Foreclosure proceedings manual Essay

PART I

MORTGAGE DELINQUENCY & FORECLOSURE

PART II

FORECLOSURE PROCEDURE

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PART III

ALTERNATIVES TO FORECLOSURE

PART – I

MORTGAGE DELINQUENCY & FORECLOSURE

Several U.S. family units hold a considerable fraction of their wealth in the form of home equity that they have accumulated through homeownership. This is particularly true for households belonging to the lower income bracket who are apt to own a home than to have financial assets such as bonds and mutual funds. According to the Federal Reserve’s 2004 Survey of Consumer Finances, home equity comprises over half of households’ net worth for those in lowest quintile of the income distribution, and makes up almost 45% of net worth for households in the second lowest income quintile. In contrast, for all U.S. households as a group, home equity makes up only a quarter of households’ net worth. Therefore, while home equity is a significant asset for most households, it is an even more important store of wealth for low and moderate income (LMI) households.

In light of the comparatively huge role that home equity plays in asset building for lower income households, LMI homeowners have so much at stake in being able to maintain homeownership. Non-payment on a mortgage and being confronted with the prospects of losing one’s home is a potentially distressing situation for any family, despite that family’s income or wealth. However, it is likely to be a particularly severe setback for households who have moved into homeownership hoping to build assets to instead lose ground financially due to the damage of their credit records and loss of home equity that comes with mortgage foreclosure. Mortgage default affects not only the financial wellbeing of those who may lose their homes, but also can produce considerable weight in the form of stress and dislocation for families, as well as potential adverse effects on surrounding neighbors and communities.

For the entire United States, mortgage delinquency and foreclosure are somewhat infrequent events, on average. According to the approximations of the Mortgage Bankers Association (MBA), at year-end 2005, 2% of home mortgages in the U.S. were 60 or more days past due and additional 1% was in foreclosure. These delinquency and foreclosure measures stood a little higher at the end of 2005 than they did a year before, but below their levels at year-end 2002 and 2003, and do not seem to show increased levels of financial stress for households when assessed against the pattern of the longer-run historical series.

In summing up MBA’s analysis of their delinquency survey data, Frantantoni (2006) interprets the relatively low delinquency and foreclosure rates reported in the MBA data as indicating there is not a national crisis in mortgage performance or in foreclosures. However, in contrast to this seemingly unexceptional drift in the delinquency trend for the U.S. as a whole, some local areas have seen sharp increases in the share of mortgage loans in default in the past few years. This has triggered research to record, authenticate and give proof to the dilemma and formulate intervention strategies to reduce the devastation brought to households, lenders and investors, and communities. As classic examples, Garcia (2003) found that the city of Buffalo experienced an increase in mortgage foreclosures of nearly 400% between 1990 and 2000; somewhat amazingly, the foreclosures were twice as likely to occur in the suburbs of the Buffalo-Niagara metro area. In like manner, Rose (2006) discovered that the Chicago metro area went through an increase in foreclosures of 54% between 1993 and 2005. Employing a more graphic and methodical approach, Apgar and Duda (2004) established that 14,415 homeowners or nearly 1.4% of homeowners with a mortgage that live within the city or county of Los Angeles lost their house to foreclosure between 2003 and 2006.

Trends and Patterns in Delinquency Rates

Cutts and Green (2004) provided a classification of mortgage servicing and default. Technically, default means that the borrower has failed to meet an obligation of the mortgage agreement. Hence, default is an extensive measure of households having a hard time meeting their mortgage payment obligations; this would include a range of borrowers — from delinquent borrowers who have missed one payment and now have a second payment due, to those who are on the verge of the foreclosure process.

