Unit 7 - Foreclosures

Depending on state foreclosure law "mortgage" may include

- Deed of trust - Installment (land) contracts that are payable over more than five (5) years and have an unpaid balance of less than 80% of the purchase price - Particular collateral assignments of the beneficial interest in land trusts used as security for lenders - Conventional mortgage instruments

If the borrower does not pay off the loan in full, the lender then files a foreclosure suit, naming the borrower as defendant. The suit asks the court to:

- terminate the defendant's interests in the property - order the property sold publicly to the highest bidder - order the proceeds applied to the debt

What is a short sale?

A borrower sells the mortgaged property for less than what is owed on the loan balance.

Deed in lieu of foreclosure

A defaulting borrower who faces foreclosure may avoid court actions and costs by voluntarily deeding the property to the mortgagee. This is accomplished with a deed in lieu of foreclosure, which transfers legal title to the lienholder. A lender may not accept a deed in lieu of foreclosure from a borrower the lender deems financially capable of making mortgage payments.

Deficiency Judgment

A foreclosure does not necessarily extinguish all the liens against the property, such as what may be owed in real estate taxes. Also, the foreclosure sale may not yield enough money to pay the loan balance in full. As a result, the borrower may still owe money to the lender after the foreclosure. In some cases, the lender may be able to get a personal judgment against the borrower for what is left unpaid.

Judicial Foreclosure

Allows the sale of a 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

When a borrower loses a home to foreclosure the results can be severe

Any equity which existed is most likely lost. The foreclosure becomes public record. The borrower's credit is damaged, possibly preventing or making very difficult the purchase of another home - at least for up to seven years, the length of time it remains in the individual's credit file.

Which of the following is NOT one of the means of enforcing a lien against real estate? Operation of the law Direct takeover Court action Powers granted in the loan document

Direct takeover

Reinstatement and Redemption

During the notice of default and notice of sale periods, the borrower may pay the lender and terminate the proceedings. Exact reinstatement periods vary from state to state. There is no redemption right in non-judicial foreclosure.

The completion of a foreclosure sale would terminate which of the following? Statutory redemption rights All rights of redemption by the borrower Equitable redemption rights All liability of the borrower to the lender

Equitable redemption rights

What are the differences between the two kinds of right of redemption and the right of reinstatement?

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. 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 (up to a year, in some states). Statutory right of reinstatement allows the borrower to cure the default and reinstate the loan during a statutory period before the law suit is concluded.

A property is secured by a mortgage that does not contain a "power of sale" clause. To foreclose, the lien holder will have to

File a foreclosure suit

The order of payment in a foreclosure is as follows:

First, the cost of the sale (this refers to the advertising, attorney fees, trustee fees, etc.). Second, any special assessment taxes and general (or ad valorem) taxes. Third, the FIRST mortgage (determined by the order of recording). Fourth, whatever is recorded next.

Strict foreclosure procedure

First, the lender must give appropriate notice to the delinquent borrower. Next, the lender prepares and records the paperwork. After a prescribed period, the lender files suit in court. The court orders the borrower to pay the mortgage debt by a certain date.

Acceleration and Filing

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. The mortgage holder will include unpaid property taxes and delinquent payments in the accelerated amount, so the borrower can end up owing more than the original amount of the mortgage.

Deficiency suit

If proceeds do not cover the debt, the lender does not obtain a deficiency judgment or lien, but must file a new deficiency suit against the borrower.

Judicial Sale

If the default is not cured by equitable right of redemption or statutory right of reinstatement, the judicial foreclosure will move forward. This leads to a judicial sale, also called a sheriff's sale, whereupon all parties are notified in writing of the sale. the sale is advertised in a newspaper with general circulation. the property is sold to the highest bidder.

Writ of execution

If the defendant fails to meet the demands of the suit during a prescribed period, the court orders the termination of interests of any and all parties in the property, and orders the property to be sold. The court's writ of execution authorizes an official, such as the county sheriff, to seize and sell the foreclosed property

Right of reinstatement

In some states, mortgagors have statutory right of reinstatement, if not redemption. This option is available when the borrower wants to cure the default (bring payments up to date) and reinstate the loan as if the loan had not been accelerated at all.

Lis pendens

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.

Foreclosure

Is a legal process by which defaulting borrower loses his or her interest in a property used as collateral for a mortgage loan or deed of trust All liens can be enforced by the sale, or other transfer of title of the secured property, whether by court action, operation of law, or through powers granted in the original loan agreement

What is the function of a deed in lieu of foreclosure?

It avoids foreclosure by transferring legal title to the mortgagee.

What is the purpose of a deficiency judgment?

It enables a lienor to attach the personal and real property of a lienee when the foreclosure sale has not produced enough funds to pay what the lienor is owed.

What happens to the title to a foreclosed property in a strict foreclosure?

It transfers immediately to the lienholder.

Which type of foreclosure involves sale of the mortgaged property under court supervision?

Judicial

Three types of foreclosure processes enforce mortgage liens

Judicial foreclosure - involves sale of the mortgaged property under the supervision of a court; initiated by a law suit; available in every state Non judicial foreclosure - involves sale of the mortgage property without court supervision; available in many, but not all, states Strict foreclosure- involves court-ordered transfer of the mortgaged property to the lender; available in a few states.

What are the basic differences between the three types of foreclosure?

Judicial foreclosure: sale under court supervision Non-judicial foreclosure: sale without court supervision Strict foreclosure: no sale; immediate transfer to lienholder.

