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Foreclosure
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". 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."
In the United States, there are two sorts of
foreclosure in most common law states. Using a "deed in lieu
of 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.
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. 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 eg. a senior mortgage, unpaid property taxes etc.
Further legal action, such as an eviction may be necessary to obtain
possession of the premises.
"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 forelcosure
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.
Some individuals and companies are engaged
in the business of purchasing properties at foreclosure sales. A
number of companies promoting themselves on the internet and in
other advertising media have sprung up touting the profits that
can be made buying properties in foreclosure. Purchasing properties
in foreclosure can be a "risky business" and should not
be attempted by the uninformed.
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