Chapter 6: Foreclosure

A defaulting borrower who faces foreclosure may avoid court actions and costs by voluntarily deeding the property to the mortgagee, with a deed in lieu of foreclosure.

A borrower voluntarily deeds collateral property in exchange for a release from all obligations under the mortgage. The transfer does not terminate any existing liens on the property.

The order of payment in a foreclosure is as follows:

First, the cost of the sale Second, any special assessment taxes and general Third, the first mortgage Fourth, whatever is recorded next

Strict foreclosure, the original form of foreclosure, involves a lawsuit filed by the lender against the borrower.

First, the lender must give appropriate notice to the delinquent borrower. Next, the lender prepares and records the paperwork. Then, the court orders the borrower to pay the mortgage debt by a certain date. If the debt is not paid in full by the deadline, the lender automatically gains full title to the property with no obligation to sell the property

Non-Judicial foreclosure requires the lender to give the borrower a notice of default (NOD) and of intent to sell the property in a form prescribed by state statutes.

If the borrower fails to cure the default or use other legal means to stop the sale, the lender may conduct a public auction. The highest bidder receives unencumbered title to the property. There is no redemption right in non- judicial foreclosure.

sheriff's sale

If the default is not cured by right of redemption or reinstatement, the judicial foreclosure will move forward

Three types of foreclosure processes enforce mortgage liens

Judicial foreclosure Non-judicial foreclosure Strict foreclosure

Kentucky is a lien theory state.

Lenders go to court for a judicial foreclosure. Kentucky does have a restricted statutory right of redemption. Deficiency judgments are legal in Kentucky.

deficiency judgment.

The lender may be able to get a personal judgment against the borrower for what is left unpaid

The winning bidder receives a certificate of sale, not a deed.

The person holding the certificate will receive a sheriff's deed only after the sale has been confirmed.

In the foreclosure suit, a lis pendens gives public notice that the mortgaged property may soon have a judgment issued against it.

This notice enables other lienholders to join in the suit against the defendant. A notice of pendency is not the same as placing a lien on a property.

A short sale occurs when

a lender allows a borrower in default on mortgage loan payments to sell the mortgaged property for less money than necessary to satisfy the loan in order to avoid the delay and expense of a foreclosure sale.

Judicial foreclosure

allows the sale of the mortgaged property under the supervision of the court, with the proceeds going first to satisfy the mortgage, then other lien holders, and finally, the borrower if any proceeds are left.

The court's writ of execution authorizes

an official to seize and sell the foreclosed property

Equitable right of redemption

gives the borrower the right to pay off loan amounts and reclaim a foreclosed property up until the completion of the foreclosure sale.

Other avoidance options include

refinancing, temporary arrangements with the lender (loan workout), and bankruptcy

Statutory right of reinstatement allows

the borrower to cure the default and reinstate the loan during a statutory period before the lawsuit is concluded.

Statutory right of redemption allows

the borrower to pay the debt and reclaim the property for a statutory period which may go beyond the completion of the sale.

If a borrower has failed to meet loan obligations in spite of proper notice and applicable grace periods

the lender can accelerate the loan, or declare that the loan balance and all other sums due on the loan are payable immediately.