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Encyclopedia > Foreclosure

Foreclosure is the equitable proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owner's failure to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust." Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, it is typically said that "the lender has foreclosed its mortgage or lien." Image File history File links Gnome-globe. ... Image File history File links Question_book-3. ... For other uses, see Bank (disambiguation). ... A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation (usually but not always the payment of a debt) which gives the beneficiary of the security interest certain preferential rights in relation to the assets. ... A creditor is a party (e. ... This article does not cite any references or sources. ... In all the civil law systems, immovable property is the equivalent of real property in common law systems, i. ... This article is about the legal mechanism used to secure property in favor of a creditor. ... This article is about the legal mechanism used to secure property in favor of a creditor. ... A promissory note is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). ... In law, lien is the broadest term for any sort of charge or encumbrance against an item of property that secures the payment of a debt or performance of some other obligation. ... This article is about the legal mechanism used to secure property in favor of a creditor. ... In law, lien is the broadest term for any sort of charge or encumbrance against an item of property that secures the payment of a debt or performance of some other obligation. ...

Contents

Types of foreclosure

The mortgage holder can usually initiate foreclosure anytime after a default on the mortgage. Within the United States, several types of foreclosure exist. Two are widely used, with the rest being possibilities in a few states.


The most important type of foreclosure is foreclosure by judicial sale. This is available in every state and is the required method in many. It involves the sale of the mortgaged property done under the supervision of a court, with the proceeds going first to satisfy the mortgage, and then to satisfy other lien holders, and finally to the mortgagor. Because it is a legal action, all the proper parties must be notified of the foreclosure, and there will be both pleadings and some sort of judicial decision, usually after a short trial.


The second type of foreclosure, foreclosure by power of sale, involves the sale of the property by the mortgage holder not through the supervision of a court. Where it is available, foreclosure by power of sale is generally a more expedient way of foreclosing on a property than foreclosure by judicial sale. The majority of states allow this method of foreclosure. Again, proceeds from the sale go first to the mortgage holder, then to other lien holders, and finally to the mortgagor.


Other types of foreclosure are only available in limited places and are therefore considered minor methods of foreclosure. Strict foreclosure is one example. Under strict foreclosure, when a mortgagor defaults, a court orders the mortgagor to pay the mortgage within a certain period of time. If the mortgagor fails, the mortgage holder automatically gains title, with no obligation to sell the property. Strict foreclosure was the original method of foreclosure, but today it is only available in a few states, such as Connecticut, New Hampshire and Vermont.


Acceleration

The concept of acceleration is used to determine the amount owed under foreclosure. Acceleration allows the mortgage holder the right when the mortgagor defaults on the mortgage to declare the entire debt due and payable. In other words, if a mortgage is taken out on property for $10,000 with monthly payments required, and the mortgagor fails to make the monthly payments, the mortgage holder can demand the mortgagor make good on the entire $10,000 of the mortgage.


Virtually all mortgages today have acceleration clauses. However, they are not imposed by statute, so if a mortgage does not have an acceleration clause, the mortgage holder has no choice but to either wait to foreclose until all of the payments come due or convince a court to divide up parts of the property and sell them in order to pay the installment that is due. Alternatively, the court may order the property sold subject to the mortgage, with the proceeds from the sale going to the payments owed the mortgage holder.


Foreclosure by judicial sale

Foreclosure by judicial sale requires the mortgage holder to proceed carefully in order to ensure that all affected parties are included in the court case, so the purchaser of the foreclosed property receives valid title to the property.


Process

The process of foreclosure is lengthy and the timeframes for when the lending institution begins the process vary from state to state. Other factors, such as the increasing availability of personal loans for owners facing foreclosure, present homeowners with foreclosure avoidance options. Websites which connect individual borrowers and homeowners to individual lenders are increasingly used as mechanisms to bypass banks while meeting payment obligations for mortgage providers. The increase in the number of foreclosures in the United States has led to more loan listings which are designed to forestall or prevent foreclosure.


