. . . Real Estate Law Lecture Notes: Finance . . . . ..
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FORECLOSURE AND
OTHER MORTGAGEE REMEDIES
Foreclosure:
Grounds for forclosure is default, by failure to pay note, when due, or failure
to do some other thing required by the note to be done, such as to pay taxes,
to insure the property, or selling the property without permission, committing
waste of the proerty, or otherwise creating an insecurity for the lender.
Types of foreclosures:
- Judicial: The forcoseure is the object of a suit, with order of foreclosure
by the court. As in all litigation, there will be notice, service of process,
and the power to answer, counter, cross, or interplead. The foreclosure sale
jmust be a public sale at auction. Statutes usually preserve an equity of
redemption before actual sale, so the homeowner can terminate the foreclosure
by paying off the debt. The court signs a deed, or orders sheriff/court agency
to sign a deed. Defaulting owner may bid at auction for the property, to assure
that the sales price is suficient. Strict notice requirements
- Exercise
of a power of sale: This is a non-judicial but the sale must be public. There
are strict notice requirements. defaulting owner may bid on the property.
The effect of valid foreclosure sale, whether judicial or private, is to extinguish
all ownership rights of the owner and divest all junior encumbrances. The
actual sale terminates equity of redemption in most states, but not all. Federal
tax liens are not discharged, unless 25 days notice to IRS. Even so, IRS has
a 120 day redemption period.
Distribution
of sale proceeds: Pay expenses of sale and the debt. Excess goes to the debtor
or to the junior encumbrances.
Frequently there may be an Interpleader: Sales proceeds are paid to court
and the court determines where the excess money goes.
Other
remedies:
- Lender in possession: Some mortgage documents may provide that the lender
can take over the property if it is income producing property, to apply income
to the debt. May deduct reasonable expenses, only.
- Receivership: A suit against the borrower will request the appointment of
a court-appointed third party to operate income producing to see to it that
income is applied to the debt.
WARNING:
Waiver by conduct. If the lender doesn't move promptly to deal with the default,
the lender's conduct might be a waiver of the rights!
DEBTOR'S REMEDIES - DEFENSES TO FORECLOSURE
Suit for injunction: An injunction is a court order, an equitable relief.
Many states require that there be no legal remedy available, first, as pre-requisite
ground for injunction. Grounds: invalidity of debt, or absence of default,
or payment, or improperly conducted sale. Some states will permit the inadequacy
of sale price at auction to be grounds.
Suit
for conversion: If the lender has caused a sale without legal right to
do so, the sale is a tortious conversion. Money damages, plus punitive damages.
Bankruptcy:
- An automatic stay requires the lender to participate in the bankruptcy,
which may provide for some portion of the secured real estate to be exempt
from administration. The lender can go ahead with the foreclosure if the lender
can get the stay lifted, which will require a motion showing that the bankruptcy
administration will not adequately protect the lender, or the debtor has no
equity in the property, or the property is not not necessary to reorganize
or liquidate the estate in bankruptcy.
- Rejection
of executory contracts: As contracts to buy or sell real estate.
