Introduction:
Foreclosure is a legal method where the lender seeks to reclaim the value of a mortgage from a loan holder who has ceased payment to the lender by requiring purchases of the asset used as collateral for the loan.
A mortgage lender either by court order or through the rule of the statute following the particular law is legally given a waiver of the equitable right to redemption of a mortgage borrower.
Usually, a creditor who leases or offers an estate, such as a home, to protect the loan, retains a security interest. If the creditor’s default and the landlord want to repossess the land, the creditor may have the equal right to repayment by the courts of equity until the borrower pays the debt. Although this equal exists, the creditor doesn’t know whether he can take the property or not.
Thus, the lender tries to terminate the equitable right and claim the legitimate and reasonable title on the property through foreclosure. While the procedure depends on the Jurisdiction, the foreclosure process usually starts when at least one mortgage loan is skipped.
A missing payment notice is then sent to the borrower stating that he did not collect payment for that month. And when the borrower misses two payments, a demand letter is sent.
After 90 days of missed payments, the creditor issues a notice of default. Later the loan is sent to the foreclosure department, and at this stage, the borrower has another 90 days to pay and reinstate the loan. At the end of the settlement period, the creditor will start the foreclosure if the borrower has missed his payments.[1]
Types of Foreclosure
The mortgage lender typically starts a foreclosure, as mentioned in the mortgage documents, after the default period of 90 days.[2]
1. Judicial Foreclosure
It is generally referred to as foreclosure by judicial sale, requires a court-supervised auctioning of the mortgaged land. The debts are collected first, followed by the other lien holders and, if any debts are left, by the creditor. By filing an appeal against the borrower, the creditor initiates legal foreclosure.
All involved should be informed of the sale along in all other civil proceedings. A judge supervises the sales and, if necessary, conducts legal proceedings and actions. A supreme court judge or an arbitrator explicitly named by a court can do this.[3]
2. Nonjudicial Foreclosure
Also known as foreclosure by power of sale, which is allowed by certain Jurisdictions where a power of sale provision in the mortgage is used or a trust deed in which such clause has been included, rather than a real mortgage. This entails the selling of the property without the approval of the court by the mortgage holder. This is usually much quicker and less costly than a judicial foreclosure.
3. Strict Foreclosure
Owing to their restricted use, some forms of foreclosure are considered small. If the mortgage wins in a strict foreclosure, then the borrower will repay the money within a defined time. If he fails to repay, the mortgage will be entitled to the property’s title with no requirement to sell it. This kind of mortgage is usually possible where the worth of the property is less than the debt. Initially, this method was followed for foreclosure, but now it is hardly observed in a few states.
Process for Foreclosure
The foreclosure procedure may be short or long; it differs state-by-state. Though the countries vary somewhat, the foreclosure process typically occurs after the initial payment has been missed, followed by a sale and a redemption period.
1. Judicial process
The landlord gets to sue the borrower in a case commonly known as foreclosure. The land is auctioned by a court officer in favour of the lender after the final judgment. Many states mandate this form of action to secure the debtor’s share of the property in any or all instances of foreclosure if the mortgage’s valuation is far below the real property; this often discourages the strategic foreclosure a landlord seeking to purchase the property.
2. Non-Judicial process
If a clause mentioning the power of sale resorts in the mortgage or a similar clause is included in a trust, the lender could use foreclosure by the power of sale. Here there is no intervention by the court. In certain situations, the lenders change the creditor’s payment plan to allow the payments to be made and preserve them. This condition is referred to as mortgage modification or special forbearance.[4]
The forfeiture party shall usually notify the other party to say that the foreclosure process starts on non-payment of the loan amount, in case of both judicial and non-judicial foreclosure.
