WEBVTT 00:00:00.000 --> 00:00:01.260 You know, I was driving through my old neighborhood 00:00:01.260 --> 00:00:05.059 the other day and I saw it. The sign, that stark 00:00:05.059 --> 00:00:08.119 red and white foreclosure sign staked into a 00:00:08.119 --> 00:00:10.220 lawn where the grass had gotten just a little 00:00:10.220 --> 00:00:12.779 too tall. And I think for most of us, when we 00:00:12.779 --> 00:00:15.460 see that. Or when we think about losing a home, 00:00:15.580 --> 00:00:18.879 we picture it as this singular tragic event. 00:00:19.059 --> 00:00:21.039 It's a moment in time. You picture the moving 00:00:21.039 --> 00:00:23.679 truck, the empty windows, maybe the family driving 00:00:23.679 --> 00:00:26.000 away. It feels like a scene from a movie. It's 00:00:26.000 --> 00:00:28.179 very cinematic. We tend to narrativize it as 00:00:28.179 --> 00:00:30.500 a climax, you know, the end of the story. Exactly. 00:00:30.859 --> 00:00:33.960 But we have been reading through this absolute 00:00:33.960 --> 00:00:36.679 mountain of documents, legal statutes, history 00:00:36.679 --> 00:00:39.259 books, international comparisons. And what you 00:00:39.259 --> 00:00:41.840 realize almost immediately is that the event 00:00:41.840 --> 00:00:45.240 is an illusion. Foreclosure isn't a moment. It 00:00:45.240 --> 00:00:48.219 is a machine. It is a machine. And it is a massive 00:00:48.219 --> 00:00:50.640 industrial -scale machine with very specific 00:00:50.640 --> 00:00:53.460 gears, levers, and triggers. And the scary part 00:00:53.460 --> 00:00:55.280 is that this machine is humming along in the 00:00:55.280 --> 00:00:57.159 background of the housing market every single 00:00:57.159 --> 00:00:59.759 day, but most people have absolutely no idea 00:00:59.759 --> 00:01:01.340 how it works until they get their sleeve caught 00:01:01.340 --> 00:01:04.180 in it. That is the perfect image. And that's 00:01:04.180 --> 00:01:06.760 our mission for this deep dive. We aren't just 00:01:06.760 --> 00:01:08.620 going to talk about the sadness of losing a house. 00:01:08.760 --> 00:01:11.620 We are going to pock the hood and look at the 00:01:11.620 --> 00:01:14.989 mechanics of loss. We're going to decode the 00:01:14.989 --> 00:01:17.430 legal machinery that makes it possible. And we're 00:01:17.430 --> 00:01:20.010 going to define a term that, frankly, most homeowners 00:01:20.010 --> 00:01:22.890 have never heard of, but it is the most important 00:01:22.890 --> 00:01:26.030 legal right you possess. It's called the equitable 00:01:26.030 --> 00:01:28.370 right of redemption. I have to admit, when I 00:01:28.370 --> 00:01:30.790 first saw equitable right of redemption in the 00:01:30.790 --> 00:01:33.030 notes, I thought we were pivoting to a theology 00:01:33.030 --> 00:01:35.370 podcast. It does sound biblical, doesn't it? 00:01:35.640 --> 00:01:37.459 But if you don't understand that phrase, you 00:01:37.459 --> 00:01:40.000 cannot understand foreclosure. Because legally 00:01:40.000 --> 00:01:42.500 speaking, foreclosure isn't about taking a house. 00:01:42.599 --> 00:01:45.519 It is about terminating a right. So we're going 00:01:45.519 --> 00:01:47.280 to unpack that. We're going to look at how a 00:01:47.280 --> 00:01:50.200 30 -year mortgage agreement can completely unravel 00:01:50.200 --> 00:01:53.680 in just 30 days. We're going to look at the weirdly 00:01:53.680 --> 00:01:55.680 different ways this machine operates, depending 00:01:55.680 --> 00:01:57.379 on whether you live in Florida or California 00:01:57.379 --> 00:02:00.340 or if you happen to live in Spain or China. And 00:02:00.340 --> 00:02:03.120 we have a really comprehensive stack of sources 00:02:03.120 --> 00:02:05.599 today. We're looking at everything from the Uniform 00:02:05.599 --> 00:02:09.379 Commercial Code to historical lobbying efforts 00:02:09.379 --> 00:02:12.599 from the 1850s to some really surprising data 00:02:12.599 --> 00:02:14.900 from the Federal Reserve about what happens to 00:02:14.900 --> 00:02:17.060 people after they lose their homes. So I want 00:02:17.060 --> 00:02:19.830 you. the listener, to do something for me right 00:02:19.830 --> 00:02:22.250 now. I want you to visualize a stack of paper. 00:02:22.710 --> 00:02:24.949 Maybe it's in a filing cabinet you haven't opened 00:02:24.949 --> 00:02:27.229 in five years. Yeah. Maybe it's in a fireproof 00:02:27.229 --> 00:02:30.949 box under the bed. It's your mortgage. It's that 00:02:30.949 --> 00:02:33.530 inch -thick stack of documents you signed until 00:02:33.530 --> 00:02:37.449 your hand cramped up. And somewhere in the fine 00:02:37.449 --> 00:02:40.150 print of Section 18, there is a single sentence 00:02:40.150 --> 00:02:42.449 that has the power to change the trajectory of 00:02:42.449 --> 00:02:45.169 your life. Imagine you've missed a payment. The 00:02:45.169 --> 00:02:47.750 clock has started. What happens next? To understand 00:02:47.750 --> 00:02:49.389 what happens next, we have to strip away the 00:02:49.389 --> 00:02:51.710 colloquialisms. We use the word foreclosure all 00:02:51.710 --> 00:02:53.849 the time. Oh, the bank foreclosed on the Smiths. 00:02:53.849 --> 00:02:55.629 It sounds like closing something, like closing 00:02:55.629 --> 00:02:58.349 a door. Right. It feels final. In a way, it is. 00:02:58.870 --> 00:03:01.770 But let's look at the legal definition. Foreclosure 00:03:01.770 --> 00:03:05.569 is a process where a lender, the mortgagee, attempts 00:03:05.569 --> 00:03:08.789 to recover the balance of a loan from a borrower. 00:03:09.259 --> 00:03:11.280 the mortgagor who has stopped making payments 00:03:11.280 --> 00:03:14.719 but here is the technical core of it okay it 00:03:14.719 --> 00:03:17.680 is the act of terminating your equitable right 00:03:17.680 --> 00:03:20.500 of redemption okay let's stop and really dig 00:03:20.500 --> 00:03:22.979 into this equitable right of redemption because 00:03:22.979 --> 00:03:25.159 this is the concept that anchors the whole system 00:03:25.159 --> 00:03:27.639 where does it come from It comes from English 00:03:27.639 --> 00:03:30.719 common law going back centuries. I mean, way 00:03:30.719 --> 00:03:33.500 back in the old days, courts were divided into 00:03:33.500 --> 00:03:36.360 courts of law and courts of equity. OK, I think 00:03:36.360 --> 00:03:38.379 I remember this from civics class law versus 00:03:38.379 --> 00:03:41.060 equity. Exactly. Courts of law were very rigid, 00:03:41.199 --> 00:03:43.979 very black and white. If the contract said pay 00:03:43.979 --> 00:03:46.360 by Tuesday and you paid on Wednesday, you lost. 00:03:46.539 --> 00:03:49.259 Done. End of story. Harsh. Very harsh. No excuses. 00:03:49.439 --> 00:03:51.419 But courts of equity were designed to be fair, 00:03:51.560 --> 00:03:54.780 to look at the nuance, the equities of the situation. 00:03:55.039 --> 00:03:57.560 And historically. these courts looked at land 00:03:57.560 --> 00:03:59.599 as something unique. Different from just money 00:03:59.599 --> 00:04:01.900 or a cart of grain. Totally different. It wasn't 00:04:01.900 --> 00:04:04.060 just a commodity. It was your livelihood, your 00:04:04.060 --> 00:04:06.340 legacy, your place in the community. So they 00:04:06.340 --> 00:04:09.219 decided that if a borrower pledged their land 00:04:09.219 --> 00:04:11.900 as collateral for a loan, they should have a 00:04:11.900 --> 00:04:15.159 right to redeem that land. So even if I miss 00:04:15.159 --> 00:04:17.699 the deadline, the court of equity says, hold 00:04:17.699 --> 00:04:21.139 on, if he can come up with the money, he should 00:04:21.139 --> 00:04:23.920 get to keep the farm. That's it in a nutshell. 00:04:23.980 --> 00:04:26.990 It's a safety valve. The court is saying we prefer 00:04:26.990 --> 00:04:30.370 the borrower to keep the property if they can 00:04:30.370 --> 00:04:33.470 make the lender whole. This right exists from 00:04:33.470 --> 00:04:35.689 the moment you sign the mortgage. It is your 00:04:35.689 --> 00:04:38.069 right to say, oops, my mistake. Here's the money. 