Foreclosure is a catch-all term for the processes used by mortgage-holders, or mortgagees, to take mortgaged property from borrowers who default on their mortgages. Foreclosure, like mortgages generally, is governed by the law of the place where the mortgaged thing is.
The foreclosure process may begin once a mortgage borrower, or mortgagor, falls so far behind on her mortgage payments that she enters default. The conditions for entering default vary, based on state law and terms in mortgage agreements. Once a mortgagor enters default, she starts to accumulate late fees, legal fees, and other charges that are added to her outstanding debt, as determined by the mortgage agreement and state law.
Mortgagees do not have to foreclose on mortgages that are in default. They are free to negotiate with mortgagors. For example, they might agree to adjust the terms of the mortgage, refinance, allow the mortgagor to sell the property, or allow the mortgagor to make up for his or her missed payments.
Types of Foreclosures
There are two types of foreclosure: judicial foreclosures, which require a court order, and non-judicial foreclosures, which do not. In judicial foreclosures, the mortgagee must go to court and prove that it owns the mortgage and has the right to foreclose on it. Non-judicial foreclosures allow a mortgagee to foreclose without going to court. This is cheaper and quicker than a Judicial Foreclosure. Non-judicial foreclosures may only be used where the mortgage has a power-of-sale clause. These clauses most often appear in deeds of trust, a type of real estate secured lending instrument similar to a mortgage.
Most mortgages now include acceleration clauses. According to these clauses, if borrowers falls far enough behind in their payments, the rest of the loan is due immediately. Mortgagors usually invoke these clauses as a prelude to foreclosure. Most states regulate acceleration clauses, either generally, as specifically as applied to mortgages, or both.
In recent years, lenders frequently bundled groups of mortgages into mortgage-backed securities, and then sold shares of the securities to investers. As a result, some mortgages have many owners. Others have changed hands so many times that it is difficult to determine who actually owns them. As a result, it is often difficult for mortgagors to modify the terms of their mortgage. Similarly, mortgagees might have trouble proving that they own a mortgage they want to foreclose on.
Sale of Foreclosed Property
Most states require mortgagees to sell foreclosed property at public auction. If the property does not sell at auction, the mortgagee keeps it, and later resells it in a normal real estate sale. State laws vary regarding what happens if foreclosed property sells for less than the mortgagor's unpaid debt. In some states, mortgagors are liable for the difference. In others, they are not. In every state, if the property sells for more than the mortgagor's unpaid debt, the mortgagor gets the difference.
Right of Redemption
In some states, mortgagors have a right of redemption that allows them to get back foreclosed property. If the original mortgagee owns the property, mortgagors may exercise the right by paying the bank the unpaid balance of their mortgage. If the property was already resold at auction, mortgagors must pay the purchaser whatever he or she paid for it. Rights of redemption only last for a limited time, which varies by state.
Once mortgagees begin the foreclosure process, it may take them six months or more to get clear title to the mortgaged land, depending on the state, foreclosure type, and type of mortgage.
Debtor and Creditor Law