Mortgage Foreclosure

Introduction

Foreclosure is a catch-all term for the processes used by mortgage-holders, or mortgagees, to take mortgaged property from borrowers who default on their mortgages. Foreclosure, like mortgages generally, is governed by the law of the place where the mortgaged thing is.

Default

The foreclosure process may begin once a mortgage borrower, or mortgagor, falls so far behind on her mortgage payments that she enters default. The conditions for entering default vary, based on state law and terms in mortgage agreements. Once a mortgagor enters default, she starts to accumulate late fees, legal fees, and other charges that are added to her outstanding debt, as determined by the mortgage agreement and state law.

Mortgagees do not have to foreclose on mortgages that are in default. They are free to negotiate with mortgagors. For example, they might agree to adjust the terms of the mortgage, refinance, allow the mortgagor to sell the property, or allow the mortgagor to make up for his or her missed payments.

Types of Foreclosures

There are two types of foreclosure: judicial foreclosures, which require a court order, and non-judicial foreclosures, which do not. In judicial foreclosures, the mortgagee must go to court and prove that it owns the mortgage and has the right to foreclose on it. Non-judicial foreclosures allow a mortgagee to foreclose without going to court. This is cheaper and quicker than a Judicial Foreclosure. Non-judicial foreclosures may only be used where the mortgage has a power-of-sale clause. These clauses most often appear in deeds of trust, a type of real estate secured lending instrument similar to a mortgage.

Acceleration Clauses

Most mortgages now include acceleration clauses. According to these clauses, if borrowers falls far enough behind in their payments, the rest of the loan is due immediately. Mortgagors usually invoke these clauses as a prelude to foreclosure. Most states regulate acceleration clauses, either generally, as specifically as applied to mortgages, or both.

Mortgage-Backed Securities

In recent years, lenders frequently bundled groups of mortgages into mortgage-backed securities, and then sold shares of the securities to investers. As a result, some mortgages have many owners. Others have changed hands so many times that it is difficult to determine who actually owns them. As a result, it is often difficult for mortgagors to modify the terms of their mortgage. Similarly, mortgagees might have trouble proving that they own a mortgage they want to foreclose on.

Sale of Foreclosed Property

Most states require mortgagees to sell foreclosed property at public auction. If the property does not sell at auction, the mortgagee keeps it, and later resells it in a normal real estate sale. State laws vary regarding what happens if foreclosed property sells for less than the mortgagor's unpaid debt. In some states, mortgagors are liable for the difference. In others, they are not. In every state, if the property sells for more than the mortgagor's unpaid debt, the mortgagor gets the difference.

Right of Redemption

In some states, mortgagors have a right of redemption that allows them to get back foreclosed property. If the original mortgagee owns the property, mortgagors may exercise the right by paying the bank the unpaid balance of their mortgage. If the property was already resold at auction, mortgagors must pay the purchaser whatever he or she paid for it. Rights of redemption only last for a limited time, which varies by state.

Timing

Once mortgagees begin the foreclosure process, it may take them six months or more to get clear title to the mortgaged land, depending on the state, foreclosure type, and type of mortgage.

Why Foreclosures Happen

A foreclosure occurs when the homeowner is behind in making payments on the mortgage loan used to purchase the home. Foreclosure is something no homeowner wants to experience and, in most cases, the lack of payments on a home loan is usually due to an unexpected dip in finances or a change in the owner’s circumstances. The reasons why a home might fall into foreclosure are endless, including:

Loss of employment, either by being fired, laid off, quitting, or inability to work for medical reasons
Unexpected medical bills
Separation or divorce
Unanticipated costs associated with the maintenance of the home itself

When Does Foreclosure Begin?

Borrowers who get behind on their mortgage usually go through a series of steps before they face foreclosure. Foreclosure is the result of breaking your repayment agreement with your lender and failing to make alternative arrangements for repayment, such as a loan modification.

The repayment agreements are outlined in the promissory note you signed at closing, as part of your mortgage commitment. These agreements may differ by lender and jurisdiction. So be sure to refer to your agreement for particular rules that govern your mortgage.

Foreclosure Timeline

In both judicial and non-judicial states, the initial process is typically the same, beginning with your first late monthly mortgage payment. Here’s the general timeline:

First missed payment. The first step is a missed payment. Lenders often offer grace periods of up to 15 days to pay your mortgage after the due date; if you don’t make your payment within the grace period, you could be charged a late fee. Additionally, some lenders might report your late payment to the credit bureaus.
Default. If you continue to miss mortgage payments, you’re considered in default. Some lenders will consider you in default after 30 days of no payment, while others have a 15-day no-payment limit. The default rules depend on your lender.
The next step depends on whether you have a judicial or non-judicial foreclosure. Typically, a judicial foreclosure happens when there is no “power of sale” in the mortgage agreement or the state mandates this type of foreclosure; non-judicial foreclosure takes place when there is a power of sale clause and is allowable under state law. Typically, non-judicial foreclosures are faster and less expensive.
Foreclosure lawsuit or notice of default. For a judicial foreclosure, your lender will file a foreclosure lawsuit. If you don’t respond, the judge will likely grant the lender a default judgment. If you do respond, the case could go to trial or the judge could file a motion of summary judgment. A motion for summary judgment is a decision made by the judge when there isn’t a genuine dispute about the material facts surrounding the foreclosure.
In a non-judicial foreclosure, the lender automatically issues you a notice of default (NOD) via certified mail, which is also recorded with the county registrar. This tells you how much you owe, including past due amounts, late fees and foreclosure costs. Once you receive the NOD, you typically have 90 days to repay what you owe or work with your lender to come up with a repayment agreement.
Pre-foreclosure. Between the notice of default and sale of the home, the borrower can pay what’s owed to stop the foreclosure process. As the borrower, you still legally own the home, so there’s time to save yourself from eviction. Even contacting your lender could help you stop the foreclosure process, especially if they determine you’re eligible for a special payment or relief plan.
Notice of sale. If you don’t pay what’s owed or make arrangements within the notice of default period, the lender will create a notice of sale. This notice might be published in a local newspaper and could also be posted on your property. The lender will then prepare to put the home up for auction, which includes setting a date and time for the sale.
Leave residence. Once the lender sells the property, you’ll have to move out. The time you have to vacate the property differs based on your state’s laws.

The Bottom Line

Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid foreclosure. If there is a chance the borrower can catch up on payments—for instance, they just started a new job following a period of unemployment—it is worth speaking to the lender in hopes of making arrangements or modifying the current loan.