Defenses for Foreclosure
Depending on the case, the borrower can take certain defences. That may include refinancing, alternative financing, contractual agreements with the lender, short sales, or even bankruptcy. Furthermore, the foreclosing party may not be able to claim its liability, or the foreclosing party failed to follow the mandatory foreclosure protocol.[5]
The latest regulations defending borrowers and growing awareness of mortgage service failures and misuse have improved borrowers’ opportunities for stopping them from becoming forfeited. If the lender is going for judicial foreclosure, you can appeal this judicial foreclosure with a lawsuit.
If the lender is going for non-judicial foreclosure, you can challenge it with a case even then. The defence can be a procedural issue or a substantive error. If you think each one applies, you can raise a variety of defences accordingly.
Procedural Defenses
One of the very primary defences against foreclosure is arguing that the party does not have the power to foreclose. If the forfeiting party cannot show the promissory note, which is very important to the case as it is based on the loan, the court can dismiss the petition.
The court can also dismiss the case if the forfeiting party has refused to obey state law rules. For a judge to dismiss a case in trial, the lender’s mistake must make sense. This will indicate that the mistake has damaged you.
Promissory notes are critical as a defence to foreclosure. In Carpenter v. Longan[6], the United States SC held that a trust deed must be fulfilled if a promissory note is issued. The deed and note cannot be divided. In compliance with the national Uniform Commercial Code (UCC), which oversees these kinds of financial instruments, the promissory note must have a specific chain of title.[7]
Substantive Defenses[8]
As described earlier, mortgage staff manage many accounts and may make errors for their employees. The payments may not be paid immediately, or payments transferred to another account. It will add to the report that you made checks, which may result in a mortgage.
You could still be incorrect to decide the price you intend to pay on a mortgage refund. This might seem to be a small concern, but an over establishment may result in a homeowner losing his house when they assume, he may not have adequate money to repay the mortgage.
Loan Modification
The lender has to decide whether a homeowner is entitled to a loan modification before being foreclosed. It shall be notified before the homeowner in writing any loan modification or other available alternative that will allow the homeowner to keep the home.
If the foreclosure process has already begun with the loan modification or other option in process, it must stop. If the loan modification is rejected, the owner will also be entitled to appeal the decision.
Right of Redemption
Under a defined amount of time, the householder may render restitution by paying any mortgage part.
Improper Service
The person foreclosing the property shall make a complaint and summon the borrower. The complaint lays down the legal foundations of the action, and the summons notifies the borrower of a pending legal proceeding and stipulates the time limit for responding.
The claimant must be presented with these papers duly. If the moving party does not adequately represent the claimant, the petition could be rejected due to insufficient authority or operation.
Lack of Standing
Sometimes the loans are sold to others by mortgage companies. This defence can be used where the defendant finds the plaintiff not to be the property’s rightful owner.
Lack of Notice
State policy stipulates the form of warning to homeowners who risk forfeiture. State legislation may allow for tending unique documents to homeowners, sending several copies, or special clauses in notification papers. Technicalities, such as not including provisions in a bold or coloured paper, may support the court’s decision of not strictly adhering to specifications.
Other Defenses
Other legitimate defences can arise, such as the challenge of the mortgage terms or mortgage protection. Service personnel shall have special rights according to the Servicemembers Civil Relief Act in the US.[9] If you carry out your mortgage before joining for active service, you will compel the creditor to seek a judicial foreclosure in lieu of non-judicial foreclosure.[10]
Impact of foreclosure
The influence of foreclosure applies not only to landowners but also to cities and districts as a whole. Higher-induced communities are also prone to more violence and vandalism as vacant houses are torn down, and waste is collected on lawns.
