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As introduced in 0, foreclosure is the legal process used by lenders to recover the balance of a mortgage loan, after the borrower has stopped making payments, by forcing the sale of the asset which backs the loan. This is based on the concept of collateral, whereby the borrower pledges a specific property—in this case, the property that was purchased with the loan in question—as security to ensure loan repayment. The idea is that were a borrower to fail to pay the principal and interest on the loan, the bank or financial institution can recoup its losses by taking possession of the property and reselling it. As a reminder, within this work the term foreclosure refers specifically to residential mortgage foreclosure.

This section gives an overview of the foreclosure process in Ohio. It covers when and how a foreclosure action can be brought, ways to halt the process, what occurs at and after completion of the process, and lender alternatives to foreclosure.

Judicial Foreclosure

Three types of foreclosure exist in the U.S.: strict foreclosure, judicial foreclosure by sale, and power of sale, or non-judicial, foreclosure. In strict foreclosure, the least common form, the lender acquires title to the property when a foreclosure judgment occurs, without any sale of the property. In a judicial foreclosure, the foreclosure goes through a judicial process and, when a foreclosure judgment occurs, the property is sold at a public auction where the lender receives the proceeds. Finally, power of sale or non-judicial foreclosure allows the lender to force a sale without a judicial process. Generally, this means publishing notice of the impending sale and, after a waiting period, holding a public auction, again with the proceeds going to the lender (Durham, 1985; Madway, 1974; Pence, 2003).

Ohio is a judicial foreclosure state. A major feature of judicial foreclosures is that the process is much longer than for other types of foreclosures. This can be beneficial—for example, a title search is done as a precursor to a judicial foreclosure so that any other parties with interest are made aware of the suit (Durham, 1985)—as well as disadvantageous—in Ohio, the average length of the foreclosure

36 process in the second quarter of 2012 was about eighteen months (Levingston, 2012). The deleterious effects of such a long foreclosure process will be discussed in detail in Section 2.2.3.

Initiating a Foreclosure

Once a mortgagor (the borrower) has missed a mortgage payment, the mortgage is then delinquent and the mortgagee (the lender or servicer of the loan) has the right to file a foreclosure suit (Madway, 1974). Because courts require evidence that a borrower does not intend to repay the loan, banks and servicers (the mortgagees) do not file foreclosure proceedings until after a borrower has missed three consecutive payments (Ambrose & Capone, 1996). Prior to 90 days of non-payment a loan is delinquent; after 90 days the loan is in default.

After three monthly payments have been missed, a lender or servicer can file a foreclosure complaint at the County Court of Common Pleas. The borrower in default will receive a copy of the suit. The borrower then has 28 days to answer the court summons, and can request mediation at this point41

(Save the Dream Ohio, 2013). If the borrower does not respond, and thus does not contest the foreclosure suit, the mortgagee can request a summary judgment (a ruling without trial), which in this case would rule in favor of the mortgagee (Save the Dream Ohio,2013; ESOP Cleveland, n.d.).

If the borrower does respond, he or she may attempt to work out an agreement with the lender or servicer, in which case the judge will grant additional time to find a resolution. After this, the court holds a series of hearings and will move to judgment (Save the Dream Ohio,2013; ESOP Cleveland, n.d.).

Curing & Workouts

There are essentially two ways in which the foreclosure process can be halted by a borrower, with cooperation from the lender or servicer. A third possibility to halt the foreclosure would be dismissal of the case by a judge on the grounds that the litigant (i.e. the lender) lacks standing (cannot produce evidence of owning the mortgage) or has not properly followed the applicable foreclosure laws. Many states give borrowers a legal right to cure the mortgage before the foreclosure sale occurs. Curing a mortgage means that the mortgage will be brought up to date, with all missed payments, penalties, and legal costs accrued by the mortgagee to date paid by the mortgagor (Durham, 1985; Madway, 1974). However, Ohio law does not provide borrowers a right to cure, though it is possible for a mortgagee to voluntarily accept the mortgage curing (National Consumer Law Center, n.d.[b]). Curing is often not a viable option for borrowers; in most cases borrowers stop paying their mortgage payments because they don’t have the financial resources. If one can’t make the monthly payment, it is unlikely to be possible to pay several months at once, as well as additional fees and costs.

Borrowers in default (or prior to default) can also pursue a “workout” with their lender. This is an attempt by both parties to come to a mutually agreeable solution with the objective of avoiding foreclosure. Borrowers can attempt workouts on their own, but often need the assistance of a foreclosure mediator or foreclosure counselor to be successful. On their own, borrowers are often

41 _{Ohio House Bill 138 went into effect September 11, 2008 and allows the court to order mediation in any} foreclosure case (Ohio State Legislature, 2008). Parties can also voluntarily engage in mediation. Mediation will be discussed in more detail in Section 2.4.3.

37 overwhelmed by the complexity of the process, specialized terminology, and variety of parties involved. Mediation and counseling will be discussed in more detail in Section 2.4.3.

Completing the Foreclosure Process

When no curing, workout, or dismissal occurs, the judge will award judgment to the lender and a Sheriff’s Sale of the property will be scheduled. The Sheriff’s sale is a public auction where the property is sold to the highest bidder. However, in Ohio, and many other states, the sale value must be at least two-thirds of the property’s assessed value; if not, the property is not sold and a second auction is scheduled (Durham, 1985; National Consumer Law Center, n.d.[b]). This requirement has become onerous during the foreclosure crisis, due the general housing market crash as well as the reduction in value of individual properties due to vacancy and abandonment (see Section 2.2.3).