In the United States, there are two types of foreclosure in most common law states. Using a "deed in lieu of foreclosure," or "strict foreclosure", the bank claims the title and possession of the property back in full satisfaction of a debt, usually on contract. In the proceeding simply known as foreclosure (or, perhaps, distinguished as "judicial foreclosure"), the property is exposed to auction by the county sheriff or some other officer of the court. Many states require this latter sort of proceeding in some or all cases of foreclosure, in order to protect any equity the debtor may have in the property, in case the value of the debt being foreclosed on is substantially less than the market value of the immovable property (this also discourages strategic foreclosure). In this foreclosure, the sheriff then issues a deed to the winning bidder at auction. Banks and other institutional lenders typically bid in the amount of the owed debt at the sale, and if no other buyers step forward the lender receives title to the immovable property in return. This article concerns the common-law legal system, as contrasted with the civil law legal system; for other meanings of the term, within the field of law, see common law (disambiguation). ... A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i. ... Title is a legal term for an owners interest in a piece of property. ... This article needs additional references or sources for verification. ... Look up Sheriff in Wiktionary, the free dictionary. ... At the start of a business, owners put some funding into the business to finance assets. ...


Other states have adopted non-judicial foreclosure procedures, in which the mortgagee, or more commonly the mortgagee's attorney or designated agent, gives the debtor a notice of default and the mortgagee's intent to sell the immovable property in a form prescribed by state statute. This type of foreclosure is commonly referred to as "statutory" or "non-judicial" foreclosure, as opposed to "judicial". With this "power-of-sale" type of foreclosure, if the debtor fails to cure the default, or use other lawful means (such as filing for bankruptcy which provides a temporary automatic stay to the foreclosure proceeding) to stop the sale, the mortgagee or its representative will conduct a public auction in a similar manner as the sheriff's auction described above. The highest bidder at the auction becomes the owner of the immovable property free and clear of any interest of the former owner but the property may be encumbered by any liens superior to the mortgage being foreclosed (e.g. a senior mortgage, unpaid property taxes etc). Further legal action, such as an eviction may be necessary to obtain possession of the premises. The Statute of Grand Duchy of Lithuania A statute is a formal, written law of a country or state, written and enacted by its legislative authority, perhaps to then be ratified by the highest executive in the government, and finally published. ... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration—see text) in the United Kingdom. ... This article needs additional references or sources for verification. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...


"Strict foreclosure" is an equitable right available in some states. The strict foreclosure period arises after the foreclosure sale has taken place and is available to the foreclosure sale purchaser. The foreclosure sale purchaser must petition a court for a decree that will cut off any junior lienholder's rights to redeem the senior debt. If the junior lienholder fails to do so within the judicially established time frame, his lien is cancelled and the purchaser's title is cleared. This effect is the same as the strict foreclosure that occurred at common law in England's courts of equity as a response to the development of the equity of redemption.


In most jurisdictions, it is customary for the foreclosing lender to obtain a title search of the immovable property and to notify all other persons who may have liens on the property, whether by judgment, by contract, or by statute or other law, so that they may appear and assert their interest in the foreclosure litigation. In all US jurisdictions a lender who conducts a foreclosure sale of immovable property which is the subject of a federal tax lien must give 25 days' notice of the sale to the Internal Revenue Service: failure to give notice to the IRS will result in the lien remaining attached to the immovable property after the sale. Therefore, it is imperative that the lender obtain a search of the local Federal Tax Liens so that if the persons or companies involved in the foreclosure have a federal tax lien filed against them, the proper notice to the IRS will be given. A detailed explanation by the IRS of the Federal Tax Lien process can be found here. A title search is an action taken prior to the sale of real property to determine whether there are any liens or other encumbrances on the property which might prevent or delay the sale of the property. ... In law, lien is the broadest term for any sort of charge or encumbrance against an item of property that secures the payment of a debt or performance of some other obligation. ... A judgment or judgement (see spelling note below), in a legal context, is synonymous with the formal decision made by a court following a lawsuit. ... A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. ... The Statute of Grand Duchy of Lithuania A statute is a formal, written law of a country or state, written and enacted by its legislative authority, perhaps to then be ratified by the highest executive in the government, and finally published. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        IRS redirects here. ...


Foreclosure auction

When a bank auctions a repossessed property, they will typically set the starting price as the remaining balance on the mortgage loan. Many times, however, in this market the bank will set the starting price at a lower amount if it believes the real estate securing the loan is worth less than the loan. This is not usually the case in the state of Alabama.


