Foreclosures Explained

[hoapres]

When you are in default on a loan secured by real property (i.e. either a deed of trust or a mortgage) then the lender has the right to foreclose on the property.

 

Deed of trusts will be referred as mortgages.

 

EVERY state has different foreclosure statutes but in general TWO basic types of foreclosures exist. (Strict foreclosure is a third possibility which proceeds under the assumption that the lender owns the property is not discussed probably more akin to a judicial foreclosure)

 

NONJUDICIAL FORECLOSURE - Some states (typically west of the Mississippi river) allow for what is called nonjudicial foreclosure. As the term implies, the court system is usually not involved. The loan i.e. security interest is the deed of trust (i.e. mortgage) which gives a third party i.e. trustee the "power of sale" should you default on the payments. The lender informs the trustee that you are in default and from that point on the trustee prepares according to state statutes the notices required to sell the property along with conducting the trustee sale.

 

JUDICIAL FORECLOSURE . Not all states allow nonjudicial foreclosure. Some states require that the lender sue i.e. file a complaint for judicial foreclosure and if the court makes the determination that you are in default will again depends on state laws give you time to cure the default and set a sale date. The sheriff will sell the property.

 

REDEMPTION RIGHTS Some states may give you the right to redeem the property after the forced sale. Other states do not i.e. The sale is final.

 

EVICTION FROM THE PROPERTY The new owner simply can not throw you out on the street. The new owner will most likely (assuming that you do not voluntarily vacate the residence) will file an unlawful detainer lawsuit against you and obtain a court order allowing the sheriff to evict you.

 

NEW OWNER TAKES TITLE TO THE PROPERTY WITH THE OWNERSHIP DATE BEING THE DATE OF THE FORECLOSING INSTRUMENT WAS EXECUTED WHICH IS NOT THE DATE OF THE TRUSTEE SALE

 

Easiest to explain this with an example :

 

1. A house is purchased for $500K with a $400K mortgage on Jan. 1, 2000

 

2. A second mortgage is taken out for a $100K on Jan 1, 2003 (i.e. The house went up in value allowing for a second)

 

3. The property goes into foreclosure

 

4. The first mortgage holder obtains the property at the foreclosure sale. i.e. No one bids on the property (i.e. the $500K house is worth $350K) so no one is willing to bid on it.

 

The new owner being the first mortgage lender takes title to the property with the condition of title as of Jan 1, 2000. The second mortgage is EXTINGUISHED as a lien to the property. i.e. The first mortgage holder can sell the property without worrying about the 2nd mortgage.

 

(Some technical considerations i.e. property taxes always being senior and federal tax liens allow the U.S. a 120 day right of redemption are ignored)

 

The holder of the 2nd mortgage whose property lien of $100 was extinguished MAY (if your state allows for a deficiency lawsuit) or MAY NOT (if your state does not allow for a deficiency lawsuit) may sue you for the $100K.

 

Most likely it can as the 2nd mortgage was NOT a purchase loan.

 

The 1st being a purchase loan may or may not be able to sue you for the deficiency. If the house sells for $350K then the 1st lost $50K.

 

 

If you entered into a lease purchase agreement i.e. signed a lease purchase agreement on Jan 1., 2006 then said lease agreement is probably NOT binding on the new owner. Remember the new owner takes title to the property as of Jan 1., 2000 being the date that the first mortgage was executed.

Edited December 19, 2007 by hoapres

[hoapres]

A bump as I believe this post may give a description of foreclosure which is becoming an unfortunate fact of life for many.

 

I would note carefully (for those that are trying to do short sales with multiple encumberances i.e. 1st and 2nd mortgage) to read the description (hopefully clear) about the concept of "first in sight being first in right". Hopefully, the concept of the date that you take title at a foreclosure sale is the date of recording of the foreclosing instrument i.e. 1st mortgage which is EARLIER than the date of the foreclosure sale is clear.

[hoapres]

bump

[momx6]

Quick question about this process. My sister and her husband had received a "notice of intent to foreclose", back in June, but were able to make payments up until now. They are now 3 months behind and are uncertain about how long they will be able to physically stay in the home. How will they know when they have to vacate the property?

 

Thanks

[momx6]

*bump*

[Mayor]

Quick question about this process. My sister and her husband had received a "notice of intent to foreclose", back in June, but were able to make payments up until now. They are now 3 months behind and are uncertain about how long they will be able to physically stay in the home. How will they know when they have to vacate the property?

 

Thanks

Call your lender and get the number to the attorneys handling the foreclosure for the lender -- they will be able to answer more specific questions like that since they will handling it. Personally -- I would NEVER wait to you get an eviction -- EVICTIONS will cause you to have problems being able to rent apts/homes down the road. I know a lot of apts that will automatically decline you if you been evicted from somewhere.