00:04:38.129 --> 00:04:40.209 Give me my title back. That sounds great for 00:04:40.209 --> 00:04:41.949 the borrower. I mean, that's a huge protection. 00:04:42.209 --> 00:04:44.290 But I imagine for the bank, that's incredibly 00:04:44.290 --> 00:04:46.689 annoying. It's worse than annoying. It's a liability. 00:04:47.399 --> 00:04:49.680 From the lender's perspective, this right of 00:04:49.680 --> 00:04:52.459 redemption is a problem. It creates what lawyers 00:04:52.459 --> 00:04:55.579 call a cloud on title. A cloud on title. I like 00:04:55.579 --> 00:04:57.720 that. It's very visual. It is. Think of it this 00:04:57.720 --> 00:04:59.779 way. As long as you have the right to show up 00:04:59.779 --> 00:05:01.720 with the bag of cash and claim the house back, 00:05:02.000 --> 00:05:04.980 the bank doesn't fully, truly own it even after 00:05:04.980 --> 00:05:07.319 you've defaulted. They can't sell it to a new 00:05:07.319 --> 00:05:09.360 owner free and clear because there is this lingering 00:05:09.360 --> 00:05:12.160 possibility, this cloud, that you might redeem 00:05:12.160 --> 00:05:14.800 it. So who would buy a house under those conditions? 00:05:15.040 --> 00:05:17.319 Right. No one. you'd be buying a potential lawsuit. 00:05:17.459 --> 00:05:19.879 Yeah. So the bank is stuck in limbo. Precisely. 00:05:19.879 --> 00:05:23.560 So foreclosure is literally the process of foreclosing, 00:05:23.560 --> 00:05:26.720 shutting out, extinguishing that right. The bank 00:05:26.720 --> 00:05:29.899 is going to court or going to a trustee to say, 00:05:29.980 --> 00:05:32.540 we need to kill this person's right to redeem 00:05:32.540 --> 00:05:35.519 so we can take fee simple title. Fee simple title. 00:05:35.600 --> 00:05:37.759 That's the clean version. That's the holy grail 00:05:37.759 --> 00:05:40.379 for the lender. Total unencumbered ownership. 00:05:40.959 --> 00:05:43.399 Once they have fee simple title, the cloud is 00:05:43.399 --> 00:05:46.120 gone. They can sell the house, evict you, and 00:05:46.120 --> 00:05:48.879 recoup their cash. So when we talk about foreclosure, 00:05:49.019 --> 00:05:51.259 we are technically talking about a lawsuit or 00:05:51.259 --> 00:05:53.680 a procedure designed to strip you of a right 00:05:53.680 --> 00:05:56.100 you might not have even known you had. That is 00:05:56.100 --> 00:05:58.040 exactly it. Most people think they're losing 00:05:58.040 --> 00:06:00.519 a house. Legally, they're losing a right. Okay, 00:06:00.579 --> 00:06:02.920 so that's the definition. That's the what. But 00:06:02.920 --> 00:06:05.100 let's talk about the how. Because people miss 00:06:05.100 --> 00:06:07.540 payments all the time. You go on vacation and 00:06:07.540 --> 00:06:09.920 forget to mail the check. The auto pay glitches. 00:06:10.730 --> 00:06:13.269 Being a week late doesn't trigger the apocalypse. 00:06:13.550 --> 00:06:15.829 No. What is the actual trigger? The trigger is 00:06:15.829 --> 00:06:18.089 hidden in that stack of papers we visualized 00:06:18.089 --> 00:06:21.550 earlier. In a standard U .S. mortgage, specifically 00:06:21.550 --> 00:06:23.870 the Fannie Mae Freddie Mac uniform instrument, 00:06:23.970 --> 00:06:26.449 which is, you know, most of them, it is usually 00:06:26.449 --> 00:06:30.050 found in sections 16, 17, or 18. It is called 00:06:30.050 --> 00:06:32.889 the acceleration clause. The acceleration clause. 00:06:33.569 --> 00:06:35.589 That sounds like something from a physics textbook. 00:06:35.850 --> 00:06:38.149 Right. Or a horror movie. It feels a bit like 00:06:38.149 --> 00:06:41.370 both when it hits you. It is the moment gravity 00:06:41.370 --> 00:06:43.529 shifts. Think about it. When you sign a mortgage, 00:06:43.730 --> 00:06:46.230 you are agreeing to pay over a long timeline. 00:06:46.509 --> 00:06:48.970 30 years, usually. Right, 30 years. You are agreeing 00:06:48.970 --> 00:06:52.430 to pay, say, $2 ,000 a month for 360 months. 00:06:52.529 --> 00:06:55.250 It's an installment plan, a really, really long 00:06:55.250 --> 00:06:57.370 one. But contained in that agreement is a clause 00:06:57.370 --> 00:07:01.350 that says, if you break a term, usually by defaulting 00:07:01.350 --> 00:07:04.269 on a payment, the lender has the right to accelerate 00:07:04.269 --> 00:07:08.250 the debt. Accelerate it to when? To now. Immediately. 00:07:08.250 --> 00:07:10.050 They don't just want the missed payment of $2 00:07:10.050 --> 00:07:13.850 ,000 anymore. They are declaring the entire remaining 00:07:13.850 --> 00:07:16.370 balance of the loan due and payable instantly. 00:07:16.689 --> 00:07:20.250 Whoa. Let's just pause on the math of that. I 00:07:20.250 --> 00:07:22.970 miss a payment of $2 ,000. I ignore a couple 00:07:22.970 --> 00:07:25.990 of letters. Suddenly, the bank isn't asking for 00:07:25.990 --> 00:07:29.610 the $2 ,000 plus a $50 late fee. They're asking 00:07:29.610 --> 00:07:33.889 for the $350 ,000 principal balance. Immediately. 00:07:33.970 --> 00:07:36.430 That is the acceleration. They are collapsing 00:07:36.430 --> 00:07:39.350 the 30 -year timeline into a single day. That 00:07:39.350 --> 00:07:42.889 seems, well, practically impossible. If I couldn't 00:07:42.889 --> 00:07:45.470 pay the $2 ,000, I definitely don't have $350 00:07:45.470 --> 00:07:47.310 ,000 sitting in my checking account. And that 00:07:47.310 --> 00:07:49.839 is the point. It is the ultimate leverage. Once 00:07:49.839 --> 00:07:51.759 they accelerate the debt, you can't just pay 00:07:51.759 --> 00:07:54.959 the missed month to make it go away unless they 00:07:54.959 --> 00:07:57.379 allow you to cure it. OK, so talk to me about 00:07:57.379 --> 00:07:59.459 this cure, because the timeline here is crucial. 00:07:59.620 --> 00:08:02.240 How long do you have before this? This acceleration 00:08:02.240 --> 00:08:04.620 happens. The machine doesn't just spring this 00:08:04.620 --> 00:08:07.199 on you overnight. Usually the mortgage contract 00:08:07.199 --> 00:08:09.860 and federal laws dictate a specific sequence. 00:08:10.339 --> 00:08:12.680 Typically, after you miss a payment or two, you 00:08:12.680 --> 00:08:15.879 get a breach letter or a demand letter. The dreaded 00:08:15.879 --> 00:08:19.319 letter in the mail. Yes. And under statutes like 00:08:19.319 --> 00:08:21.899 the Fair Debt Collection Practices Act, the FDCPA, 00:08:22.139 --> 00:08:25.060 this letter has to be very specific. It can't 00:08:25.060 --> 00:08:27.980 just say. You're late. It has to tell you exactly 00:08:27.980 --> 00:08:30.199 how much you owe to bring the account current. 00:08:30.560 --> 00:08:33.899 This is your window to cure the default. To cure 00:08:33.899 --> 00:08:36.159 it like the loan is sick. It's a legal term. 00:08:36.220 --> 00:08:38.700 To cure means to reverse the default by paying 00:08:38.700 --> 00:08:41.500 just the back payments and the fees. It puts 00:08:41.500 --> 00:08:43.840 you back on the 30 year track like nothing happened. 00:08:44.059 --> 00:08:46.269 And how long is that window? Standard residential 00:08:46.269 --> 00:08:48.990 mortgages usually give you 30 days from the date 00:08:48.990 --> 00:08:51.950 of that letter to cure. 30 days. And if you have 00:08:51.950 --> 00:08:53.870 a commercial loan, maybe for a small business 00:08:53.870 --> 00:08:55.970 or an apartment building. Shorter. Often only 00:08:55.970 --> 00:08:58.190 10 days. So you have a 30 -year relationship 00:08:58.190 --> 00:09:01.490 with this bank. You've paid them thousands, maybe 00:09:01.490 --> 00:09:03.289 hundreds of thousands of dollars in interest. 00:09:03.950 --> 00:09:06.450 And the dissolution of that entire relationship. 00:09:06.990 --> 00:09:09.269 Basically comes down to a 30 day window. That's 00:09:09.269 --> 00:09:11.870 the reality. Once that 30 day window expires, 00:09:11.870 --> 00:09:14.230 if you haven't paid up, the acceleration kicks 00:09:14.230 --> 00:09:17.090 in fully. The lender stops asking for the missed 00:09:17.090 --> 00:09:19.429 payment and starts the machinery to take the 00:09:19.429 --> 00:09:22.190 house. And this is where the road forks. Right. 