still working...They currently have good credit. They own this house (loan and title is in my mother's name alone) that used to be their primary residence, but because of not being able to sell it few years ago, became a rental. Their lender is HSBC, which is from what I have read is not a very good one as far as trying to do a modification. At this point it is upside down and nothing in the area is selling. They don't think doing a Short Sale would work...They are at this point $1100 negative as far rent vs mortgtage payment, which includes taxes and insurance and they really strugling to keep this house. I think they should walk away... the only problem is my father is concerned because of Illinois foreclosure laws lender might come after their assets, attach my mother's wages.. etc... Please help, what should they do?

[dcurtis7418]

Dear Hoping to find,

Just wanted to drop a quick note to you. I am new to the forum and wouldn't want to give you the wrong advice. A moderator will post a message to you soon. One thing I do know is that this web site is full of valuable information specfic to your situation... Once you find your way around you will have many of your questions answered... I too am facing the same situation personally and though no one can answer for me what is the right thing to do... you can be assured you are not alone and everyone here is sure to help with support... The one thing I do know is that you need to talk to an attorney in their state who specializes in real estate so you can be clear before making any decisions... best wishes

[Professor Shays]

Below you will find what I was able to learn by going into the forum on this site that describes the state laws for Illinois. While it appears that a lender could go after your mother's assets, I would suggest that before you start worrying about that the lender be contacted about the potential of structuring the resolution as a "consent foreclosure." The good news for the lender is there is no right of redemption, meaning they would not have to wait the redemption period to sell the property (sure beats the 210 day timeline suggested below). The good news for your mom is that they can't go after a deficiency judgment if the transaction is structured in this manner.

I would follow this path or alternatively the deed-in-lieu process defined below which may be a first attempt before suggesting a "consent foreclosure. Know that there are certain specific assets that are exempt from execution (including typically retirement income). As always I suggest hiring a lawyer skilled in real estate and debt collection practices to review your parents' situation.

Take care,

Daniel





Illinois Foreclosure Law Summary


- Judicial Foreclosure Available: Yes

- Non-Judicial Foreclosure Available: No

- Primary Security Instrument: Mortgage

- Timeline: Typically 210 days

- Right of Redemption: No

- Deficiency Judgments Allowed: Yes
Lenders in Illinois have a number of options available to them to foreclose on a mortgage in default.

Judicial Foreclosure

A notice of the lenders intent to foreclose must be given to the borrower, and any other person entitled by Illinois statutes to receive notice, at least thirty (30) days prior to the courts judgment of foreclosure.
If the court finds in favor of the lender and issues a notice of sale, the sale will be conducted on the terms and conditions specified in the notice of sale, provided they meet the minimum standards provided in the Illinois Statutes.
The sheriff or any judge within the county where the property is located may conduct the sale. The borrower has no rights of redemption after the foreclosure sale.

Deed in Lieu of Foreclosure

If the borrower has defaulted on the mortgage and the lender agrees, the borrower may simply give the deed to the lender and his interests in the property securing the deed will be terminated. If the lender agrees and accepts the deed, they may not seek to obtain a deficiency judgment against the borrower at any time afterward.

Consent Foreclosure

In this type of foreclosure, the court enters a judgment satisfying the mortgage by giving absolute title to the property secured by the mortgage to the lender. The borrower has no rights of redemption after this type of foreclosure judgment has been rendered and the lender may not file for a deficiency judgment.
Lenders may also foreclose on a mortgage in default by using the common law strict foreclosure method, but Illinois law does not permit non-judicial power of sale foreclosures.

[HopingtoFind]

Professor, thank you for responding. Can you tell me what the main difference is between 'Deed-in-lieu' and 'Consent' foreclosure and the advantage one over the other. The result seems to be the same which is the bank gets the title to the property without going though a lengthy process.

[Professor Shays]

The primary difference is that with a deed-in-lieu there is no court supervision of the process, you are simply conveying the property to the lender. But if for example there was a second loan on the property, the lender would take ownership with that second loan still attached and the lender would have to face paying it off.

On the other hand, with the court supervised "consent foreclosure," junior liens such as the second loan can be extinguished (however the junior lien holders would have to be made parties to the lawsuit and there would have to be a judicial finding that there is no equity in excess of the first loan's balance in order to extinguish the junior liens).

The "consent foreclosure" provides a degree of safety that the deed-in-lieu doesn't.

Take care,

Daniel

[HopingtoFind]

I have relayed this information to my parents, they will go ahead and contact an attorney who can help. They currently have only one loan on the property.

Thank you again for your help.

[HopingtoFind]

Update: I spoke to my father, and he let me know that he went to speak to an attorney, they have attorney and Realtors in that office who specialize in Short Sales and they advised him to proceed with Short Sale... he said that if they do a short sale they wouldn't have to pay for about one year which of course means saving significant amount of money.

I also made a phone call to their servicer which is HSBC to find out what they need in order to proceed with short sale, and got to talk to an unpleasant woman who was basically saying that they need to list at fair market price.. I said but the fair market price is currently lower then the loan.. Then she said she (my mother) would be responsible for the difference.. I did mention to her that my mother is about a year or two away from her retirement... In any case she just said to bring an offer.. I also found out that investor is Freddie Mac and they have PMI insurance on this loan, don't know if it means anything...

My father thinks to stop making payments at this point and proceed with short sale as advised by an attorney. I also wonder if the lender can come after the rent they are receiving from the Tenant if they are doing a Short Sale.

[Professor Shays]

I can't speak to Illinois loan servicing practices relative to the rents, but I think it is safe to say that they would have to initiate court action to capture the rents. Here in California the process is somewhat complex and not used except for commercial rentals and apartments where the total monthly rentals support a decision to seek the appointment of a receiver by a court, so that the third party receiver can collect the rents and pay ongoing expences.

Going the short sale route may in many instances delay the foreclosure process because lenders and borrowers hold out hope that the property will sell and the problem will be resolved. Note however that lenders often require the borrower to sign an unsecured note for any shortfall, something I would suggest resisting. Be sure to have your parents retain an attorney to help them through the negotiations process.

Daniel

[HopingtoFind]

Thank you again Professor, I'll definitely let them know to work with an attorney which I think they will.

[HopingtoFind]

My Father talked to an attorney and this point thinking that Short Sale might not be that great of an idea for him. From what he understood they would be have to pay 1/3 in taxes on the deficiency amount plus the total amount of payments that they did not pay. So for example if deficiency is $50k and 6 month worth of mortgage payments is 18k, he would have to pay 1/3 or $68k. And that is not even counting attorney fees. Am I understanding this correctly?

[Professor Shays]

Frankly what you are saying doesn't really make a lot of sense. A foreclosure sale, where the loan amount exceeds the value of the property at the time of sale, is basically a "forced short sale" with the lender typically being the purchaser. The advantage of an arranged short sale to a third party is it gives the borrower the opportunity to "negotiate" a resolution with the lender as part of the transaction, with the possibility of elimination of any potential deficiency.

Daniel

[HopingtoFind]

Sorry about being confusing... He just didn't think it would work for them financially because of tax issues... He said he will just try a regular sale.. He actually talked to his tenant and the tenant would be interested to buy at a little above what they currently owe if he can get financing so he put him together with mortgage broker... hopefully they can work it out.