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.