MBA’s National Delinquency Survey is a widely cited source of the historical trends in home mortgage delinquencies and foreclosures going as far back as 1979. The MBA bring together their quarterly delinquency statistics from mortgage servicers’ data on more than 40 million loans gathered from mortgage companies, commercial banks and other financial institutions. Their broad measure of the share of all home mortgage loans 60 ++ days delinquent or in foreclosure has generally remained in the 2½ to 3%t range since the late 1990s. Delinquency and foreclosure rates increased during the 2000 to 2002 period, most probably as a result of the 2001 recession. Over the past several years this broad overall measure has come down a bit as the share of loans 60 or more days delinquent has remained relatively steady, nonetheless, the foreclosure rate has declined a little.

The impact of tempests Katrina and Rita on delinquency rates generated an increase in the rate of loans 60 or more days delinquent in 2005:Q4. According to estimates made by the MBA (2006), the spike in delinquency rates in states affected by the storms increased the national delinquency rate by about 0.15 percentage points at the end of 2005.

Because prime mortgages make up most of the mortgages in the U.S., overall delinquency rates like the MBA delinquency rate measure tend to follow the trends in the prime market more so than the sub-prime market. That said, the sub-prime mortgage market has grown substantially in recent years, and thus the contribution of the performance of sub-prime mortgages to overall delinquency statistics has been growing over time. Figures 1 and 2 exhibit different drifts for delinquency rates in the prime and sub-prime markets based on data from the First American Loan Performance from 2003:Q3 through 2006:Q2. Like the delinquency measures assembled by the MBA, the Loan Performance data is accumulated from loan servicers. The MBA and Loan Performance delinquency rates show similar trends, although differences in the servicers they cover and in their methodologies produce some distinctions between the measures.

Figure 1 show that the share of loans that was 60 or more days delinquent or in foreclosure (the top line) for the prime market stood a little lower at the beginning of 2006 than it did at the end of 2003. Delinquencies (the middle line) have changed little, on net, over this period, but foreclosures (the bottom line) are down slightly, which accounts for the slight drop in the overall measure. As of 2006:Q2, about 1% of prime loans were 60 or more days past due and 0.25% were in foreclosure.

The delinquency rates for the sub-prime market are quite a bit higher than those for the prime market. Given that many of these loans were given to borrowers with some degree of credit impairment, it is expected that the sub-prime delinquency rates would be somewhat higher than the prime delinquency rates. Nevertheless, in addition to the difference in credit risk between prime and sub-prime borrowers, there are also differences in the prevalence of predatory lending practices across the two markets. So while sub-prime delinquency rates are expected to be higher than those in the prime market,

it is not determined to what extent that difference in loan performance is due to the underlying credit characteristics of the borrowers, and to what extent it is due to predatory practices that may be more prevalent in the sub-prime market.

Figure 2 shows that although sub-prime delinquencies and foreclosures (the top line) have gone down since 2003, they have gone up a few percentage points in the last several quarters. As in the prime market, the measure of foreclosures went lower after 2003, while delinquencies are relatively flat, on net, over the period. As of 2006:Q2, the share of sub-prime loans that were 60 or more days past due stood at 6.25% and the share in foreclosure at around 2.75%.

While the overall levels of these mortgage delinquency rates for the U.S. do not appear to have worsened over the past few years, an examination of rates across

the different states indicate that the share of loans in default varied substantially in different areas of the country. Figures 3 and 4 use data from the First American Loan Performance as of 2005:Q43 to rank states in quartiles according to their delinquency rates in the prime and sub-prime mortgage markets, respectively. The darkest shaded areas represent the areas with the highest delinquency rates; the lightest shaded areas show states with the lowest delinquency rates. In both the prime and sub-prime markets, delinquency rates tend to be the highest in the South and to some degree in the “Rust Belt”; both coasts (the West Coast in particular) have lower levels of delinquency. As of year-end 2005, the Gulf Coast states had some of the highest rates of mortgage delinquency, owing to the destructive effects of the hurricanes that hit the region in the latter part of the year. The shares of prime loans in Louisiana and Mississippi that were 60 or more days late or in foreclosure were at an outsized 13.2% and 8.7% respectively as of

