You might think the lender controls the foreclosure process, but things are not quite that simple.
Let us look at Robin Smith, a typical mortgage borrower. Robin borrowed $145,000 from her local home-town bank, 1st National. Most likely, 1st National will then sell the mortgage to someone else, a company that buys loans from lenders all over the United States. The largest buyers are Fannie Mae (Federal National Mortgage Association), Ginnie Mae (Government National Mortgage Association), and Freddie Mac (Federal Home Loan Mortgage Corporation). Private investment firms also purchase loans. For this example, we will call one such firm Acme Investors.
Robin might continue to receive statements from 1st National even though Acme Investors bought her loan. Or, she might receive statements from yet a third party, a loan servicing company we will call Loan Servicers.
Suppose Robin loses her job and will not be able to make her mortgage payments. She is facing foreclosure. You want to work something out with her and with the lender to buy the property before foreclosure. Who do you talk to, and how much authority does he or she have to negotiate with you? This issue alone, who you talk to, probably accounts for most people becoming discouraged and dropping out of preforeclosure investing.
The servicing company usually controls the foreclosure process and any negotiations to avoid foreclosure. In our example, Loan Servicers might have a great deal of latitude in working out a solution with you. Or, they might have no discretion at all because their hands are tied under the servicing contract they signed with Acme Investors.
If Loan Servicers is not allowed to control the process, but merely put into motion preapproved steps leading to foreclosure, then Acme Investors probably does not control anything meaningful, either. I know that does not make sense because we said that Acme Investors owned the loan. Surely, you would think, the owner can exercise control and work with you to find a solution that would result in more money than a foreclosure would generate.
You have to remember that Acme owns many thousands or millions of loans. It is not cost effective for them to spend hours working with you and completing all the necessary internal paperwork, just to receive a little more money than an auction would yield. Also, Acme has investors to whom it has sold bonds that are backed up by mortgages such as Robin’s. Because of Acme’s responsibilities to its bond holders, it might be safer for it to do nothing and let the foreclosure proceed to auction, rather than depart from routine and possibly end up in a worse financial position.
For the most part, servicing companies and large investment companies are bureaucracies. It is common wisdom inside a bureaucracy that following the rules will never get you in trouble, even if it results in a stupid and wasteful outcome. Not following the rules can result in punishment if the outcome is bad, but it can result in the same thing even if the outcome is good. There is no incentive to work creatively to find solutions. That is the problem with bureaucracies.
The short answer is that you might find out that no one truly controls the foreclosure process. Once Robin defaults, everyone might be on a runaway freight train headed toward a foreclosure auction. If you try to control it, you will just make yourself crazy before you finally become discouraged.
Instead of doing that, find out early if anyone is in control, who that party is, and how much discretion he or she has.