Foreclosure often influences competing sales of houses on two factors – time and space. For every given timeframe, foreclosures affect the property directly, waiting to be sold more adversely. According to the mainstream view, the rise in foreclosures would lead to reductions in the valuation of surrounding homes, contributing in response to a worsening of the housing crisis.[11]
Another significant effect of higher foreclosure rate is on children’s school independence. Data indicates that moving schools are usually detrimental to children; they are dependent on the standard of schools of origin and the destination. Emotional and physical effects on humans are also influenced due to foreclosures.[12]
Foreclosure around the Globe
As mentioned earlier, foreclosure varies in different states. In New Zealand, foreclosure is banned by the law. The use of the power of sale is also regulated. Foreclosure is repealed by The Land and Conveyancing Reform Act, 2009 in Ireland.[13] Still, NAMA is entitled to issuing orders similar to foreclosure under Chapter 4 of Part 9 of the National Asset Management Act 2009. [14]
Conclusion
In foreclosure, a lender tries, by imposing an auction of the asset used as collateral to the debt, to reclaim the balance from the borrower who has ceased paying to the lender. The rapid rise in the number of homeowners in the foreclosure process has been well recorded over the last decade. While some of these cases end in foreclosure, many homeowners can achieve alternative results. There is justification to expect that legislative officials will lead to positive outcomes for homeowners.
When a property reaches foreclosure, one of the most common responses is to file a Lis Pendens. If a creditor decides that foreclosure is required, the notice acts as a warning to all efforts to sell the property to prevent the sale, as long as the legal notice turns into a quest for titles.[15]
A Lis Pendens may also be lodged anytime someone believes he has a legitimate right to the title or wishes to challenge the legitimacy of the land’s possession under any other situation. Generally speaking, investors are not likely to purchase an estate embroiled in a pending lawsuit as they cannot obtain a loan to buy it or the possible consequence of a civil case. Lis Pendens is cancelled after the foreclosure process is completed.
References:
[1] James Chen, Foreclosure: What you need to know, Investopedia (Sep. 5, 2020, ), https://www.investopedia.com/terms/f/foreclosure.asp.
[2] Ibid;
[3] Sanchayeeta Das, Foreclosure Law, The Indian Lawyer (July. 14, 2016, ), http://www.theindianlawyer.in/blog/2016/07/14/foreclosure-law/.
[4] HG, Foreclosure Defenses for Homeowners, Hg ( ,), https://www.hg.org/legal-articles/foreclosure-defenses-for-homeowners-45567.
[5] Sanchayeeta Das, Foreclosure Law, The Indian Lawyer (July. 14, 2016, ), http://www.theindianlawyer.in/blog/2016/07/14/foreclosure-law/.
[6] Carpenter v. Longan, 83 U.S. 271, 83 (1872).
[7] Al Krulick, Foreclosure Defense, Debt ( , ), https://www.debt.org/real-estate/foreclosure-defense/.
[8] HG, Foreclosure Defenses for Homeowners, Hg ( ,), https://www.hg.org/legal-articles/foreclosure-defenses-for-homeowners-45567.
[9] Servicemembers Civil Relief Act, 50 U.S.C. §§ 501-597b (1940).
[10] HG, Foreclosure Defenses for Homeowners, Hg (,), https://www.hg.org/legal-articles/foreclosure-defenses-for-homeowners-45567.
[11] William H. Rogers, William Winter, The Impact of Foreclosures on Neighboring Housing Sales 31 Journal of Real Estate Research 455, 455 (2009) https://www.jstor.org/stable/24888324.
[12] Michael J. Seiler, Understanding the Far-Reaching Societal Impact of Strategic Mortgage Default, 22 Journal of Real Estate Literature 205, 205 (2014), https://www.jstor.org/stable/24885078.
[13] A&L Goodbody, The Land and Conveyancing Law Reform Act 2009, Lexology (July. 23, 2009, ), https://www.lexology.com/library/detail.aspx?g=b91f8d28-df4c-4178-be39-cc68e4cdc680.
[14] Ibid;
[15] Y. Srinivasa Rao, Can the doctrine of lis pendens prevail over the rule of res judicata, legal Services India ( , ), http://www.legalservicesindia.com/article/1596/Can-the-doctrine-of-lis-pendens-prevail-over-the-rule-of-res-judicata.html.
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