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Foreclosure and Options for Avoiding Foreclosure

Abstract:This chapter highlights that the six dominant decision-making pathways can definitely assist us in selecting the best pathway that can eliminate or reduce uncertainty as well as provide us, when necessary, the insightful means of problem solving. This chapter examines foreclosure and foreclosure options available to borrowers who wish to walk away from a property.

Keywords Deed-in-lieu of foreclosure – Short sale – Pre-foreclosure equity sale

Although there was less foreclosure activity nationwide in the first half of 2014 since before the housing bubble burst in August 2006, foreclosure continues to be an issue in some states and local markets. This is partly due to the fact that correction of the residential real estate market continues to be slow, despite the massive improvement in home prices. Although 312,000 homes in the United States regained positive equity in the first quarter of 2014-, approximately 6.3 million homes or 12.7% of all residential properties with a mortgage were still with negative equity (upside-down mortgages), and approximately 10 million (20.6%) of the 43 million homes that have equity have less than 20%. Borrowers with less than 20% equity are almost as bad off as those with no equity as they oftentimes have a hard time refinancing their homes, obtaining financing to buy another home, and/ or covering the down payment necessary to purchase another home. Consequently, some of these borrowers are choosing to walk away from their properties.

As mentioned in Chap. 4, sometimes foreclosure is the right economic decision for a borrower after careful analysis (process thinking) of one’s situation.

In this chapter, we will discuss foreclosure and foreclosure options available to borrowers who wish to walk away from a property. We will also provide real-life examples for each option to show in which situations they may best be utilized and explore how to buy another home after taking such drastic measures.


Foreclosure is the legal right of a lender to take ownership of a property when a borrower stops making payments on the mortgage loan. The foreclosure process is lengthy. A borrower who defaults on loan payments will first receive a warning from the lender in the form of a “Notice of Default” and then a grace period during which time he or she must make arrangements with the lender to either pay the outstanding amount owed or sell the property for less than is owed, which is known as a “short sale”. If the borrower cannot or will not pay the outstanding balance and no one buys the house during the short sale period, the property will be auctioned off to the highest bidder. However, the borrower can still stop the foreclosure by paying off the outstanding amount. If the borrower does not stop the foreclosure and the property does not sell at auction, the lender will take ownership of the property and get a real estate agent or liquidation auction to sell it.


Although there should be no shame in foreclosure, there are options for borrowers who are 20% or more upside down on their mortgage loans and decide to walk away from their property. These options include the following:

  1. deed-in-lieu of foreclosure;
  2. short sale; and
  3. pre-foreclosure equity sale.

Published in 2017, the book Decision Making for Personal Investment was co-authored by California attorney Timothy McFarlin and Waymond Rodgers, chair professor at the School of Business of University of Texas.