00:09:22.269 --> 00:09:24.049 Because I think most people assume there is just 00:09:24.049 --> 00:09:26.870 one way to foreclose. You go to court, the judge 00:09:26.870 --> 00:09:29.450 bangs a gavel and you lose the house. But looking 00:09:29.450 --> 00:09:32.450 at the sources. That's not true at all. It depends 00:09:32.450 --> 00:09:34.789 entirely on where you live. It varies wildly. 00:09:35.049 --> 00:09:37.269 In the U .S., we basically have three different 00:09:37.269 --> 00:09:40.169 paths or types of foreclosure. And the experience 00:09:40.169 --> 00:09:42.690 of losing your home, how long it takes, how much 00:09:42.690 --> 00:09:45.470 it costs, whether you can fight back, is completely 00:09:45.470 --> 00:09:47.289 different depending on which path your state 00:09:47.289 --> 00:09:49.830 follows. So let's start with the one that feels 00:09:49.830 --> 00:09:52.590 most familiar to what we see on TV, the courtroom 00:09:52.590 --> 00:09:56.120 path. Right. This is judicial foreclosure. This 00:09:56.120 --> 00:09:59.120 is the standard in about half the states. If 00:09:59.120 --> 00:10:01.740 you live in Florida, New York, Illinois or Pennsylvania, 00:10:02.100 --> 00:10:05.720 this is likely your world. So how does this play 00:10:05.720 --> 00:10:07.820 out? What does it feel like? It feels like a 00:10:07.820 --> 00:10:10.940 lawsuit because it is a lawsuit. Pure and simple. 00:10:11.080 --> 00:10:13.639 The lender files a civil complaint against you. 00:10:13.720 --> 00:10:16.919 Bank of America v. John Doe. So I get served 00:10:16.919 --> 00:10:20.379 papers. You get served papers. There are pleadings, 00:10:20.379 --> 00:10:23.379 hearings, motions, discovery. It works just like 00:10:23.379 --> 00:10:26.000 a lawsuit over a car accident or a contract dispute. 00:10:26.259 --> 00:10:28.620 Which means there is a judge involved. Yeah. 00:10:28.740 --> 00:10:31.559 An actual person. Yes. And that is the key feature. 00:10:31.679 --> 00:10:34.200 A judge has to review the evidence and sign the 00:10:34.200 --> 00:10:37.259 order. If the lender wins, the judge orders the 00:10:37.259 --> 00:10:39.179 property to be sold under court supervision, 00:10:39.559 --> 00:10:42.340 usually a sheriff's sale. Now looking at this, 00:10:42.460 --> 00:10:44.740 the pro side seems to be that there is oversight. 00:10:45.289 --> 00:10:47.330 A human being in a robe is actually looking at 00:10:47.330 --> 00:10:49.009 the paperwork to make sure the bank didn't mess 00:10:49.009 --> 00:10:51.190 up. Theoretically, yes. It offers the most protection 00:10:51.190 --> 00:10:53.090 for the borrower. You can raise defenses. You 00:10:53.090 --> 00:10:55.049 can file motions to delay. You can demand the 00:10:55.049 --> 00:10:57.190 bank produce the original note. You have your 00:10:57.190 --> 00:11:00.230 day in court, so to speak. But the con... from 00:11:00.230 --> 00:11:02.870 the system's perspective, is that it is incredibly 00:11:02.870 --> 00:11:05.870 slow. Oh, incredibly. In states like New York 00:11:05.870 --> 00:11:08.429 or New Jersey, a judicial foreclosure can take 00:11:08.429 --> 00:11:11.929 years. I'm talking three, four, five years from 00:11:11.929 --> 00:11:14.610 the first missed payment to the actual eviction. 00:11:14.690 --> 00:11:18.860 Five years? Yes. It clogs up the courts. During 00:11:18.860 --> 00:11:21.919 the height of the housing crisis in 2009, judicial 00:11:21.919 --> 00:11:24.620 foreclosure states were backed up so badly they 00:11:24.620 --> 00:11:26.820 had to bring judges out of retirement just to 00:11:26.820 --> 00:11:29.440 sign foreclosure orders. They were called rocket 00:11:29.440 --> 00:11:32.139 dockets, just trying to clear the backlog. So 00:11:32.139 --> 00:11:34.860 the banks and the lobbyists probably didn't love 00:11:34.860 --> 00:11:37.080 that system. They hated it. It's expensive, it's 00:11:37.080 --> 00:11:38.820 time -consuming, and it locks up their capital 00:11:38.820 --> 00:11:41.500 for years. Which brings us to the second path. 00:11:42.029 --> 00:11:44.049 The path the banks built for themselves. The 00:11:44.049 --> 00:11:46.909 fast track. Exactly. This is non -judicial foreclosure 00:11:46.909 --> 00:11:49.350 or technically foreclosure by power of sale. 00:11:49.490 --> 00:11:51.669 This is common in states like California, Texas, 00:11:51.870 --> 00:11:53.950 Washington and Georgia. And the difference here 00:11:53.950 --> 00:11:58.110 is no judge. No judge, no lawsuit, no court pleadings, 00:11:58.110 --> 00:12:00.710 no guy in a robe banging a gavel. How is that 00:12:00.710 --> 00:12:02.649 even legal? Can they just take your house without 00:12:02.649 --> 00:12:04.990 going to court? They can because you agreed to 00:12:04.990 --> 00:12:07.330 it. If you look at your paperwork in California, 00:12:07.570 --> 00:12:10.070 you likely didn't sign a document called a mortgage. 00:12:10.620 --> 00:12:13.179 You signed a document called a deed of trust. 00:12:13.779 --> 00:12:15.779 I've heard those terms used interchangeably. 00:12:15.799 --> 00:12:17.500 What's the difference? It's a huge difference. 00:12:17.740 --> 00:12:21.340 A mortgage involves two parties, you and the 00:12:21.340 --> 00:12:25.360 bank, the mortgager and the mortgagee. A deed 00:12:25.360 --> 00:12:28.639 of trust involves three parties, you, the bank. 00:12:29.100 --> 00:12:31.840 And a trustee. Who is the trustee, a neutral 00:12:31.840 --> 00:12:34.000 third party. Well, neutral is a strong word. 00:12:34.039 --> 00:12:36.100 It's usually a title company or a subsidiary 00:12:36.100 --> 00:12:38.700 of the bank. But legally, they hold the power 00:12:38.700 --> 00:12:42.000 of sale. The power of sale. Right. Inside that 00:12:42.000 --> 00:12:44.080 deed of trust, there is a clause where you basically 00:12:44.080 --> 00:12:46.240 said, I grant the trustee the power to sell this 00:12:46.240 --> 00:12:48.740 property if I default without needing a court 00:12:48.740 --> 00:12:51.299 order. So you waive your right to a trial before 00:12:51.299 --> 00:12:53.419 you even bought the house. Essentially, yes. 00:12:53.759 --> 00:12:56.809 The process is entirely administrative. The trustee 00:12:56.809 --> 00:12:59.690 records a notice of default, an NOD, at the county 00:12:59.690 --> 00:13:02.450 recorder's office. They mail you a copy. You 00:13:02.450 --> 00:13:04.990 get a statutory period, usually 90 days in California, 00:13:05.149 --> 00:13:07.750 to cure. And if you don't cure in those 90 days... 00:13:07.899 --> 00:13:11.340 Then they record a notice of trustee sale, publish 00:13:11.340 --> 00:13:13.980 it in a local newspaper of general circulation. 00:13:14.240 --> 00:13:16.039 You know, one of those tiny ones no one reads. 00:13:16.220 --> 00:13:19.759 And 21 days later, they auction your house on 00:13:19.759 --> 00:13:22.019 the courthouse steps. That sounds infinitely 00:13:22.019 --> 00:13:26.460 faster. It is. In Texas, a foreclosure can theoretically 00:13:26.460 --> 00:13:29.980 be completed in as little as 41 days. 41 days 00:13:29.980 --> 00:13:32.100 versus four years. Exactly. Compare that to the 00:13:32.100 --> 00:13:34.159 four years in New York. And it's much cheaper 00:13:34.159 --> 00:13:36.500 for the bank. What's fascinating to me is the 00:13:36.500 --> 00:13:39.399 history. The financial industry has been lobbying 00:13:39.399 --> 00:13:41.779 for this power of sales system since the mid 00:13:41.779 --> 00:13:45.139 -19th century. The 1850s. Way back. And their 00:13:45.139 --> 00:13:47.960 argument was essentially, if we make foreclosure 00:13:47.960 --> 00:13:50.220 faster and cheaper, we can offer loans at lower 00:13:50.220 --> 00:13:51.980 interest rates because our risk is lower. That's 00:13:51.980 --> 00:13:53.759 the economic argument. Which makes some sense. 