Foreclosure is the legal
proceeding in which a
bank or other secured
creditor sells or repossesses a parcel
of
real property (immovable
property) due to the owner's failure to
comply with an agreement between the lender
and borrower called a "mortgage"
or "deed of trust". Commonly, the violation
of the mortgage is a default in payment of a
promissory note, secured by a lien on the
property. When the process is complete, it
is typically said that "the lender has
foreclosed its
mortgage or
lien."
In the
United States, there are two sorts of
foreclosure in most
common law states. Using a "deed
in lieu of foreclosure," the bank claims
the
title and possession of the property
back in full satisfaction of a debt, usually
on contract. In the proceeding simply known
as foreclosure (or, perhaps, distinguished
as "judicial foreclosure"), the property is
exposed to
auction by the county
sheriff or some other officer of the
court. Many states require this latter sort
of proceeding in some or all cases of
foreclosure, in order to protect any
equity the debtor may have in the
property, in case the value of the debt
being foreclosed on is substantially less
than the market value of the immovable
property (this also discourages strategic
foreclosure). In this foreclosure, the
sheriff then issues a deed to the winning
bidder at auction. Banks and other
institutional lenders typically bid in the
amount of the owed debt at the sale, and if
no other buyers step forward the lender
receives title to the immovable property in
return.
Other states have adopted non-judicial
foreclosure procedures, in which the
mortgagee, or more commonly the mortgagee's
attorney or designated agent, gives the
debtor a notice of default and the
mortgagee's intent to sell the immovable
property in a form prescribed by state
statute. This type of foreclosure is
commonly referred to as "statutory" or
"non-judicial" foreclosure, as opposed to
"judicial". With this "power-of-sale" type
of foreclosure, if the debtor fails to cure
the default, or use other lawful means (such
as filing for
bankruptcy which provides a temporary
automatic stay to the foreclosure
proceeding) to stop the sale, the mortgagee
or its representative will conduct a public
auction in a similar manner as the
sheriff's auction described above. The
highest bidder at the auction becomes the
owner of the immovable property free and
clear of any interest of the former owner
but the property may be encumbered by any
liens superior to the mortgage being
foreclosed (e.g. a senior mortgage, unpaid
property taxes etc). Further legal action,
such as an
eviction may be necessary to obtain
possession of the premises.
"Strict foreclosure" is an equitable
right available in some states. The strict
foreclosure period arises after the
foreclosure sale has taken place and is
available to the foreclosure sale purchaser.
The foreclosure sale purchaser must petition
a court for a decree that will cut off any
junior lienholder's rights to redeem the
senior debt. If the junior lienholder fails
to do so within the judicially established
time frame, his lien is cancelled and the
purchaser's title is cleared. This effect is
the same as the strict foreclosure that
occurred at common law in England's courts
of equity as a response to the development
of the equity of redemption.
In most jurisdictions it is customary for
the foreclosing lender to obtain a title
search of the immovable property and to
notify all other persons who may have
liens on the property, whether by
judgment, by
contract, or by
statute or other law, so that they may
appear and assert their interest in the
foreclosure litigation. In all US
jurisdictions a lender who conducts a
foreclosure sale of immovable property which
is the subject of a federal tax lien must
give 25 days' notice of the sale to the
Internal Revenue Service: failure to
give notice to the IRS will result in the
lien remaining attached to the immovable
property after the sale. Therefore, it is
imperative that the lender obtain a search
of the local Federal Tax Liens so that if
the persons or companies involved in the
forelcosure have a federal tax lien filed
against them, the proper notice to the IRS
will be given. A detailed explanation by the
IRS of the Federal Tax Lien process can be
found
here.
Some individuals and companies are
engaged in the business of purchasing
properties at foreclosure sales. A number of
companies promoting themselves on the
internet and in other advertising media have
sprung up touting the profits that can be
made buying properties in foreclosure.
Purchasing properties in foreclosure can be
a "risky business" and should not be
attempted by the uninformed.
A Deed in lieu of
foreclosure is a
deed instrument in which
a mortgagor (i.e., the
borrower) conveys all
interest in a
real property to the
mortgagee (i.e., the lender)
to satisfy a loan that is in
default and avoid
foreclosure proceedings.
The deed in lieu of
foreclosure offers several
advantages to both the
borrower and the lender. The
principle advantage to the
borrower is that it
immediately releases him
from most or all of the
personal indebtedness
associated with the
defaulted loan. The borrower
also avoids the public
notoriety of a foreclosure
proceeding and may receive
more generous terms than he
would in a formal
foreclosure. Advantages to a
lender include a reduction
in the time and cost of a
repossession, and additional
advantages if the borrower
subsequently files for
bankruptcy.
In order to be considered
a deed in lieu of
foreclosure, the
indebtedness must be
secured by the real
estate being transferred.
Both sides must enter into
the transaction voluntary
and in good faith. The
settlement agreement must
have total
consideration that is at
least equal to the
fair market value of the
property being conveyed.
Generally, the lender will
not proceed with a deed in
lieu of foreclosure if the
current fair market value of
the property exceeds the
outstanding indebtedness of
the borrower.
Because of the
requirement that the
instrument be voluntary,
lenders will often not act
upon a deed in lieu of
foreclosure unless they
receive a written offer of
such a conveyance from the
borrower that specifically
states that the offer to
enter into negotiations is
being made voluntarily. This
will enact the
parol evidence rule and
protect the lender from a
possible subsequent claim
that the lender acted in
bad faith or pressured
the borrower into the
settlement. Both sides may
then proceed with settlement
negotiations.
Neither the borrower nor
the lender is obliged to
proceed with the deed in
lieu of foreclosure until a
final agreement is reached.
