DEFAULT

Enforcement

Foreclosure

Deed in lieu of foreclosure

Short sale

Enforcement               

All liens can be enforced by the sale or other transfer of title of the secured property, whether by court action, operation of law, or through powers granted in the original loan agreement. The enforcement proceedings are referred to as foreclosure.

State law governs the foreclosure process. Broadly, a statutory or court-ordered sale enforces a general lien, including a judgment lien. A lawsuit or loan provision authorizing the sale or direct transfer of the attached property enforces a specific lien, such as a mortgage. Real estate tax liens are enforced through tax foreclosure sales, or tax sales.

The defaulting borrower may also offer the lender a deed in lieu of foreclosure to avoid the foreclosure process, but the lender does not have to accept it. Finally, there is the option of a short sale, which also avoids foreclosure but must be agreed to by the lender and borrower.

Foreclosure                 

Three types of foreclosure process enforce mortgage liens:

  • judicial foreclosure
  • non-judicial foreclosure
  • strict foreclosure

Judicial foreclosure.  Judicial foreclosure occurs in states (such as Florida) that use a two-party mortgage document (borrower and lender) that does not contain a “power of sale” provision. Lacking this provision, a lender must file a foreclosure suit and undertake a court proceeding to enforce the lien.

  • acceleration and filing

    If a borrower has failed to meet loan obligations in spite of proper notice and applicable grace periods, the lender can accelerate the loan, or declare that the loan balance and all other sums due on the loan are payable immediately.

    If the borrower does not pay off the loan in full, the lender then files a foreclosure suit, naming the borrower as defendant. The suit asks the court to:
  • terminate the defendant’s interests in the property
  • order the property sold publicly to the highest bidder
  • order the proceeds applied to the debt
  • lis pendens

    In the foreclosure suit, a lis pendens gives public notice that the mortgaged property may soon have a judgment issued against it. This notice enables other lienholders to join in the suit against the defendant.

  • writ of execution

    If the defendant fails to meet the demands of the suit during a prescribed period, the court orders the termination of interests of any and all parties in the property, and orders the property to be sold. The court’s writ of execution authorizes an official, such as the county sheriff, to seize and sell the foreclosed property.

  • public sale and sale proceeds

    After public notice of the sale, the property is auctioned to the highest bidder. The new owner receives title free and clear of all previous liens, whether the lienholders have been paid or not. Proceeds of the sale are applied to payment of liens according to priority. After payment of real estate taxes, lienholders’ claims and costs of the sale, any remaining funds go to the mortgagor (borrower).

  • deficiency judgment

    If the sale does not yield sufficient funds to cover the amounts owed, the mortgagee may ask the court for a deficiency judgment. This enables the lender to attach and foreclose a judgment lien on other real or personal property the borrower owns.

  • right of redemption

    The borrower’s right of redemption, also called equity of redemption, is the right to reclaim a property that has been foreclosed by paying off amounts owed to creditors, including interest and costs. Redemption is possible within a redemption period. Florida allows redemption at any time until the foreclosure sale concludes.

Non-judicial foreclosureWhen there is a “power of sale” provision in the mortgage or trust deed document, a non-judicial foreclosure can force the sale of the liened property without a foreclosure suit. The “power of sale” clause in effect enables the mortgagee to order a public sale without court decree.

  • foreclosure process

    On default, the foreclosing mortgagee records and delivers notice to the borrower and other lienholders. After the proper period, a “notice of sale” is published, the sale is conducted, and all liens are extinguished. The highest bidder then receives unencumbered title to the property.
  • deficiency suit

    The lender does not obtain a deficiency judgment or lien in a non-judicial foreclosure action. The lender instead must file a new deficiency suit against the borrower.

  • reinstatement and redemption

    During the notice of default and notice of sale periods, the borrower may pay the lender and terminate the proceedings. Reinstatement and redemption rights in Florida end with the conclusion of the foreclosure sale. There is no redemption right in non-judicial foreclosure.

Strict foreclosureStrict foreclosure is a court proceeding that gives the lender title directly, by court order, instead of giving cash proceeds from a public sale.

On default, the lender gives the borrower official notice. After a prescribed period, the lender files suit in court, whereupon the court establishes a period within which the defaulting party must repay the amounts owed. If the defaulter does not repay the funds, the court orders transfer of full, legal title to the lender.

Deed in lieu of foreclosure                  

A defaulting borrower who faces foreclosure may avoid court actions and costs by voluntarily deeding the property to the mortgagee. This is accomplished with a deed in lieu of foreclosure which transfers legal title to the lienholder. The transfer, however, does not terminate any existing liens on the property.

Short sale                    

A short sale occurs when a property owner owes more than resale value and loan pay-off and agrees to let the lender sell it in exchange for release from the lien. The lender may or may not agree to accept the deficient price as satisfaction and may require the seller to pay the deficiency by way of a deficiency judgment.  There may also be tax consequences for the seller.  To avoid the deficiency, seller must make sure that the agreements include a full release of the underlying debt and a statement that it was fully satisfied.

After retaking property via foreclosure or short sale, the property becomes “bank owned.” Forbearance or a loan modification allows the borrower to avoid legal action and keep the property under a new agreement with the lender.

The parties to a short sale are the buyer and seller.  The lender is a third party contingency who must approve the sale. The process is generally as follows.

Short sale procedure

  1. The borrower or borrower’s agents contact the lender to discuss the short sale option.
  2. If willing, the lender sets the required terms of the short sale.
  3. The real estate agent provides the lender a Broker’s Price Opinion (BPO).
  4. The agent lists the property for sale at the price that will cover the mortgage.
  5. The agent places a note in the Multiple Listing Service (MLS) stating that the lender will consider a short sale.
  6. A buyer submits an offer.
  7. The owner agrees to the contract
  8. The lender approves the short sale.
  9. The transaction closes.
  10. Lender’s action to recover deficiency may ensue.