00:13:53.919 --> 00:13:56.659 It does. But they also used a psychological argument. 00:13:56.980 --> 00:14:00.320 They argued that nonjudicial foreclosure is kinder. 00:14:00.340 --> 00:14:03.379 Kinder, how is bypassing the judge and speeding 00:14:03.379 --> 00:14:06.250 up the eviction kinder? They argued it avoids 00:14:06.250 --> 00:14:09.230 the trauma and public shame of being sued. It 00:14:09.230 --> 00:14:13.009 avoids the interim effects of a lawsuit. They 00:14:13.009 --> 00:14:14.809 said, look, we're just going to handle this quietly. 00:14:15.169 --> 00:14:19.190 No bailiffs, no subpoenas, just a quiet sale. 00:14:19.429 --> 00:14:20.990 We're just going to take your house politely 00:14:20.990 --> 00:14:23.330 without dragging you through the mud. That's 00:14:23.330 --> 00:14:25.490 the pitch. It's a real point of debate whether 00:14:25.490 --> 00:14:27.950 that's actually kinder or just faster and cheaper 00:14:27.950 --> 00:14:29.809 for the bank. I think I know which side I'd fall 00:14:29.809 --> 00:14:32.500 on. Most people do. Now, there is a third path 00:14:32.500 --> 00:14:35.379 mentioned in the notes. It's called strict foreclosure. 00:14:36.000 --> 00:14:38.120 This sounds like something from a Dickens novel. 00:14:38.399 --> 00:14:40.820 It is very old school. It's a minor method now, 00:14:40.899 --> 00:14:43.059 mostly seen in parts of Connecticut, New Hampshire, 00:14:43.139 --> 00:14:45.159 and Vermont. How does this one work? Is there 00:14:45.159 --> 00:14:48.220 a court? It starts in court, like a judicial 00:14:48.220 --> 00:14:51.000 foreclosure. But if the lender wins, there is 00:14:51.000 --> 00:14:54.080 no auction. The court simply orders the borrower 00:14:54.080 --> 00:14:56.980 to pay the full debt by a set date. They call 00:14:56.980 --> 00:14:59.679 it the law day. And if they don't, if they can't 00:14:59.679 --> 00:15:02.200 make the law day payment? The title reverts directly 00:15:02.200 --> 00:15:05.360 to the lender. No sale. No bidding. No chance 00:15:05.360 --> 00:15:07.879 of getting any equity back. No sale. The bank 00:15:07.879 --> 00:15:11.620 just takes the house. Snap. It's theirs. This 00:15:11.620 --> 00:15:14.879 is usually only allowed when the property is 00:15:14.879 --> 00:15:17.500 underwater, meaning the debt is higher than the 00:15:17.500 --> 00:15:20.179 house is worth. Why does that matter? Because 00:15:20.179 --> 00:15:23.059 if the debt is $400 ,000 and the house is worth 00:15:23.059 --> 00:15:26.360 $300 ,000, a sale wouldn't generate any extra 00:15:26.360 --> 00:15:28.759 money for the borrower anyway. So the court says, 00:15:28.919 --> 00:15:30.840 let's skip the charade of an auction and just 00:15:30.840 --> 00:15:34.019 hand over the keys. Wow. It's efficient. I'll 00:15:34.019 --> 00:15:36.940 give it that. But it feels harsh. It was actually 00:15:36.940 --> 00:15:39.980 the original method of foreclosure historically. 00:15:40.519 --> 00:15:43.179 In the medieval period, if you didn't pay, the 00:15:43.179 --> 00:15:45.899 lender just kept the land. We've evolved away 00:15:45.899 --> 00:15:47.820 from it because we generally want to see if a 00:15:47.820 --> 00:15:49.899 sale can generate some suppressed cash for the 00:15:49.899 --> 00:15:52.399 borrower. But in those New England states, the 00:15:52.399 --> 00:15:54.639 tradition persists. OK, so those are the paths. 00:15:54.840 --> 00:15:56.279 You're either in a lawsuit, you're on the fast 00:15:56.279 --> 00:15:58.200 track with a trustee, or you're in New England 00:15:58.200 --> 00:16:00.799 getting strictly foreclosed. But let's say I'm 00:16:00.799 --> 00:16:02.789 the borrower. I'm on the tracks. The train is 00:16:02.789 --> 00:16:05.370 coming. Do I have any way to stop it? Can I fight 00:16:05.370 --> 00:16:09.129 back? You can. But it is much, much harder than 00:16:09.129 --> 00:16:11.090 people think. We need to talk about the defenses. 00:16:11.250 --> 00:16:12.990 And honestly, we need to talk about the defenses 00:16:12.990 --> 00:16:14.889 that aren't really defenses. Let's start with 00:16:14.889 --> 00:16:17.940 the big one. The Constitution. Due process. If 00:16:17.940 --> 00:16:20.179 I'm in California and a bank is taking my house 00:16:20.179 --> 00:16:22.460 without a judge, without a hearing, isn't that 00:16:22.460 --> 00:16:24.600 a violation of my constitutional right to due 00:16:24.600 --> 00:16:27.500 process? That is the most common argument borrowers 00:16:27.500 --> 00:16:29.299 try to make when they first talk to a lawyer. 00:16:29.399 --> 00:16:32.559 They can't do this. I have rights. And in non 00:16:32.559 --> 00:16:34.960 -judicial states, that argument almost always 00:16:34.960 --> 00:16:38.509 fails. Why? It seems so obvious. Because of something 00:16:38.509 --> 00:16:41.590 called the state action doctrine. The Constitution, 00:16:41.970 --> 00:16:44.490 specifically the 14th Amendment, protects you 00:16:44.490 --> 00:16:46.350 from the government. It protects you from state 00:16:46.350 --> 00:16:48.730 action. It says the state cannot deprive you 00:16:48.730 --> 00:16:51.690 of property without due process. But in a nonjudicial 00:16:51.690 --> 00:16:54.830 foreclosure, who is taking your house? The bank 00:16:54.830 --> 00:16:59.039 or the trustee. Exactly. Private actors. Private 00:16:59.039 --> 00:17:02.159 companies. The courts have ruled repeatedly that 00:17:02.159 --> 00:17:04.720 just because the state allows nonjudicial foreclosure 00:17:04.720 --> 00:17:07.039 laws to exist or just because the county recorder 00:17:07.039 --> 00:17:09.700 stamps the deed, that doesn't make it state action. 00:17:09.940 --> 00:17:12.240 So because it's a private contract between me 00:17:12.240 --> 00:17:14.519 and the bank, the Constitution sets this one 00:17:14.519 --> 00:17:17.579 out. Essentially, yes. In California, the courts 00:17:17.579 --> 00:17:20.559 have even called the due process defense frivolous. 00:17:20.859 --> 00:17:23.440 They say if you wanted the protection of a judge, 00:17:23.640 --> 00:17:26.539 you should have found an ender who used judicial 00:17:26.539 --> 00:17:28.880 foreclosure. Which is impossible because they 00:17:28.880 --> 00:17:31.660 all use deeds of trust. Exactly. It's a theoretical 00:17:31.660 --> 00:17:34.059 choice, not a practical one. You want the loan. 00:17:34.299 --> 00:17:36.980 You sign the deed. OK, so the constitutional 00:17:36.980 --> 00:17:40.720 argument is a dead end. What about this tender 00:17:40.720 --> 00:17:43.559 trap I saw on the nose? This seems honestly, 00:17:43.720 --> 00:17:45.880 it seems maddening. This is a procedural hurdle 00:17:45.880 --> 00:17:48.400 that stops many lawsuits before they even start. 00:17:48.519 --> 00:17:50.960 In states like California, Georgia and Texas, 00:17:51.240 --> 00:17:54.059 if you want to sue for wrongful foreclosure. 00:17:54.460 --> 00:17:56.039 Let's say the bank actually screwed up. They 00:17:56.039 --> 00:17:57.680 didn't send the notice. They got the math wrong. 00:17:58.160 --> 00:18:01.839 You have to first offer valid tender. Define 00:18:01.839 --> 00:18:03.759 tender for me. You have to prove you have the 00:18:03.759 --> 00:18:06.779 money to pay off the entire debt. Wait. To sue 00:18:06.779 --> 00:18:09.339 them for foreclosing on me incorrectly, I have 00:18:09.339 --> 00:18:11.480 to prove I can pay off the whole loan first. 00:18:11.839 --> 00:18:15.319 Yes. The legal principle is he who seeks equity 00:18:15.319 --> 00:18:19.019 must first do equity. The court says, look, even 00:18:19.019 --> 00:18:21.160 if the bank made a mistake, if you don't have 00:18:21.160 --> 00:18:22.799 the money to pay them back, the result would 00:18:22.799 --> 00:18:24.839 be the same anyway. You'd still lose the house. 00:18:25.299 --> 00:18:27.299 So we aren't going to waste the court's time. 00:18:27.460 --> 00:18:31.019 That's a total catch -22. If I had the cash to 00:18:31.019 --> 00:18:33.500 pay off the house, I wouldn't be in foreclosure. 