2005:Q4. Alabama and Texas also registered relatively high rates that quarter of over 3%. Aside from these states, the range of this measure for prime loans ranged from just under 3% in Indiana down to 0.3% in California. The sub-prime market shows a much wider range of delinquency rates across states. Louisiana and Mississippi had the highest rates of sub-prime loans in default in 2005:Q4 at 29% and 24%, respectively. The rates for the remainder of the states spanned from around 16% for Ohio to around 3.25% for Hawaii. Only five states had sub-prime delinquency rates under 5% while 21 states had a rate greater than 10%.

FORECLOSURE is that legal right of a mortgage holder or other third-party lien holder to gain ownership of the property and/or the right to sell that property and use the proceeds to pay off the mortgage if the mortgage or lien is in default.  At the outset, according to the law, a mortgage results in a mandatory ownership of the property by the holder of the mortgage, referred to as the mortgagee. However, as the law evolved over the years, it now allows mortgagors time to pay off mortgages before their property is taken away from them. The process of confiscating the mortgagor’s property because of default is what constitutes foreclosure.

Foreclosure takes place for various reasons. A sudden illness, divorce, or an unexpected job loss can endanger a family’s financial circumstance and its stability and leave them unable to pay mortgages. Foreclosures which resulted from personal hardship are unlikely to disappear and are difficult to mitigate. Nevertheless, some foreclosures result from poor loan quality and or a poor match between loan and borrower. Briefly, an industry has surfaced which consists of lenders and brokers that provide credit to people with less than perfect but this is done a way that strips borrowers of equity through excess fees, points, and excessively high interest rates. Some borrowers face outright fraud such as discovering too late that their written interest rate is several percentage points higher than the orally and originally agreed-upon rate. Likewise, some loans are made with little attention to whether a borrower can afford to maintain the monthly payments over time or not.

The practice of providing inappropriate loans with egregious terms is called predatory lending. Moreover, recent mortgage market changes are enabling a dangerous phenomenon — unprepared borrowers end up with loans that do not suit their needs and circumstances. For instance, a lot of buyers take out nontraditional mortgages (NTMs), such as interest-only loans, but are financially unprepared for the payment reset—when the monthly payment suddenly rises. The end result would be that many borrowers are stuck with mortgage arrangements that endanger their ability to retain their home and strip them of the ability to build a “housing asset.”

Currently, a number of state laws and policies preside over foreclosure proceedings to protect both the mortgagor and the holder of the mortgage from rip-offs, deception and inequities. In America, though states have their own distinct foreclosure policies and procedures, the basic premise of foreclosure law remains the same.

Types of Foreclosure

The mortgage holder can normally instigate foreclosure anytime after a default on the mortgage. Within the United States, there exist several types of foreclosure. Two are widely used, with the rest being possibilities only in a few states.

The most important type of foreclosure is foreclosure by judicial sale. This is available in every state and is the required method in many. It involves the sale of the mortgaged property done under the supervision of a court, with the proceeds going first to satisfy the mortgage, and then to satisfy other lien holders, and finally to the mortgagor. Because it is a legal action, all the proper parties must be notified of the foreclosure, and there will be both pleadings and some sort of judicial decision, usually after a short trial.

The second type of foreclosure, foreclosure by power of sale, involves the sale of the property by the mortgage holder not through the supervision of a court. Where it is available, foreclosure by power of sale is generally a more expedient way of foreclosing on a property than foreclosure by judicial sale. As it is, the majority of states allow this method of foreclosure and just like foreclosure supervised by the courts, in this method of foreclosing a property, again, proceeds from the sale go first to the mortgage holder, then to other lien holders, and finally to the mortgagor.