What basically happens in a foreclosure?

Lienors force a property owner to give up title. This may involve either the lienors' forcing the owner to sell and pay off the creditors, or taking title directly.

Notice of pendecy

NOT the same as placing a lien on a property. It is only legal notice of a pending action that involves the title to, or possession of, a specific piece of real estate. The notice is filed in the office of the county clerk. The notice could not be used in a suit to recover attorney fees or broker commissions. The end result of filing a lis pendens, however, is that the property cannot be freely sold or encumbered. So the title to the property is unmarketable during the period of the litigation.

In what type of foreclosure does a lender give a borrower a notice of default in a form prescribed by the state?

Non judicial foreclosure

When a lender is required to foreclose on a deed of trust, the lender does not have to go through the courts to foreclose if the deed of trust contains a power of sale clause. This kind of foreclosure is known as

Non judicial foreclosure

Foreclosure proccess

On default, the foreclosing mortgagee records and delivers notice to the borrower and other lienholders. After the proper period, a "notice of sale" is published, the sale is conducted, and all liens are extinguished. The highest bidder receives unencumbered title to the property.

What happens to the sale proceeds in a judicial sale?

Proceeds are used to pay 1) costs of the sale; 2) special assessment and ad valorem taxes; 3) first mortgage; 4) other mortgages and liens in order of recording; 5) remainder to the borrower.

Ronald defaulted on his home mortgage payments. The lender obtained a court order to foreclose on the property. At the foreclosure sale, Ronald's house sold for $29,000 and the unpaid balance of his loan is $40,000. What must the lender do to recover the $11,000 Ronald still owes?

Seek a deficiency judgment

Which type of foreclosure involves a court-ordered transfer of the mortgaged property to the lender?

Strict

Right of redemption

The borrower's right of redemption, also called equity of redemption, is the right to reclaim a property that has been foreclosed by paying off amounts owed to creditors, including interest and costs. Redemption is possible within a redemption period.

What power does a lender have if a mortgagor defaults in a state that allows non-judicial foreclosure and the mortgage document includes a "power of sale" clause?

The lender can give the borrower notice of the default and a chance to cure it, after which the lender may auction the property.

What action must the lender take when a notice of reinstatement occurs?

The lender must dismiss the suit and continue the mortgage.

Sale proceeds

The new owner receives title free and clear of all previous liens, whether the lienholders have been paid or not. Proceeds of the sale are applied to payment of liens according to priority. After payment of real estate taxes (lienholders' claims and costs of the sale), any remaining funds go to the mortgagor (borrower).

Which of the following statements best defines Statutory Right of Redemption? The right of a defaulted property owner to recover damages after the sale. The right of a lender to recover expenses after the sale from the defaulted property owner. The right of a defaulted property owner to recover and remove personal property after the sale. The right of a defaulted property owner to recover the property after the sale.

The right of a defaulted property owner to recover the property after the sale

How long after default does the foreclosure process begin?

Whatever length the lender customarily uses

Non judicial foreclosure

When there is a "power of sale" provision in the mortgage or trust deed document, a non-judicial foreclosure can force the sale of the liened property without a foreclosure suit. The "power of sale" clause in effect enables the mortgagee to order a public sale without court decree. 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 (such as filing a bankruptcy or filing to temporarily stay the foreclosure), the lender may conduct a public auction.

If a property sold at a court foreclosure does not sell for an amount sufficient to satisfy the outstanding mortgage loan debt, the mortgagee may sue for

a deficiency judgment.

In a strict foreclosure,

a lender takes title to the liened property directly.

Foreclosure is

a proceeding to enforce a lien by forcing sale or transfer of a secured property.

The first step in a judicial foreclosure is

acceleration of the loan.

Which statement about a deed in lieu of foreclosure is TRUE? It gives the borrower an opportunity to change the loan terms. It is a deed to the lender in exchange for a reduction in the loan payoff. It avoids public notice of the foreclosure. It is always accepted by the lender since it reduces the costs of foreclosure.

it avoids public notice of the foreclosure

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. The lender usually forgives the mortgage balance owed after the sale. Other avoidance options include refinancing, temporary arrangements with the lender (loan workout), and bankruptcy.

A strict foreclosure begins with

proper notice to the delinquent borrower.

All of the following are common consequences suffered by a mortgagor in a foreclosure procedure EXCEPT all or most equity is lost. the mortgagor is embarrassed by public knowledge of the foreclosure. the borrower's credit is damaged for a long time. the borrower is not allowed to apply for another mortgage for the rest of his or her life.

the borrower is not allowed to apply for another mortgage for the rest of his or her life.

The first item to be paid out of foreclosure funds is

the costs of Sale - advertising, attorney fees, trustee fees, etc.

Which of the following statements best defines equitable right of redemption? The legal right of a borrower to seek a reduction in payments on a property mortgage. The legal right of a borrower to redeem property between the time of default and the foreclosure sale. The legal right of a borrower to seek a statutory right of reinstatement. The legal right of a borrower to appeal a deficiency judgment within 7 months of notice.

the legal right of a borrower to redeem property between the time of default and the foreclosure sale

Strict foreclosure

the original form of foreclosure, involves a lawsuit filed by the lender against the borrower. Strict foreclosure is a court proceeding that gives the lender title directly, by court order, instead of giving cash proceeds from a public sale. This procedure is usually available only when the value of the property is less than the value of the debt.