Foreclosure Process

Foreclosure 101

Posted on Saturday, April 18, 2009

Foreclosure is a legal procedure with roots going back to English common law pursuant
to which a lender takes title to a parcel of real estate following a borrower’s failure to
comply with the mortgage loan agreement entered into with the lender. The most
frequent failure is a default in payment under the promissory note, but in some cases,
particularly commercial loans, defaults under other agreement terms are common. For
example, a developer default may be triggered if multiple buyers of the homes the
developer planned to build cancel their purchase contracts or if the construction involves
too many changes, runs over budget, or takes longer than the agreed time frame for
completion. or a shopping center loan default may be triggered if the tenant vacancy rate
rises above a preset level.
Which Foreclosure Theory Does Your State Follow?
Foreclosure processes vary, depending upon whether your state uses mortgages or deeds
of trust for financing real estate.
? Those states using mortgages generally conduct judicial foreclosures, effectuating
the foreclosure via the state’s court system. These are also referred to as lien theory
states since a mortgage grants a mortgagee a lien, as opposed to title or some other
interest, in the real estate.
? Those using deeds of trust utilize out-of-court, non-judicial , procedures defined by
state law Also referred to as trustee or title theory, in these states title to the
financed real estate is essentially held by a trustee until the loan is repaid.
? Some use a hybrid of both.
Non-judicial foreclosure tend to proceed more quickly than judicial foreclosure but
each state has it’s own laws or statutes setting forth the exact amount of time within
which each step in the process may and must be completed. Time frames will of
course also be impacted by how busy the courts are.
The attorney for a mortgagee (lender) in a judicial foreclosure typically initiates a lawsuit
against the mortgagor (borrower) by filing a complaint and a lis pendens (lawsuit
pending notice) with the clerk of the court.
The complaint will reflect the default, how much money is owed, and why mortgagee
should be allowed to foreclose and must be delivered to the mortgagee in accordance
with the state laws which typically require service by a process server or, if that is not
possible, by publication. The complaint must name and be served on anyone with an
interest in the real estate as a defendant.
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The lis pendens is also recorded in the local public records to give the public (potential
buyers and lenders) notice of the lawsuit against the property.
Many judicial circuits are exploring the possibility of requiring the parties to attempt
mediation before proceeding with foreclosure litigation, but for the time being in most
jurisdictions, once a mortgagor has been served, he has three basic options;
1. Do nothing, in which case the mortgagee’s attorney will request and the judge
will likely grant, a default judgement and set a date for the sale (discussed below),
2. File an answer to the complaint with no real affirmative defenses (reasons why
what the mortgagee claims is a default should not be treated as such) or counterclaims
(allegations of wrong-doing against the mortgagee), in which case the
mortgagee’s attorney will request and the judge will likely grant a summary
judgement (essentially agreeing that there is no issue to discuss and therefore no
reason for further hearings) and order the sale, or
3. File an answer to the complaint with realistic affirmative defenses or counterclaims,
in which case the judge will likely set a date for a hearing during which
each party will present their case and the judge will either rule in favor of the
mortgagee granting a sale, in favor of the mortgagor oftentimes dismissing the
case, or that further discovery and hearings with the judge will be needed in order
for him to make a decision. Discovery is the legal process by which each side is
allowed an opportunity to gather information about the facts surrounding the case
from the other side and third parties (such as witnesses) before starting a trial.
There are several different types of discovery. For example; Interrogatories are
written questions one side gives to the other to respond to, also in writing.
Requests for production are written requests one side gives the other to produce
various documents and information. And depositions are questions one side asks
the other (or third parties such as witnesses), which are documented word-forword
by the court reporter. One or more of the parties may subpoena an
individual to appear and testify.
Most judgments will include provision for reimbursement of the mortgagee’s attorney
fees and other costs incurred in connection with the foreclosure.
When the judge orders a sale, a writ will be issued authorizing the foreclosure sale
(sometimes referred to as a sheriff’s sale). Sales, conducted in an auction format, are
open to the public, and are generally held in a public place such as on the courthouse
steps or in front of the property. State laws vary with regard to payment methods and
time frames but generally require cash or a substantial deposit to be paid prior to a
person being allowed to bid and the balance to be paid later that day or, in some states,
within 30 days. The highest bidder will, of course, become the owner of the property,
and receive a certificate of title subject to the mortgagor and junior lien holder
redemption rights (the right to pay off the mortgage being foreclosed and own the
property which also very by state) and the judge’s confirmation of the sale, after which a
clerk’s deed (sometimes referred to as a sheriff’s deed) will be recorded vesting title to
the property in the highest bidder. If the owner or a tenant is still occupying the
property, eviction steps may then be necessary. The time allowed to redeem foreclosed
property varies from state to state from zero days all the way up to almost a year and
obviously has a big impact on how long a mortgagor can stay in his home as well as the
potential risk and expense involved in foreclosures for both mortgagees and for
foreclosure investors.
Deeds of trust used in non-judicial states contain a power-of-sale clause enabling the
trustee to initiate a foreclosure sale without having to file a lawsuit or otherwise go to
court. Typically the trustee must first issue a notice of default informing the trustor
(borrower). Some states also require that a notice of default be recorded in the local
public records.
As is the case in judicial foreclosure states, the trustor has three basic options; do nothing,
in which case the trustee will likely begin taking necessary steps to sell the property;
respond with no real defenses or allegations against the lender or respond with realistic
answers and allegations against the lender.
Assuming the trustee moves forward, again depending on the state’s specific laws, a
notice of sale may be mailed to the trustor, posted in public places, recorded in the local
public records, or published in local legal publications. After the legally required time
period has expired, a public auction will be held. Again with the highest bidder becomes
the owner of the property subject to the redemption period and receipt of a deed.
Auctions of non-judicial foreclosures will generally require cash, or cash equivalent
either at the sale, or very shortly thereafter. The various non-judicial foreclosure states
have different procedures. For example, some do not require a notice of default, but start
with a notice of sale. Others require only the publication of the Notice of Sale to
announce the sale, with no direct owner notification required.
During the course of a judicial or non-judicial foreclosure, various work-out alternatives
including a short sale, modification, refinance, forbearance, cash for keys, deed-in-lieu,
bankruptcy, or mediation may become relevant.

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