Other types of foreclosure are only available in limited places and are therefore considered minor methods of foreclosure. Strict foreclosure is one example. Under strict foreclosure, when a mortgagor defaults, a court orders the mortgagor to pay the mortgage within a certain period of time. If the mortgagor fails, the mortgage holder automatically gains title, with no obligation to sell the property. Strict foreclosure was the original method of foreclosure, but today it is only available in New Hampshire and Vermont.

Acceleration     The idea of acceleration is employed to ascertain the amount owed under foreclosure. Acceleration allows the mortgage holder the right when the mortgagor defaults on the mortgage to declare the entire debt due and payable. In other words, if a mortgage is taken out on property for $10,000 with monthly payments required, and the mortgagor fails to make the monthly payments, the mortgage holder can demand the mortgagor make good on the entire $10,000 of the mortgage.

Virtually all mortgages today have acceleration clauses. However, they are not imposed by statute, so if a mortgage does not have an acceleration clause, the mortgage holder has no choice but to either wait to foreclose until all of the payments come due or convinces a court to divide up parts of the property and sell them in order to pay the installment that is due. Alternatively, the court may order the property sold subject to the mortgage, with the proceeds from the sale going to the payments owed the mortgage holder.

Parties and Omissions    A mortgage holder bringing a foreclosure suit in court must join any “necessary” parties to the case. To understand what a necessary party is, it must be realized that the purpose of a foreclosure sale is to sell the property as it was when the mortgage was first taken out. Anyone who acquired an interest in the property after the mortgage was taken out must be dealt with in the court case before the property can be sold.
Necessary parties include parties who acquired easements, liens, or leases after the mortgage being foreclosed was executed. They can be added, or “joined” to the case as parties without their consent. The intent is to terminate their interest in the property. If a party is not joined, then their interest in the property is not affected by the foreclosure, and the purchaser does not acquire an interest in the property fee of their rights.

For instance, if party X takes out a mortgage from party Y and then takes out a second mortgage from party Z, and party Y decides to foreclose on the property and sell the property to party A at foreclosure, party Y must extinguish the interest of party Z to sell the property to party A. Otherwise party Z can enforce their mortgage on party A.

The other type of party involved in a foreclosure case is called a “proper” party. A proper party is a party that is useful, but not necessary, to a foreclosure case. An example would be a party who has an interest in the property before the mortgage was executed. Since this party would not be affected by the foreclosure, the individual is considered a voluntary party to a case and normally cannot be included in the case without consenting to it. However, often courts will require these parties to be joined anyway to the case to clarify their status with respect to the mortgage being foreclosed.

Deficiency Judgments     This is a situation wherein the foreclosure sale is not enough to satisfy the amount of the mortgage, the mortgage holder can bring a deficiency judgment against the mortgagor to make up the difference. For example, a mortgage holder of a $10,000 mortgage, who only receives $8,000 in a foreclosure sale, may sue the mortgagor for the remainder of the amount due under the mortgage.

Deficiency judgments are tempered in many jurisdictions by “fair value” legislation. This requires the deficiency to be calculated using the difference between the mortgage debt and the fair value of the real estate. In the above example, a court in a fair value jurisdiction might determine that the fair value of the property was $9,000. In that case, the mortgage holder could only obtain a deficiency judgment of $1,000.

Availability and Disadvantages     Currently, 29 states (Alabama, Alaska, Arizona, California, Colorado, the District of Columbia, Georgia, Hawaii, Idaho, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming) allow foreclosure by the power of sale. However, foreclosure by the power of sale is often subject to judicial review at a later date because there are issues about title that must be resolved by the court. These would include actual defects in the deed, and the priority of various lien holders and lessees on the property. In addition, in many jurisdictions the mortgage holder is prohibited from seeking a deficiency judgment if the holder chooses to sell the property through extra-judicial means. Also, the mortgage form must generally allow for power of sale and cannot be in the form of an absolute deed for a foreclosure by the power of sale to take place.