00:18:33.640 --> 00:18:37.150 It is the ultimate paradox. Legal textbooks explicitly 00:18:37.150 --> 00:18:39.589 critique this. They call it a paradox because 00:18:39.589 --> 00:18:42.569 it effectively bars the people who need protection 00:18:42.569 --> 00:18:45.329 the most, those who are broke from challenging 00:18:45.329 --> 00:18:48.430 illegal foreclosures. It means only rich people 00:18:48.430 --> 00:18:51.430 can sue for wrongful foreclosure. The notes mention 00:18:51.430 --> 00:18:54.150 a specific case that really highlights how rigid 00:18:54.150 --> 00:18:57.299 this is. Nguyen V. Calhoun. Tell us that story. 00:18:57.480 --> 00:18:59.519 This is a heartbreaker. It happened in California. 00:18:59.859 --> 00:19:03.019 A borrower, Nguyen, was in default. The foreclosure 00:19:03.019 --> 00:19:05.599 sale was scheduled for a Friday. Nguyen managed 00:19:05.599 --> 00:19:08.099 to scrape the money together to cure the default. 00:19:08.240 --> 00:19:09.900 Okay, so he's trying to do the right thing. He's 00:19:09.900 --> 00:19:12.359 got the money. He got a cashier's check. He put 00:19:12.359 --> 00:19:14.460 it in a FedEx envelope addressed to the lender. 00:19:14.539 --> 00:19:17.059 He sent it on Thursday. Cutting it close. Very 00:19:17.059 --> 00:19:19.980 close. The check arrived at the lender's office 00:19:19.980 --> 00:19:22.819 on Monday morning. But the sale was Friday. Exactly. 00:19:22.980 --> 00:19:25.910 The house was sold at auction on Friday. And 00:19:25.910 --> 00:19:28.710 Gwynn sued, arguing, I sent the money, I tendered 00:19:28.710 --> 00:19:30.910 the payment. The court looked at it and said, 00:19:31.049 --> 00:19:34.710 essentially, close only counts in horseshoes. 00:19:35.210 --> 00:19:37.349 They held that the tender attempt was inadequate 00:19:37.349 --> 00:19:39.549 because it wasn't received before the sale. Three 00:19:39.549 --> 00:19:42.289 days. A weekend. He did everything he could. 00:19:42.410 --> 00:19:45.190 A weekend. And the house was gone. The machinery 00:19:45.190 --> 00:19:47.890 has no mercy for logistics. If the gear turns 00:19:47.890 --> 00:19:49.930 and your hand is still in there, it crushes you. 00:19:50.670 --> 00:19:53.359 That is brutal. It's not just about having the 00:19:53.359 --> 00:19:55.140 money. It's about the precise logistics of the 00:19:55.140 --> 00:19:57.799 transfer down to the minute. Absolutely. Okay, 00:19:57.839 --> 00:20:00.180 so legitimate defenses are hard. But what about 00:20:00.180 --> 00:20:02.660 the wild stuff? I feel like I've read internet 00:20:02.660 --> 00:20:04.339 rumors about people getting out of mortgages 00:20:04.339 --> 00:20:06.559 because the bank didn't actually lend them money. 00:20:06.880 --> 00:20:10.579 Ah, yes. The vapor money theory. Or the show 00:20:10.579 --> 00:20:13.059 me the note defense. Yeah, that's the one. The 00:20:13.059 --> 00:20:15.279 idea that banks create money out of thin air 00:20:15.279 --> 00:20:17.519 so there was no consideration and the contract 00:20:17.519 --> 00:20:20.720 is void. This is a classic internet myth. It's 00:20:20.720 --> 00:20:23.359 very popular in sovereign citizen circles. It 00:20:23.359 --> 00:20:26.500 stems from a case in Minnesota back in 1968 called 00:20:26.500 --> 00:20:29.180 First National Bank of Montgomery v. Jerome Daly. 00:20:29.539 --> 00:20:32.279 Tell us about Jerome Daly. So Daly was fighting 00:20:32.279 --> 00:20:34.960 eviction. He was an attorney representing himself. 00:20:35.240 --> 00:20:37.799 He argued that when the bank gave him a mortgage, 00:20:38.039 --> 00:20:39.940 they didn't give him gold or silver. They just 00:20:39.940 --> 00:20:43.039 typed numbers into a ledger. He argued that the 00:20:43.039 --> 00:20:45.059 bank created the credit out of nothing, so they 00:20:45.059 --> 00:20:47.000 gave him nothing of value, and therefore the 00:20:47.000 --> 00:20:49.240 contract was void. And what did the judge say? 00:20:49.630 --> 00:20:52.609 Well, this is why the myth survives. The justice 00:20:52.609 --> 00:20:55.049 of the peace, a man named Martin Mahoney, who 00:20:55.049 --> 00:20:57.309 wasn't a real judge in a court of record, actually 00:20:57.309 --> 00:21:00.089 agreed with him. He declared the mortgage void 00:21:00.089 --> 00:21:02.450 and said the bank had committed fraud. So it 00:21:02.450 --> 00:21:05.109 worked. For about five minutes in that tiny room. 00:21:05.190 --> 00:21:08.069 But legally, it was a nullity. The ruling was 00:21:08.069 --> 00:21:10.430 void on its face. The courts overturned it immediately. 00:21:11.319 --> 00:21:13.539 Justice Mahoney was actually disbarred later 00:21:13.539 --> 00:21:16.440 for going rogue. But the story lives on in internet 00:21:16.440 --> 00:21:19.079 forums. People sell kits claiming they can help 00:21:19.079 --> 00:21:22.099 you use this defense. Let me guess. It doesn't 00:21:22.099 --> 00:21:24.180 end well for the people who buy those kits. It 00:21:24.180 --> 00:21:26.599 ends with them losing their house and often getting 00:21:26.599 --> 00:21:28.859 sanctioned by the court for filing a frivolous 00:21:28.859 --> 00:21:33.119 lawsuit. Let me be clear. This defense does not 00:21:33.119 --> 00:21:36.359 work. If you try to tell a judge the money wasn't 00:21:36.359 --> 00:21:39.970 real, you will lose. Okay, so that's a dead end. 00:21:40.089 --> 00:21:42.589 But there are procedural defenses, right? Like... 00:21:42.779 --> 00:21:45.200 The bank just messing up the paperwork. Oh, yes. 00:21:45.400 --> 00:21:47.440 And that's where most of the successful challenges 00:21:47.440 --> 00:21:49.500 happen. It's not about these grand theories. 00:21:49.640 --> 00:21:51.880 It's about dotting the I's and crossing the T's. 00:21:52.119 --> 00:21:54.440 For example, there was a New York case where 00:21:54.440 --> 00:21:57.039 a foreclosure was stopped because the lender's 00:21:57.039 --> 00:21:59.900 affidavits weren't prepared in the ordinary course 00:21:59.900 --> 00:22:02.420 of business. What does that mean? It means they 00:22:02.420 --> 00:22:04.500 were robo -signed. Someone was just stamping 00:22:04.500 --> 00:22:06.799 thousands of documents without actually reading 00:22:06.799 --> 00:22:09.240 them or verifying the facts. The court said, 00:22:09.339 --> 00:22:11.500 nope, you can't do that. Go back and do it right. 00:22:11.920 --> 00:22:14.019 It doesn't kill the foreclosure, but it can delay 00:22:14.019 --> 00:22:16.559 it for months, even years. So if these defenses 00:22:16.559 --> 00:22:19.900 fail, we end up at the auction. The auction block. 00:22:20.000 --> 00:22:22.119 This is where the machinery completes its cycle. 00:22:22.380 --> 00:22:24.819 Set the scene for us. What's it like? Typically, 00:22:24.900 --> 00:22:27.599 it's on the courthouse steps. Or nowadays, sometimes 00:22:27.599 --> 00:22:30.160 it's online. You have a trustee or a sheriff 00:22:30.160 --> 00:22:32.460 running it. And you have a crowd of bidders, 00:22:32.480 --> 00:22:36.279 investors, flippers, bargain hunters. But there 00:22:36.279 --> 00:22:39.809 is one bidder who has a superpower. The bank. 00:22:39.890 --> 00:22:42.210 The bank. Everyone else in that crowd usually 00:22:42.210 --> 00:22:44.390 has to show up with cash or cashier's checks. 00:22:44.549 --> 00:22:46.509 I mean, literally bags of money they have to 00:22:46.509 --> 00:22:49.670 pay immediately if they win. But the bank can 00:22:49.670 --> 00:22:52.869 credit bid. Meaning they bid with the debt I 00:22:52.869 --> 00:22:55.609 owe them. Right. They can bid up to the amount 00:22:55.609 --> 00:22:58.609 of the total debt principal, interest, fees, 00:22:58.809 --> 00:23:01.569 everything. No cash changes hands. They're just 00:23:01.569 --> 00:23:05.480 using the IOUs. So if you owe $400 ,000, they 00:23:05.480 --> 00:23:08.240 can bid up to $400 ,000 without putting a dollar 00:23:08.240 --> 00:23:10.319 down. Which almost no one else can compete with. 00:23:10.420 --> 00:23:12.900 Exactly. And if no one bids higher than the bank... 00:23:12.900 --> 00:23:15.660 Then the bank wins its own property. That's when 00:23:15.660 --> 00:23:17.880 the property becomes REO, real estate owned. 