DEFINITIONS RELATED TO “DISTRESSED PROPERTIES”

BANK OWNED – Bank owned property is also called “investor owned” and “R.E.O” (for Real Estate Owned by the bank or lender).  These are properties that have passed through the foreclosure process (see below) and are owned free and clear by the bank or lender.

DEFAULT – A legal condition brought about by a borrower/homeowner failing to pay to the bank/lender the agreed monthly mortgage payment for several months.  Default normally is not declared until after at least two months of Delinquency (see below) and the filing of a formal Notice of Default (N.O.D.) by the bank/lender

DELINQUENT – A behind-schedule condition in which the borrower/homeowner owes one or several payment(s) to the bank/lender.  Normally a pre-condition for the filing of a Notice of Default (N.O.D.) by the bank/lender.

FORECLOSURE – A process whereby a bank or other lender recovers real property from a defaulting borrower/homeowner.  In California the process takes about four months minimum from the time the bank/lender files a formal Notice of Default (N.O.D.) with the County Recorder.  Technically, there is probably not such a thing as a “foreclosure property”, since it is a process and not a condition.  Properties may be termed “pre-foreclosure”, meaning that they are “delinquent” and that a “N.O.D” is anticipated; alternatively, they may have been “foreclosed”, in which case the term is meaningless as the property is now “bank owned” or “R.E.O.”, but the term “foreclosure” is often used (incorrectly) to describe any of these conditions.

SHORT PAY – A settlement between a borrower/homeowner and a bank/lender (most often negotiated by a real estate professional) whereby an owner can avoid foreclosure and satisfy mortgage indebtedness by paying off less than the balance due the bank/lender.  Lenders are not obligated to engage in the process and the borrower/ homeowner must “prove” an inability to continue payments.  It can be described as being very much like “reverse qualification” for the original loan, a sort of “loan disapproval”.  An important change in the tax law concerning short payoff (the correct term) occurred on January 1, 2008: previously, the amount “forgiven” by the bank/lender was taxable to the borrower/homeowner as ordinary income; until the end of 2009, that tax is forgiven on purchase money (not refinanced) debt that is forgiven by the banker/lender/