Deed of Trust     In many jurisdictions, a deed of trust is required in order to conduct a foreclosure by the power of sale. It conveys the property from the mortgage holder to the trustee, who holds the property in trust for the mortgage holder. In the instance of foreclosure, the trustee, not the mortgage holder, conducts the sale of the mortgaged property. The trustee is generally instructed by the mortgage holder to foreclose on the mortgage and is under no obligation to determine whether this foreclosure is justified.

A deed of trust and trustee supervised foreclosure allows the mortgage holder to bid for the foreclosed property, provided the trustee and the mortgage holder are not closely associated. Otherwise, a mortgage holder cannot bid for the mortgaged property when the foreclosure is by power of sale.

Constitutional Issues
Foreclosure by power of sale requires notice of the sale to interested parties. Generally speaking, this is done by taking out an advertisement in a local newspaper in the jurisdiction in which the property is located. Many states also require notice be given to the mortgagor.

This procedure has resulted in some constitutional controversy. It has been argued in several cases that foreclosure by power of sale legislation fails to comply with the notice and hearing requirements of the Fourteenth Amendment of the U. S. Constitution. Courts have consistently rejected this theory when it comes to private foreclosure actions with no public official conducting the foreclosure sale, ruling that there is no state action necessary to invoke the terms of the Fourteenth Amendment. However, there have been rulings indicating that if the mortgage holder is a government entity or if a public official conducts the foreclosure sale, the Fourteenth Amendment might be invoked and stricter notice requirements might apply. The case law on this issue is so far unsettled.

Federal Laws Affecting Foreclosure   While the Fourteenth Amendment has an arguable nexus to foreclosure actions, at least two federal laws clearly apply to foreclosure actions.

Bankruptcy
The filing of any bankruptcy action automatically stays a foreclosure proceeding, regardless of type. At that point, whether the stay will be lifted depends on whether the mortgagor has equity in the mortgaged property. If the bankruptcy has been filed under a Chapter 11 petition, the bankruptcy court may “terminate, annul, modify or condition such stay” for cause, including the lack of adequate protection of an interest in property of the mortgage holder, or if the mortgagor does not have equity in the property and the property is not necessary for an effective reorganization.

If it has been filed as a straight bankruptcy petition, asking for discharge of all debts, the mortgage holder will be allowed to foreclose if the bankrupt debtor has no equity in the property. If there is equity in the property, the property can be sold by the bankruptcy court.

Soldier and Sailors Relief Act
The Soldiers and Sailors Relief Act of 1940 gives special protection to mortgagors on active duty in the armed forces for mortgage loans executed prior to when they went into service. The Act provides that a service person can apply to a court to set aside a default judgment leading to a foreclosure action. Because of this provision, a mortgage holder initiating a foreclosure action against a mortgagor who fails to answer the foreclosure complaint must file an affidavit with the court stating the mortgagor is not on active duty in the armed services.

 If the mortgagor is in the armed services, the individual must be present or represented at the foreclosure hearing, meaning foreclosure by power of sale is not available. If a court finds that the mortgagor’s ability to meet the terms of the mortgage has been affected by his service in the armed forces, they can stay the foreclosure action as long as the person is in the service.

Statutory Redemption

Statutory redemption allows the mortgagor to redeem the mortgage even after foreclosure sale. About one-half of the states have statutory redemption laws. Generally, these laws give anywhere from six months to a year for the mortgagor to redeem the mortgage by payment of the foreclosure sale price plus a statutory rate of interest to the sale purchaser. Junior lien holders also have a right to redeem under these statutes, in order of their priority, though not until the period for the mortgagor to redeem runs out. As a rule, the mortgagor can retain possession of their property during this statutory redemption period.