00:23:18.200 --> 00:23:20.579 Right. It goes from being a loan on their books 00:23:20.579 --> 00:23:23.079 to a physical asset they have to manage and sell. 00:23:23.480 --> 00:23:25.700 So when I see a bank -owned listing on Zillow, 00:23:25.720 --> 00:23:27.839 that's not just a house the bank bought for fun. 00:23:28.160 --> 00:23:30.420 That's a foreclosure that failed to sell at auction. 00:23:30.990 --> 00:23:33.509 Exactly. It's inventory the bank is stuck with. 00:23:33.569 --> 00:23:36.710 It's a monument to a failed mortgage. Now, here 00:23:36.710 --> 00:23:40.509 is where it gets really scary. I lose the house. 00:23:40.670 --> 00:23:43.190 The bank takes it. I'm thinking, OK, worst case 00:23:43.190 --> 00:23:46.170 scenario, I'm homeless. I'm devastated. But at 00:23:46.170 --> 00:23:48.150 least the debt is gone. I'm starting from zero. 00:23:48.549 --> 00:23:52.650 But that's not always true, is it? No. And this 00:23:52.650 --> 00:23:54.730 is the sting in the tail. It's called a deficiency 00:23:54.730 --> 00:23:57.470 judgment. A deficiency. The difference between 00:23:57.470 --> 00:24:00.029 what the house sold for and what I owed. Right. 00:24:00.279 --> 00:24:02.740 Let's do the math again. Let's say you owed $400 00:24:02.740 --> 00:24:05.740 ,000, the market crashed, the house only sold 00:24:05.740 --> 00:24:09.359 for $300 ,000 at auction. There is a $100 ,000 00:24:09.359 --> 00:24:13.279 deficiency. In many states, the bank isn't just 00:24:13.279 --> 00:24:14.819 going to write that off. They can come after 00:24:14.819 --> 00:24:16.759 you for that $100 ,000. Even though they already 00:24:16.759 --> 00:24:19.579 took the house. Yes. They can sue you personally. 00:24:19.799 --> 00:24:21.980 They can garnish your wages. They can attach 00:24:21.980 --> 00:24:24.420 your other assets, your car, your savings account. 00:24:24.619 --> 00:24:27.200 They can pursue you for the principal, the interest, 00:24:27.400 --> 00:24:29.339 and the attorney fees. But this depends on the 00:24:29.339 --> 00:24:31.720 state again, right? It's not universal. It does. 00:24:31.759 --> 00:24:33.779 It depends on whether you are in a recourse or 00:24:33.779 --> 00:24:36.539 non -recourse state. And California is. California 00:24:36.539 --> 00:24:38.859 is interesting. It has a very specific protection, 00:24:39.119 --> 00:24:42.400 a famous anti -deficiency law. For the original 00:24:42.400 --> 00:24:44.640 mortgage on your home, what they call the purchase 00:24:44.640 --> 00:24:47.829 money loan, It is generally non -recourse. If 00:24:47.829 --> 00:24:50.230 they take the house via non -judicial foreclosure, 00:24:50.329 --> 00:24:52.349 they can't come after your money. You can walk 00:24:52.349 --> 00:24:55.289 away. That's a huge protection. It is. It's why 00:24:55.289 --> 00:24:58.349 we saw so many strategic defaults in 2008. People 00:24:58.349 --> 00:25:01.089 realize, hey, I'm underwater and they can't sue 00:25:01.089 --> 00:25:03.990 me. Here are the keys. I'm out. There's always 00:25:03.990 --> 00:25:06.509 a but. There is always a but. That protection 00:25:06.509 --> 00:25:09.490 usually only applies to the original loan if 00:25:09.490 --> 00:25:12.410 you refinance that loan or if you took out a 00:25:12.410 --> 00:25:15.650 EO low home equity line of credit. The protection 00:25:15.650 --> 00:25:18.490 disappears. Often, yes. Those are often recourse 00:25:18.490 --> 00:25:21.490 loans. So if you refinanced in 2005 to get a 00:25:21.490 --> 00:25:24.009 lower rate or to pull cash out for a renovation, 00:25:24.289 --> 00:25:26.690 you might have accidentally converted your loan 00:25:26.690 --> 00:25:29.170 from non -recourse to recourse. Oh, wow. So you 00:25:29.170 --> 00:25:31.250 traded a lower interest rate for personal liability 00:25:31.250 --> 00:25:33.849 and you probably didn't even know it. Exactly. 00:25:33.970 --> 00:25:36.089 And many people discovered this the hard way 00:25:36.089 --> 00:25:38.329 in 2008. They walked away thinking they were 00:25:38.329 --> 00:25:41.410 safe and two years later got a lawsuit for $50 00:25:41.410 --> 00:25:44.109 ,000. And even if the bank forgives the debt, 00:25:44.210 --> 00:25:46.589 says, OK, fine, we won't sue you for the $100 00:25:46.589 --> 00:25:51.029 ,000, Uncle Sam steps in. The IRS. This is the 00:25:51.029 --> 00:25:54.089 final insult. If a debt is forgiven, the IRS 00:25:54.089 --> 00:25:57.640 often views that as income. How is losing money 00:25:57.640 --> 00:26:01.539 income? The logic is you borrowed $100 ,000, 00:26:01.619 --> 00:26:04.619 you didn't pay it back, therefore you are $100 00:26:04.619 --> 00:26:07.599 ,000 richer than you should be. That is taxable 00:26:07.599 --> 00:26:10.740 income. Now, laws have changed back and forth 00:26:10.740 --> 00:26:12.500 on this, especially around the housing crisis, 00:26:12.640 --> 00:26:14.240 but the general principle is still there. You 00:26:14.240 --> 00:26:16.079 lose the house, you lose your equity, and then 00:26:16.079 --> 00:26:18.660 next April you get a tax bill for $30 ,000 on 00:26:18.660 --> 00:26:20.950 money you never actually saw. The machinery just 00:26:20.950 --> 00:26:22.329 keeps grinding. It doesn't care if you're down. 00:26:22.450 --> 00:26:24.490 It really does not. I want to shift gears a bit. 00:26:24.549 --> 00:26:27.890 We've talked about the legal machinery, but machines 00:26:27.890 --> 00:26:30.549 chew things up. And in this case, they chew up 00:26:30.549 --> 00:26:33.869 people. The source material has some heavy statistics 00:26:33.869 --> 00:26:36.799 on the human toll of this. It's devastating and 00:26:36.799 --> 00:26:39.099 it's not distributed equally. When you look at 00:26:39.099 --> 00:26:41.740 the demographics of loss, minorities are hit 00:26:41.740 --> 00:26:44.240 disproportionately hard. What are the numbers 00:26:44.240 --> 00:26:46.720 there? The research shows that African -American 00:26:46.720 --> 00:26:50.619 buyers are 3 .3 times more likely to be in foreclosure 00:26:50.619 --> 00:26:54.119 than white buyers. Latinos are 2 .5 times more 00:26:54.119 --> 00:26:56.539 likely. That is a massive disparity. Is that 00:26:56.539 --> 00:26:58.640 just income levels or is there something else 00:26:58.640 --> 00:27:01.529 going on? It's not just income. It tracks with 00:27:01.529 --> 00:27:05.049 the history of subprime lending. We know now 00:27:05.049 --> 00:27:07.410 that banks and mortgage brokers specifically 00:27:07.410 --> 00:27:10.069 targeted minority communities with predatory 00:27:10.069 --> 00:27:13.369 inclusion. They sold them riskier, high -interest 00:27:13.369 --> 00:27:16.029 loans with exploding rates, loans they knew were 00:27:16.029 --> 00:27:18.789 likely to fail. So when the market turned, those 00:27:18.789 --> 00:27:20.970 communities were the first to blow up. But there 00:27:20.970 --> 00:27:23.289 is another demographic that gets forgotten. Renters. 00:27:23.650 --> 00:27:26.069 Invisible victims. Renters don't own the home. 00:27:26.250 --> 00:27:28.440 How do they get foreclosed on? Their landlord 00:27:28.440 --> 00:27:30.920 gets foreclosed on, and if the landlord defaults, 00:27:30.920 --> 00:27:33.559 the tenants get evicted. In New York City in 00:27:33.559 --> 00:27:36.920 2007, over 60 % of foreclosure filings involved 00:27:36.920 --> 00:27:41.009 rental properties. 60%. So the majority of people 00:27:41.009 --> 00:27:43.809 losing their homes in NYC weren't the ones who 00:27:43.809 --> 00:27:45.410 missed the mortgage payment. They were just paying 00:27:45.410 --> 00:27:47.309 rent to a guy who missed the payment. Exactly. 00:27:47.710 --> 00:27:49.950 Collateral damage. You pay your rent on time. 00:27:49.990 --> 00:27:51.829 You keep the apartment clean, but you still come 00:27:51.829 --> 00:27:54.269 home to a notice on the door. The bank owns this 00:27:54.269 --> 00:27:56.910 building now. Get out. And the psychological 00:27:56.910 --> 00:28:00.109 impact? The sources mention a study on depression. 