In the case where the remaining mortgage balance is higher than the actual home value, known as an Upside-down mortgage, the bank is unlikely to attract auction bids at this price level. A house that went through foreclosure auction and failed to attract any bids becomes property of the bank. It is called "REO" (real estate owned). The bank will typically try to sell it at a loss later through standard channels. Upside-Down, also known as Negative Equity, refers to owing more on a loan than the value of the asset for which the loan was used to purchase. ... Real Estate Owned or REO is a term frequently used by lending institutions as applied to ownership of real property acquired for investment or as a result of foreclosure. ...


See mortgagee auction. Mortgagee auction is the term used in both Australia & New Zealand to describe a property foreclosure auction. ...


Further borrower's obligations

The mortgagor is required to pay for mortgage insurance, or PMI, for as long as the principal of his primary mortgage is above 80% of the value of his property. In most situations, insurance requirements are sufficient to guarantee that the lender will get all his money back, either from foreclosure auction proceeds or from PMI. It has been suggested that this article or section be merged with Mortgage. ...


Nevertheless, in an illiquid real estate market or following a significant drop in real estate prices, it may happen that the property being foreclosed is sold for less than the remaining balance on the primary mortgage loan, and there's no insurance to cover the loss. In this case, the court overseeing the foreclosure process may enter a deficiency judgment against the mortgagor. Deficiency judgment is a lien that obligates the mortgagor to repay the difference. It gives lender a legal right to collect the remainder of debt out of mortgagor's other assets (if any). Deficiency judgment (also spelled Deficiency judgement) is a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficent funds to pay the mortgage in full. ...


There are exceptions to this rule, however. If the mortgage is a non-recourse debt (which is often the case with residential mortgages), lender may not go after borrower's assets to recoup his losses. Lender's ability to pursue deficiency judgment may be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't. It has been suggested that Non-recourse debt be merged into this article or section. ...


If the lender chooses not to pursue deficiency judgment—or can't because the mortgage is non-recourse—and writes off the loss, the borrower may have to pay income taxes on the unrepaid amount.


Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but borrower is still obligated to pay them off if they are not paid out of foreclosure auction's proceeds. A second mortgage typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property. ... HELOC is an abbreviation of Home Equity Line of Credit. ...


Foreclosure investment

Some individuals and companies are engaged in the business of purchasing properties at foreclosure sales. Distressed assets (such as foreclosed property or equipment) are considered by some to be worthwhile investments because the bank or mortgage company is not motivated to sell the property for more than is pledged against it.


Other countries

  • Australia & New Zealand - Foreclosures are generally referred to as Mortgagee sales or Mortgagee auctions. In those cases, the bank or lender ("Mortgagee") forces the borrower ("Mortgagor") to sell under the terms of the loan contract.
  • United Kingdom - Foreclosure is a little used remedy which vests the property in the mortgagee with the mortgagor having no right to any surplus from the sale. Due to the potential harshness of the remedy, courts will almost never allow this remedy. Instead they will grant an order for possession and an order for sale, which mitigates some of the harshness of the repossession by allowing the mortgagor to retain any surplus from the sale.

Mortgagee auction is the term used in both Australia & New Zealand to describe a property foreclosure auction. ...

External links

See also


  Results from FactBites:
 
Foreclosure (3109 words)
Once the foreclosure process has begun, if you're armed with the right information, you may be able to save your home from foreclosure and, in some instances, avoid the foreclosure process altogether.
When foreclosure documents are filed they become a matter of public record and many people review these records for various purposes such as compiling lists to sell to bankruptcy attorneys, investors, real estate professionals and other people interested in either purchasing your home or.
Foreclosure sales are auctions held by the mortgage holder while a sheriff's sale is held by a lien holder or attaching creditor.
Foreclosure - Wikipedia, the free encyclopedia (770 words)
Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owner's failure to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust".
In the proceeding simply known as foreclosure (or, perhaps, distinguished as "judicial foreclosure"), the property is exposed to auction by the county sheriff or some other officer of the court.
This effect is the same as the strict foreclosure that occurred at common law in England's courts of equity as a response to the development of the equity of redemption.
  More results at FactBites »

 
 

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