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A mortgage foreclosure is a legal procedure whereby property that has been pledged as security for the payment of a debt is sold to satisfy the debt in the event of default in the payment or violation of any term or provision of the mortgage instrument.
The purposes of any mortgage foreclosure action are the following:
Foreclosure procedures can be judicial or nonjudicial and vary greatly from state to state.
The most common impediments to the commencement of a mortgage foreclosure action are the following:
Foreclosure by Judicial Action
In the majority of jurisdictions, the foreclosure of mortgages is accomplished through judicial proceedings.
In general terms, a court action is commenced seeking a decree of foreclosure and an order for a sale of the real estate. The action must be brought in a court having jurisdiction over both the subject matter and land and all necessary parties must be made defendants and be served properly. Upon completion of the pertinent statutory proceedings, a decree of foreclosure and an order for the sale of the real estate is entered by the court.
Foreclosure by Power of Sale
In a number of states, nonjudicial foreclosure by exercise of power of sale is permitted. This type of foreclosure rests upon a power of sale clause included in the mortgage instrument. This clause provides for a nonjudicial sale conducted after advertising, serving, and posting of a notice of sale as specified in the mortgage and the applicable state law. Hence, it is sometimes referred to as "foreclosure by advertisement." Usually, the mortgage document is a deed of trust.
However, the existence of power of sale foreclosure in a given state does not prelude the right to resort to judicial foreclosure.
Judicial dicta indicate that, in the absence of a state statute forbidding foreclosure except by judicial proceeding, a power of sale is valid and foreclosure by exercise of power of sale is proper and expeditious.
Foreclosure by power of sale is much simpler in its process than foreclosure by action.
The statutory requirements and procedures regarding to the form and contents of the instrument containing the power of sale and the mechanics of the foreclosure by power of sale vary greatly from jurisdiction to jurisdiction.
This was the original method of foreclosure adopted by the English courts of equity under the early common law.
A strict foreclosure decree will determine the amount due under the mortgage obligation and order the payment of that amount to be made within a specified time and will further provide that in the event of default in making the payment, the mortgagor's right and equity of redemption is to be forever barred and foreclosed. The effect of the decree is to vest title to the property absolutely in the mortgagee without any sale of the property.
At the present time, very few states recognize strict foreclosure.
Foreclosure by Entry and Possession
Foreclosure by entry and possession is permitted under the statutes of a few New England states.
This type of foreclosure is effected by an entry by the mortgagee on the mortgaged subject property and the retention of the possession for a limited time, after which all right of redemption is barred. The provisions of the statute must be strictly observed. After the expiration of this time, the mortgagee takes an absolute estate and becomes entitled to all the rents and profits. The entry must be peaceable and in the presence of witnesses, who are to make a certificate of the fact, and the certificate is to be recorded.
If all the necessary parties have not been named as defendants and redemption is not made or if no redemption period is allowed by law, the purchaser at a foreclosure sale takes title to the property as of the date of the mortgage by the "doctrine of relation back." Hence, the general rule is that the purchaser's title is that which the purchaser would have obtained had the purchaser acquired the property from the mortgagor at the time the mortgage was executed.
According to a number of court cases in some jurisdictions, in the event the mortgagor under the mortgage or deed of trust foreclosed subsequently reacquires title to the property, it is possible that such a reacquisition may effectuate the revival of the junior liens and encumbrances that were cut out by the foreclosure action. State law must be properly researched in order to determine any possibility of revival within a specific jurisdiction. In this respect, nonjudicial foreclosures represent areas of extreme risk.
In many states, if the foreclosure sale of the real estate secured by a mortgage or deed of trust does not produce a sufficient sale price to pay the loan balance in full after deducting expenses and accrued unpaid interest, the mortgagee may be entitled to a personal judgment against the maker of the note for the unpaid balance. Such judgment is called a deficiency judgment. It may also be obtained against any endorsers or guarantors of the note and any owners of the mortgaged property who may have assumed the debt by written agreement.
The existence of the right to a deficiency judgment depends upon the jurisdiction where the land is located, the manner in which the foreclosure is conducted and the kind of mortgage being foreclosed, and the particular type of property, i.e., single family residential property.
Deficiency judgments are enforceable in the same manner as any other judgment or decree. Deficiency judgment questions are often closely related to the one form of action rule in effect in several states. In general, this rule establishes that in the event of a default, the mortgagee's sole remedy is a foreclosure action and that any deficiency claim must be sought in that proceeding.
Most states confer upon defaulting borrowers the right to redeem their properties. In such cases, redemption takes one of two forms: equitable redemption or statutory redemption. The latter, in some cases, is also made applicable to inferior lienholders and other parties in interest.
Historically, the right of redemption is inherited from the old common-law proceedings in which the court sale ended the equitable right of redemption. Carried over to statutory law, this concept provides that, if during the course of a foreclosure proceeding but before the foreclosure sale or the decree in strict foreclosure, the borrower or any other person who has an interest in the real estate (such as another creditor) pays the lender the amount currently due, plus costs, the debt will be reinstated as before. In some cases, the person who redeems may be required to repay the accelerated loan in full. If some person other than the mortgagor or trustor redeems the real estate, the borrower becomes responsible to that person for the amount of the redemption.
Many states allow defaulted borrowers and some other parties with interest a period in which to redeem the real estate after the foreclosure sale. During the statutory redemption period, which may be as long as one year, the court may appoint a receiver to take charge of the property. The mortgagor or party with interest may redeem the property within the statutory period of time by paying into the court the amount of money determined for that purpose by the judgment decree of foreclosure.
State law provides the parties entitled to redemption rights and the time and conditions for their exercise. It also provides the cases and circumstances in which redemption rights may be waved.
Redemption periods and conditions for redemption vary greatly among the states.
United States as a Mortgagee
When the mortgage is one in which the United States has an interest, as where the mortgage is FHA insured, VA insured, or a Small Business Administration mortgage, some court decisions hold that the state redemption law is inapplicable and that a federal court may order such redemption period as it deems appropriate.
United States as a Party Defendant
Section 2410(c) of the U.S.C.A. governs the period within which the United States may redeem from a judicial sale made to satisfy a lien superior to that of the lien of the United States. As amended by the Federal Tax Lien Act of 1966, this section reads in part as follows:
"Where a sale of real estate is made to satisfy a lien prior to that of the United States, the United States shall have one year from the date of sale, within which to redeem, except that with respect to a lien arising under the internal revenue laws, the period shall be 120 days or the period allowable for redemption under State law, whichever is longer..."
In some states, a mortgagee can choose a mode of foreclosure that eliminates the right of redemption.
Mechanics' and materialmans' liens should not be ignored on the assumption of their possible elimination as a consequence of a foreclosure action unless the claimants were parties to the proceedings, or, in the case of nonjudicial foreclosure, until it is clearly established that the priority of such claims is inferior to the priority of the security instrument foreclosed.