00:28:00.950 --> 00:28:05.089 Yes. A study of 250 people going through foreclosure 00:28:05.089 --> 00:28:08.529 found that 36 .7 % met the criteria for major 00:28:08.529 --> 00:28:12.069 depression. And what's tragic is that medical 00:28:12.069 --> 00:28:14.849 conditions are often cited as the cause of the 00:28:14.849 --> 00:28:16.730 foreclosure in the first place. Right. You get 00:28:16.730 --> 00:28:18.569 sick. You can't work. You can't pay the mortgage. 00:28:18.730 --> 00:28:21.069 It's a vicious cycle. You get sick. You lose 00:28:21.069 --> 00:28:23.430 the house. The stress of losing the house makes 00:28:23.430 --> 00:28:25.470 you sicker. It spirals. And the credit impact. 00:28:25.750 --> 00:28:29.269 I mean, we know it's bad. But how bad? A finalized 00:28:29.269 --> 00:28:32.769 foreclosure hits your credit score by 85 to 160 00:28:32.769 --> 00:28:36.369 points. That's a nuclear bomb on your financial 00:28:36.369 --> 00:28:39.130 reputation. It stays on your record for seven 00:28:39.130 --> 00:28:41.990 years. It affects your ability to rent an apartment, 00:28:42.210 --> 00:28:45.190 get a car loan, even get a job. Some employers 00:28:45.190 --> 00:28:48.069 check credit scores. But and here's where it 00:28:48.069 --> 00:28:50.589 gets really interesting. There is a study here 00:28:50.589 --> 00:28:52.869 from the Federal Reserve that challenges the 00:28:52.869 --> 00:28:55.910 narrative a little bit. It's about post foreclosure 00:28:55.910 --> 00:28:58.470 migration. This was a fascinating find. The Fed 00:28:58.470 --> 00:29:01.730 tracked 37 million people. They wanted to see 00:29:01.730 --> 00:29:03.490 where people went after they lost their homes. 00:29:03.869 --> 00:29:05.829 The common assumption was that they would fall 00:29:05.829 --> 00:29:08.950 off a cliff. They would move to Skid Row or drastically 00:29:08.950 --> 00:29:11.609 worse neighborhoods. Right. A total socioeconomic 00:29:11.609 --> 00:29:14.210 collapse. But the data didn't show that. It found 00:29:14.210 --> 00:29:16.809 that while 23 percent of foreclosed individuals 00:29:16.809 --> 00:29:20.240 moved within a year. which is a lot, the majority 00:29:20.240 --> 00:29:22.799 did not end up in substantially less desirable 00:29:22.799 --> 00:29:24.980 neighborhoods. They didn't move to more crowded 00:29:24.980 --> 00:29:27.319 conditions. So they managed to maintain their 00:29:27.319 --> 00:29:29.859 standard of living just without the ownership. 00:29:30.180 --> 00:29:33.759 Mostly, yes. Only about 20 % went back to a household 00:29:33.759 --> 00:29:36.339 with a mortgage. Most became renters or moved 00:29:36.339 --> 00:29:38.339 in with others, but they stayed in similar quality 00:29:38.339 --> 00:29:41.200 areas. The researchers basically concluded that 00:29:41.200 --> 00:29:43.480 the shock of foreclosure, while traumatic, might 00:29:43.480 --> 00:29:45.700 not be as permanently displacing geographically 00:29:45.700 --> 00:29:48.779 as we feared. People are resilient. They scramble. 00:29:48.799 --> 00:29:51.240 They find a way to stay in their community. That's 00:29:51.240 --> 00:29:53.859 a small silver lining, I guess. Yeah. But for 00:29:53.859 --> 00:29:56.900 the neighborhoods left behind, the spillover 00:29:56.900 --> 00:29:59.529 effect is real. Oh, absolutely. When a house 00:29:59.529 --> 00:30:01.769 sits empty, especially in those judicial states 00:30:01.769 --> 00:30:04.430 where it takes years, it rots. The sources mention 00:30:04.430 --> 00:30:07.849 abandoned houses attracting crime, trash, prostitution. 00:30:08.049 --> 00:30:10.970 It drags down the property value of every neighbor. 00:30:11.130 --> 00:30:13.690 So if my neighbor gets foreclosed on, my house 00:30:13.690 --> 00:30:16.450 is worth less. Exactly. Your property value declines. 00:30:16.490 --> 00:30:19.250 And the schools. School mobility is a huge issue. 00:30:19.640 --> 00:30:21.619 Children forced to switch schools because of 00:30:21.619 --> 00:30:23.720 foreclosure often move to schools with lower 00:30:23.720 --> 00:30:26.299 test scores. So the academic future of the child 00:30:26.299 --> 00:30:28.619 is impacted by the financial failure of the mortgage. 00:30:28.880 --> 00:30:31.559 Now, during the 2008 crisis, there was a specific 00:30:31.559 --> 00:30:34.640 practice that I remember making people furious. 00:30:34.960 --> 00:30:37.599 Dual tracking. This was the height of institutional 00:30:37.599 --> 00:30:40.599 cynicism. Explain what that was. Dual tracking 00:30:40.599 --> 00:30:43.539 is when a bank works with you on one track. Hey, 00:30:43.660 --> 00:30:46.420 let's negotiate a loan modification. Send us 00:30:46.420 --> 00:30:49.369 your paperwork. We want to help. while simultaneously, 00:30:49.630 --> 00:30:52.269 on a second track, pushing the foreclosure process 00:30:52.269 --> 00:30:54.789 forward. So you think you're fixing it? You think 00:30:54.789 --> 00:30:57.109 you're safe. You're on the phone with a representative 00:30:57.109 --> 00:31:00.410 who says, we're reviewing your application, everything 00:31:00.410 --> 00:31:02.630 looks good, and then you come home and find out 00:31:02.630 --> 00:31:04.650 your house was sold at auction that morning. 00:31:04.849 --> 00:31:07.369 That feels like entrapment. It was incredibly 00:31:07.369 --> 00:31:11.009 common. Borrowers were blindsided. It got so 00:31:11.009 --> 00:31:14.309 bad that California eventually passed the Homeowner 00:31:14.309 --> 00:31:18.349 Bill of Rights on January 1st, 2013, specifically 00:31:18.349 --> 00:31:21.309 to outlaw this practice. They said you cannot 00:31:21.309 --> 00:31:23.769 foreclose while a modification application is 00:31:23.769 --> 00:31:26.029 pending. But why were banks doing that? Why not 00:31:26.029 --> 00:31:27.849 just modify the loan? Wouldn't they rather have 00:31:27.849 --> 00:31:30.420 a paying customer than an empty house? You would 00:31:30.420 --> 00:31:33.640 think so, but the data shows otherwise. A 2009 00:31:33.640 --> 00:31:36.960 Fed study found that only 3 % of seriously delinquent 00:31:36.960 --> 00:31:40.180 borrowers got a modification. 3 %? That's nothing. 00:31:40.380 --> 00:31:43.880 The leading theory is re -default risk. The banks 00:31:43.880 --> 00:31:46.640 calculated that if they modified the loan, lowered 00:31:46.640 --> 00:31:48.859 your payment, you might just default again in 00:31:48.859 --> 00:31:51.019 six months. They decided it was actually more 00:31:51.019 --> 00:31:53.660 profitable, or at least safer, to just take the 00:31:53.660 --> 00:31:56.119 house now and sell it, rather than risk a self 00:31:56.119 --> 00:31:58.460 -cure that fails later. It's just cold math. 00:31:58.730 --> 00:32:01.009 It is cold math. All right. We've been very U 00:32:01.009 --> 00:32:03.369 .S. centric so far, but this is a global show. 00:32:03.509 --> 00:32:05.630 Yeah. And looking at how other countries handle 00:32:05.630 --> 00:32:08.069 this, well, it makes you realize the American 00:32:08.069 --> 00:32:10.609 system is actually kind of unique. Let's start 00:32:10.609 --> 00:32:12.990 with Spain, because if you think the U .S. is 00:32:12.990 --> 00:32:17.049 harsh, look at Spain. Spain is terrifying. In 00:32:17.049 --> 00:32:19.029 the U .S., as we said, in many states, you can 00:32:19.029 --> 00:32:22.150 walk away or go bankrupt. In Spain, foreclosure 00:32:22.150 --> 00:32:24.490 is just the beginning of your troubles. How so? 00:32:24.809 --> 00:32:26.869 Spanish mortgage holders are liable for the full 00:32:26.869 --> 00:32:29.650 loan, plus penalty interest, plus fees. And here 00:32:29.650 --> 00:32:32.289 is the kicker. Mortgage debt is excluded from 00:32:32.289 --> 00:32:35.029 bankruptcy. Wait, so you lose the house, you 00:32:35.029 --> 00:32:37.549 still owe the money, and you can't even declare 00:32:37.549 --> 00:32:39.990 bankruptcy to clear it? Correct. You can owe 00:32:39.990 --> 00:32:43.319 the bank for life. even after they take the house. 