Some states offer the borrower statutory right of redemption after the Sheriff’s Sale has occurred. In Ohio, the borrower can redeem the property for the price of the foreclosure sale plus the foreclosure expenses up until when the foreclosure sale is confirmed (Durham, 1985; Pence, 2003; National Consumer Law Center, n.d.[b]). This can range from a couple of days up to ninety days in Ohio, because the Sheriff has 60 days to inform the court of the sale and the court has 30 days to confirm the sale (Save the Dream Ohio, 2013).

In most states, in cases when the foreclosure sale results in an amount less than the debt owed on the mortgage, a bank or servicer can pursue a deficiency judgment; that is, a ruling that the borrower must pay the remaining debt (Durham, 1985; Pence, 2003). However, deficiency judgments are not pursued often because in most cases borrowers have minimal remaining assets to pursue.

After the foreclosure sale is confirmed, the new owner may evict the current occupants—who may be the holders of the delinquent loan or renters who are not involved with the loan in any way. When this occurs the Sheriff will serve an eviction notice to the residents; the time allowed to vacate varies by county (Save the Dream Ohio, 2013; ESOP Cleveland, n.d.). However, many residents are unaware of their rights and move out upon receiving notice of a foreclosure suit. Thus has negative impacts on the household level—disruption, additional housing costs, stress—as well as increasing vacancy in the neighborhood and increasing the likelihood of vandalism and stripping for the property. This is particularly true when the foreclosure process is drawn out, which it often was during the foreclosure crisis, as both financial institutions and court systems were not equipped to deal with the volume of cases. For example, in March 2006 in Cuyahoga County, Ohio the average length of a foreclosure suit was over 18 months (Weinstein, Hexter, & Schnoke, 2006).

Post-foreclosure, many properties are categorized as REO, or real estate owned, properties. While REO technically refers simply to a property owned by a bank or other financial institution, in practice REO refers to vacant and frequently blighted, foreclosed properties (Immergluck, 2012). These properties are possessed by banks as the result of Sheriff’s sales where the bank owning the mortgage won the auction, which tends to occur when there were no other serious bids placed. Prior to the foreclosure crisis, REO properties were a relatively rare occurrence, because bidders would usually win the properties at auction above the bank’s minimum acceptable price; banks, not being property managers or real estate professionals, preferred not to take possession of foreclosed properties. This has changed with the foreclosure crisis and resulting flood of foreclosed properties on the market.

38 REOs are problematic for neighborhoods because a lack of accountability is frequently associated with them. They tend to be in poor condition, under- or non-maintained, and are often tax delinquent. Many properties that transfer out of REO are purchased cheaply by absentee investors or landlords, who are also often unaware or uninterested in the effect of these properties on neighborhood stability (Coulton, Schramm, & Hirsch, 2008c; Ellen, Madar, & Weselcouch, 2012a; Immergluck, 2012). These impacts will be discussed in more detail in Section 2.2.3.

Foreclosure Alternatives

Lenders and servicers have additional options beyond foreclosures when loans default. These include a deed-in-lieu (DIL), a preforeclosure sale, and loan modification and/or forbearance. Deed-in-lieu (of foreclosure) occurs when the mortgagee discharges the remaining mortgage debt in return for title to the property. Then the bank owns the property and the borrower is no longer indebted. This process is less costly for the mortgagee because there are minimal legal costs involved (Ambrose & Capone, 1996). Ghent & Kudlyak (2010) found that DILs (and short sales) are more likely to occur in states that allow deficiency judgments.

A second alternative is the preforeclosure sale, or short sale. In this case, rather than beginning a foreclosure suit, the lender or servicer allows the borrower time to sell the home in order to pay off the mortgage debt. Thus, the bank and borrower avoid the foreclosure process and associated costs, and the property is less likely to sell at a discount due to the ‘foreclosure stigma’ (Ambrose & Capone, 1996).

Third, the mortgagee can modify the loan. Options to modify the loan include modifying the term, modifying the interest rate, putting missed payments and fees into arrearage, or, in some cases, reducing the principal of the loan. A mortgagee may also offer forbearance, allowing the mortgagor to skip some payments during a ‘grace period’ and then resume payments. The missed payments are put in arrears or become a second lien on the property (Ambrose & Capone, 1996). This option may be preferable when the mortgagor has a temporary income shortage, such as the result of job loss, and is likely to restart payments after a short period.

These options ought to have been financially appealing to all parties during the foreclosure crisis. They all keep homeowners in the property longer, which greatly reduces the likelihood of property damage that devalues the house; all reduce legal costs; and in the case of loan modification, lenders could stop acquiring foreclosed properties that they are not equipped to manage. In a normally functioning housing market, foreclosed properties are usually discounted at sale but easily sold; during the foreclosure crisis many foreclosed properties became essentially valueless and unsellable, due to the glut in the housing market, the bursting of the housing bubble, and the deteriorated condition of many foreclosed properties. However these foreclosure alternatives were relatively scarcely utilized during the housing crisis.