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Foreclosure Dictionary

Foreclosure is the legal process of the mortgage holder taking the collateral for a promissory note in default. The process is slightly different from state to state, but there are basically two types of foreclosure, judicial and non-judicial. In mortgage states, judicial foreclosure is most-often used, whereas in deed of trust states, non- judicial (called power of sale) foreclosure is used. Most states permit both types of proceedings, but it is common practice in most states to exclusively use one method or the other. 

Judicial Foreclosure . Judicial foreclosure is a lawsuit that the lender (mortgagee) brings against the borrower (mortgagor) force the sale of the property. About a third of the states use judicial foreclosure. Like all lawsuits, a judicial foreclosure starts with a summons (a legal notice of the lawsuit) served upon the borrower and any other parties with inferior rights in the property (remember, all junior liens, including tenancies, are wiped out by the foreclosure, so they all need notice of the proceeding). The mortgagee usually files a 'lis pendens' (latin for "notice of pending action') with the County Recorder's Office just before commencing suit. The lis pendens gives notice to the world of the commencement of the foreclosure action. 

If the borrower does not file an answer to the lawsuit, the lender gets a judgment by default. A person is then appointed by the court to compute the total amount due including interest and attorney's fees. The lender then must advertise a notice of sale in the newspaper for several weeks. If the total amount due is not paid by the sale date a public sale is held on the courthouse steps. The entire process can take as little as three months and as much as twelve months depending on your state and the volume of court cases in your county. 

The sale is conducted like an auction, in that the property goes to the highest bidder. Unless there is significant equity in the property, the only bidder at the sale will be a representative of the lender. The lender can bid up to the amount it is owed, without having to actually come out of pocket with cash to purchase the property. Once the lender has ownership of the property, it will try to sell it through a real estate agent. If the proceeds from the sale are insufficient to satisfy the amount owed to the lender, the lender may be entitled to a deficiency judgment against the borrower and anyone else who guaranteed the loan. Some states prohibit a lender from obtaining a deficiency judgment against a borrower. In practice, few lenders seek a deficiency judgment against the borrower. 

Non-Judicial Foreclosure . A majority of the states permit a lender to foreclose without a lawsuit, using what is commonly called a "power of sale." Upon default of the borrower, the lender simply files a notice of default and a notice of sale that is published in the newspaper. The entire process generally takes about ninety days. In some states, the borrower has a right of redemption after the sale (see below). 

Strict Foreclosure . A few states permit strict foreclosure, which does not require a sale. When the court proceeding is started, the borrower has a certain amount of time to pay what is owed. Once that date has passed, title reverts to the lender without the need for a sale.

Reinstating the Loan . Many states permit a borrower to cure the loan before the date of sale. The curing process simply requires paying the amount in arrears, plus interest and attorney's fees. It is certainly more desirable for a defaulting borrower to reinstate a loan rather than pay off the entire principal balance. 

Redemption Rights . Some states give a borrower the right to redeem the amount owed and get title to the property back after the sale date. The length of the redemption period varies from state to state. Obtaining a deed from the owner during the redemption period also gives you the right to redeem the property yourself. In addition, a person holding a lien that is junior to the lien being foreclosed may redeem. 

If the IRS has a lien on the property, it has 120 days after the sale to redeem the property, no matter which state the property is located. If the United States government has a lien on the property (Small Business Administration or U.S. Treasury-not IRS), then the U.S. government is granted a one year redemption period. Deed in Lieu of Foreclosure In some cases, the lender and borrower may settle a foreclosure in the middle of the proceeding (or before a proceeding begins) by the borrower giving the lender a deed in lieu of foreclosure. A borrower may opt for a deed in lieu rather than having his credit ruined by the foreclosure and a possible deficiency judgment against him. 

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Late breaking Foreclosure News: California real estate foreclosure s rise.
15,814 homeowners defaulted during third quarter, up 3.1%
from second quarter.

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