00:32:43.519 --> 00:32:46.140 It effectively creates a class of zombie debtors 00:32:46.140 --> 00:32:48.740 who can never own anything again, not even a 00:32:48.740 --> 00:32:51.279 car, because the bank will seize it. That sounds 00:32:51.279 --> 00:32:54.460 almost futile, like indentured servitude. It 00:32:54.460 --> 00:32:57.940 has caused massive social unrest in Spain. There 00:32:57.940 --> 00:33:00.359 have been suicide waves linked to evictions. 00:33:00.619 --> 00:33:02.819 But the government argues it keeps the banks 00:33:02.819 --> 00:33:05.819 solvent. OK, let's hop over to the UK. The UK 00:33:05.819 --> 00:33:08.079 is softer. They don't even really use the word 00:33:08.079 --> 00:33:10.480 foreclosure much. They call it mortgage possession. 00:33:10.819 --> 00:33:12.880 What's the difference? True foreclosure, where 00:33:12.880 --> 00:33:16.220 the bank keeps the surplus value, is rare. In 00:33:16.220 --> 00:33:18.900 the UK, the courts usually grant a possession 00:33:18.900 --> 00:33:21.759 order. They sell the house. If they sell it for 00:33:21.759 --> 00:33:24.119 more than the debt... The borrower gets the extra 00:33:24.119 --> 00:33:26.420 money. That seems fair. That seems like how it 00:33:26.420 --> 00:33:28.180 should work. It is more equitable. The courts 00:33:28.180 --> 00:33:30.579 are also much more involved in managing the process 00:33:30.579 --> 00:33:33.640 to avoid total ruin for the borrower. They try 00:33:33.640 --> 00:33:36.000 to find a way to let you stay if possible. Now 00:33:36.000 --> 00:33:39.000 let's go down under. Australia and New Zealand. 00:33:39.259 --> 00:33:42.079 New Zealand is fascinating because foreclosure 00:33:42.079 --> 00:33:45.240 is actually prohibited by law. Prohibited. So 00:33:45.240 --> 00:33:47.039 you can't lose your house? Well, you can, but 00:33:47.039 --> 00:33:50.000 not via foreclosure in the technical sense. They 00:33:50.000 --> 00:33:52.779 use the Torrens title system. What is that? It's 00:33:52.779 --> 00:33:55.839 a land registration system. In New Zealand, the 00:33:55.839 --> 00:33:59.430 mortgagee... The bank never holds the fee simple 00:33:59.430 --> 00:34:01.730 title. They just have a registered charge against 00:34:01.730 --> 00:34:04.990 it. To get their money, they can force a mortgagee 00:34:04.990 --> 00:34:07.490 sale, but they can't just foreclose and take 00:34:07.490 --> 00:34:10.250 the title for themselves. It's a subtle but important 00:34:10.250 --> 00:34:12.690 legal distinction about who actually owns the 00:34:12.690 --> 00:34:14.690 land. It sounds like they are very careful about 00:34:14.690 --> 00:34:18.449 property rights. Very. And finally, China, a 00:34:18.449 --> 00:34:20.530 place where private property is a relatively 00:34:20.530 --> 00:34:23.650 new concept anyway. Right. They moved from granted 00:34:23.650 --> 00:34:27.210 land rights to allocated rights, which paved 00:34:27.210 --> 00:34:29.230 the way for private ownership and mortgages. 00:34:29.590 --> 00:34:32.730 But their system is strict judicial foreclosure. 00:34:32.809 --> 00:34:35.170 Very structured. And in theory, it's supposed 00:34:35.170 --> 00:34:38.070 to be finalized within six months. Yes. Deficient. 00:34:38.210 --> 00:34:40.690 But again, it's a developing legal framework 00:34:40.690 --> 00:34:42.889 compared to the centuries of case law in the 00:34:42.889 --> 00:34:44.550 West. And there was one more interesting one, 00:34:44.670 --> 00:34:48.210 Canada, specifically Alberta. Alberta is unique. 00:34:48.250 --> 00:34:51.010 They have a process involving the Court of Queen's 00:34:51.010 --> 00:34:53.639 Bench. King's bench now, I suppose. Yes, king's 00:34:53.639 --> 00:34:56.059 bench now. The court takes control of the property 00:34:56.059 --> 00:34:59.800 first. And here is the twist. The courts favor 00:34:59.800 --> 00:35:03.440 the owners. They rarely sell under market value. 00:35:03.599 --> 00:35:05.920 That sounds good for the owner. It is, but it 00:35:05.920 --> 00:35:08.139 has a weird side effect. Because the court insists 00:35:08.139 --> 00:35:10.900 on a high price and the bank won't sell for less, 00:35:11.179 --> 00:35:14.139 foreclosed homes in Alberta are often overpriced. 00:35:14.260 --> 00:35:16.880 They sit on the market forever because no one 00:35:16.880 --> 00:35:19.400 wants to pay top dollar for a foreclosed home 00:35:19.400 --> 00:35:21.599 with no warranty. So the protection actually 00:35:21.599 --> 00:35:24.219 stagnates the market. Exactly. Unintended consequences. 00:35:24.840 --> 00:35:27.320 Okay, let's bring this home. We've traveled from 00:35:27.320 --> 00:35:29.679 the acceleration clause in your filing cabinet 00:35:29.679 --> 00:35:32.119 to the sheriff's auction, through the paradox 00:35:32.119 --> 00:35:34.420 of the tender rule, and all the way to Spain 00:35:34.420 --> 00:35:37.599 and China. It's a lot of machinery. It is. And 00:35:37.599 --> 00:35:40.159 for me, the big takeaway is this tension. On 00:35:40.159 --> 00:35:42.400 one side, you have contract law. You promised 00:35:42.400 --> 00:35:45.119 to pay. You didn't. We take the collateral. It's 00:35:45.119 --> 00:35:48.039 binary. It's cold. Right. And without that coldness, 00:35:48.139 --> 00:35:50.510 banks wouldn't lend us money. If they couldn't 00:35:50.510 --> 00:35:53.309 foreclose, mortgage rates would be 20%. True. 00:35:53.530 --> 00:35:55.690 But on the other side, you have social reality. 00:35:55.969 --> 00:35:58.429 People need homes. Communities need stability. 00:35:59.090 --> 00:36:00.849 Foreclosure is the friction point where those 00:36:00.849 --> 00:36:03.389 two things grind against each other. It is a 00:36:03.389 --> 00:36:05.849 cloud on title that becomes a storm for a neighborhood. 00:36:06.110 --> 00:36:09.150 And as we saw with the history from strict foreclosure 00:36:09.150 --> 00:36:13.369 in the 1800s to the power of sale, we are always 00:36:13.369 --> 00:36:16.829 trying to tweak the machine. We are. But here 00:36:16.829 --> 00:36:19.699 is the question I'm left with. The final... Provocative 00:36:19.699 --> 00:36:22.300 thought, if you will. Hit me. We moved away from 00:36:22.300 --> 00:36:24.300 strict foreclosure where the bank just took the 00:36:24.300 --> 00:36:27.340 land because we wanted to be fairer. We added 00:36:27.340 --> 00:36:29.559 auctions. We added notices. We added redemption 00:36:29.559 --> 00:36:32.340 periods. But we also added deficiency judgments. 00:36:32.519 --> 00:36:34.699 We added credit score destruction. We created 00:36:34.699 --> 00:36:36.659 a system where you could lose the house and still 00:36:36.659 --> 00:36:39.739 owe the money. Right. So have we actually made 00:36:39.739 --> 00:36:42.699 the process less punitive or have we just made 00:36:42.699 --> 00:36:45.059 it more bureaucratic? Is the modern foreclosure 00:36:45.059 --> 00:36:47.960 machine actually... kinder than the old one or 00:36:47.960 --> 00:36:49.880 just more efficient at extracting value from 00:36:49.880 --> 00:36:52.880 the desperate? That is a haunting question. It 00:36:52.880 --> 00:36:55.260 makes you wonder if efficiency was the goal all 00:36:55.260 --> 00:36:58.280 along, not fairness. Well, on that cheery note, 00:36:58.420 --> 00:37:00.420 I think everyone listening should probably go 00:37:00.420 --> 00:37:03.639 find their mortgage paperwork tonight. Check 00:37:03.639 --> 00:37:06.380 section 18. Check section 18. See if you have 00:37:06.380 --> 00:37:09.800 an acceleration clause. See if you are in a judicial 00:37:09.800 --> 00:37:13.500 or non -judicial state. Know the machine you 00:37:13.500 --> 00:37:15.599 are living inside. Knowledge is the only real 00:37:15.599 --> 00:37:18.280 defense. Thanks for diving deep with us today. 00:37:18.320 --> 00:37:19.019 We'll see you next time.