Foreclosure Process and Foreclosure Laws

The foreclosure process is the legal remedy for lenders to reclaim the collateral when a borrower defaults on a mortgage or real estate loan.  Each state has specific laws regarding this mortgage foreclosure process. The "Foreclosure Process" is similar but different from state to state in two main categories:

• Non-Judicial Foreclosure  - no court approval or court process
• Judicial Foreclosure  - requires court filings and court appearances

Non judicial Foreclosure Process

Non Judicial Foreclosures are performed by foreclosure companies without going through the court system.  A lender chooses a private foreclosure company to act as trustee and perform the foreclosure process which can take 30days to 1yr depending on the state laws.  This is a faster, more efficient and less expensive process for the lender, than a judicial foreclosure.

The Non judicial foreclosure process, begins by recording a notice of default at the county recorders office, noticing the borrower and any junior lien holders, and publishing the notice of default in local newspapers. This is usually done several times over a period of weeks or months. There is typically a waiting period of weeks or months for the borrower to cure the default. After that, the next step in the foreclosure process is announcing the trustee sale / foreclosure sale, by recording a notice of sale at the recorders office, publishing the auction sale date and property address in a local newspaper. Shortly thereafter the trustee sale / foreclosure sale is conducted by an auctioneer, where the public is allowed to bid on the defaulted property, and it is sold to the highest bidder. This auction is usually an all cash auction, where bidders must qualify to bid by presenting the auctioneer with cashiers checks prior to bidding. The winning bidder then pays the auctioneer by cashiers check immediately afterwards.  If there are no bidders the property refers back to the bank.  The foreclosure trustee prepares and delivers a trustee's deed, granting title to the winning bidder within the next few days/week and it is recorded at the county recorders office.

Judicial Foreclosure Process

The Judicial Foreclosure process is required in about half of the 50 states and is allowed in almost all states. A Judicial foreclosure is slower, more expensive and performed through a series of court filings, appearances before judges, noticing the borrowers and junior lien holders. The lender must hire an attorney and prove in court that they have the right to take possession of a property.  The foreclosure process ends in a judge giving the lender permission to proceed with a foreclosure auction / sheriff's sale, which is generally supervised by the court.

Many states require a judicial foreclosure process, and some states allow either a judicial or non-judicial foreclosure process.  Lenders generally prefer the faster non-judicial process if it is available, but may choose a judicial foreclosure process in special situations, especially the foreclosure of very large commercial properties, and when litigation is likely. The judicial process may give the lender certain advantages over non judicial foreclosure such as deficiency judgments and sometimes disadvantages such as right of redemption.

50 State Foreclosure Laws Comparison Table

Original Source of Table:  http://www.foreclosureforum.com/basics.html

Timeline for Foreclosure

The timeline for the mortgage foreclosure process is based on your state foreclosure laws, and may also depend on if the property is owner occupied, and in some cases also the property type (residential, commercial, vacant land). Typically it takes 1-12 months to complete a foreclosure. See the table above for your state foreclosure laws.

Steps of Foreclosure (Non Judicial steps for most states are similar)

1. The first foreclosure step is to  Record a Notice of Default at county recorders office.
2. Notice Borrower and Junior Lien holders by mail and publish Notice of default in Local Newspapers
3. Waiting period (varies by state)
4. Record Notice of Sale at recorders office and publish Trustee Sale info (date, time, place) in local newspapers.
5. Waiting period (varies by state)
6. The final step of foreclosure is to hold trustee sale auction and sell to highest bidder.

Deficiency Judgments

A deficiency judgment may occur after a foreclosure has been completed, if the lender suffers a loss on the loan, and is not able to recoup their original principal.  The lender can go to court and get a judgment against the borrower for the amount of their loss. This is not allowed in all states, and may also depend on whether a judicial or non-judicial foreclosure process was used. Junior lien holders who were wiped off title by a foreclosed senior lien may be allowed deficiency judgments if the junior lien was NOT created at the time of purchasing the property (non purchase money junior liens).

Right of Redemption

A right of redemption after a trustee sale / foreclosure sale, allows the borrower who just lost their home at the foreclosure auction, the opportunity to buy it back from the bank (or winning bidder), usually at the same price as the highest bid at the trustee sale. This is allowed in some states and for a specific amount of time after the trustee sale (weeks to many months). This is a disadvantage for bidders and lenders, as any property improvement costs will not be recouped if the borrower exercises this right.

Security Instruments

A loan is secured by real estate with one of two types of security instrument, called a mortgage or deed of trust.  Mortgages and Deed's of Trust are similiar and are the instrument which gets recorded at the county recorders office, to announce to the world that the property owner has a debt secured by a particular property.  Judicial or Non-judicial foreclosure may be influenced by which type of security instrument is used to secure the loan.

Power of Sale

Power of Sale is a clause in a Note or Security instrument which allows the lender to foreclose and sell the property if the borrower defaults on the terms of a loan.  This is typically a clause which is necessary to allow a non-judicial foreclosure process for a particular loan.

Recent legislation on Foreclosure Moratoriums

There has been several new laws regarding foreclosure recently, both at the state level and federal level aimed at slowing down the foreclosure process.  These laws have changed the timeline of foreclosures and the process slightly, requiring longer foreclosure noticing periods, and adding guidelines to encourage loan modifications.

Foreclosure Resources and Foreclosure Links:

Bank Owned Homes by Lender Directory - a free directory of bank REO homes for all major lenders

Foreclosure Auction Companies - foreclosure trustees and auctioneers list

Foreclosure Sale Risks - explanation of risks to the buyer when bidding at the trustee sales and sheriff's sales

Real Estate and REO Property Investment Resources

Real Estate Articles and Investing Resources

Article: Buying REO property for Real Estate Investors -REO property investment tips

Disclaimer, I am not an attorney, foreclosure laws are complicated, vary from state to state and change constantly, this information should not be relied upon as legal advice. If you have corrections or additions please direct them to comments.