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A Guide from MC Customer Support

Foreclosed Loans and REO

Now that a few loans are going into foreclosure, MC customers have been asking how the MC Software is designed to handle foreclosed loans

Foreclosure is the legal process by which the lender obtains legal title to property after the borrower has failed to make the payments. State law determines how to foreclosure property. It requires less time for a Trust Deed than a Mortgage. If you service loans for an investor, refer to how the investor wants the loan to be foreclosed. If the loan is part of your own portfolio, refer the loan to your legal counsel to foreclosure on the property.

When you the lender obtain legal title to the property, the loan has to be removed from "Real Estate Notes Receivables" and debited to REO "Real Estate Owned" in your General Ledger.

The following are steps recommended by MC for proper accounting:

Change the Action Code in the Master Record.
Report to the Credit Bureau one more time the loan is foreclosed.
Change the control number and possibly the investor number. MC suggests a number at the end of all loan controls such as 991 (or similar). The control should be called "REO Real Estate Owned." Do not set up any GL accounts. If you have been escrowing funds on this loan, do not remove the tickler data. If you have not been escrowing funds on this loan, then set up an escrow for taxes and hazard insurance as a tickler. (Post no lender funds to these escrow accounts.) You want to assure the taxes are paid and the property is insured. If you have to pay taxes or insurance before the property is sold, then post transactions to the loan for the amount. Checks are to be written in the accounting department.
Turn off the Interest Accrual and Credit Bureau reporting, and change the Mail Code to Do Not Mail.
Leave the borrower name, loan amount, interest paid, and interest paid to date.
When the property is sold, it is necessary to post to the loan.

A. Manually post Tran Code 05 to the principal. Make an entry to the GL manually.
B. If the property sells for less than the loan balance, plus attorney fees, preservation charges, taxes paid, etc., manually prepare a GL debit ticket for the amount to "Loss on Sale of Property" and credit the loan. Cash from the sale and the GL debit ticket will bring the balance to zero.
C. If the property sells for more than the loan balance, plus attorney fees, preservation charges, taxes, etc., credit the balance of the loan. Then prepare a GL credit ticket to "Gain on Sale of Property." The debit will be "Cash In."

When you process year end save, then you can prepare a 1098 or 1099 for the borrower if any funds have been paid by the borrower during the year. After the IRS is notified, turn off the IRS reporting field.
When the loan has a zero balance, do not remove. Retain the loan in this control for the examiners to have access for review. This will show all loans ever foreclosed by your company.

Updated November 8, 2006 at 11:54 a.m.