TYPES OF FORECLOSURE ; REDEMPTION PERIODS

(ALL STATES)

STATE
TYPE OF
FORECLOSURE
MONTHS
TO FORECLOSE
MINIMUM/EXPECTED
DEFICIENCY
JUDGMENT
REDEMPTION
PERIOD
Alabama
Primarily
Non-Judicial
1/3
Possible and
Practical
12 Months
Alaska
Both
3/4
Not Practical
None
Arizona
Both
3/4
Not Practical
None
Arkansas
Both
4/5
Possible and
Practical
None
California
Primarily
Non-Judicial
4/4
Not Practical
None
Colorado
Both
2/5
Possible and
Practical
75 Days
Connecticut
Judicial/Strict
5/6
Possible and
Practical
None
Delaware
Judicial
3/7
Possible and
Practical
None
District of
Columbia
Non-Judicial
2/4
Possible and
Practical
None
Florida
Judicial
5/5
Possible and
Practical
None
Georgia
Primarily
Non-Judicial
2/2
Possible and
Practical
None
Hawaii
Primarily
Non-Judicial
3/4
Not Practical
None
Idaho
Non-Judicial
5/6
Possible and
Practical
None
Illinois
Judicial
7/10
Possible and
Practical
None
Indiana
Judicial
5/7
Possible and
Practical
3 Months
Iowa
Both
5/6
Not Practical
6 Months,
if judicial
Kansas
Judicial
4/4
Possible and
Practical
6-12 Months
Kentucky
Judicial
6/5
Possible and
Practical
None
Louisiana
Judicial
2/6
Possible and
Practical
None
Maine
Primarily Judicial
6/10
Possible and
Practical
None
Maryland
Judicial
2/2
Possible and
Practical
None
Massachusetts
Non-Judicial
3/4
Possible and
Practical
None
Michigan
Both
2/2
Possible and
Practical
6 Months
Minnesota
Both
2/3
Not Practical
6 Months
Mississippi
Primarily
Non-Judicial
2/3
Possible and
Practical
None
Missouri
Primarily
Non-Judicial
2/2
Possible and
Practical
None
Montana
Primarily
Non-Judicial
5/5
Not Practical
None
Nebraska
Judicial
5/6
Possible and
Practical
None
Nevada
Primarily
Non-Judicial
4/4
Possible and
Practical
None
New Hampshire
Primarily
Non-Judicial
2/3
Possible and
Practical
None
New Jersey
Judicial
3/10
Possible and
Practical
10 Days
New Mexico
Judicial
4/6
Possible and
Practical
None
New York
Judicial
4/8
Possible and
Practical
None
North Carolina
Non-Judicial
2/4
Possible and
Practical
None
North Dakota
Judicial
3/5
Not Possible
60 Days
Ohio
Judicial
5/7
Possible and
Practical
None
Oklahoma
Primarily Judicial
4/7
Possible and
Practical
None
Oregon
Non-Judicial
5/5
Not Practical
None
Pennsylvania
Judicial
3/9
Not Practical
None
Rhode Island
Both
2/3
Possible and
Practical
None
South Carolina
Judicial
6/6
Not Practical
None
Tennessee
Non-Judicial
2/2
Possible and
Practical
None
Texas
Non-Judicial
2/2
Possible and
Practical
None
Utah
Both
4/5
Possible and
Practical
None
Vermont
Both
7/10
Possible and
Practical
None
Virginia
Non-Judicial
2/2
Possible and
Practical
None
Washington
Non-Judicial
4/5
Not Practical
None
West Virginia
Non-Judicial
2/2
Possible and
Practical
None
Wisconsin
Judicial
varies/10
Not Practical
None
Wyoming
Non-Judicial
2/3
Possible and
Practical
3 Months

Foreclosure Market Statistics Nationwide and by State

State Name
January 2006
February 2006
March 2006
Q1 2006 (Total)
1/every #Households
% change from Q4 2005
% change from Q1 2005
US 2006
104,354
117,151
101,597
323,102
358
38
72
Alabama
102
80
176
358
5,484
-1
-55
Alaska
97
74
102
273
752
-18
2
Arizona
2,020
2,163
2,049
6,232
351
-2
6
Arkansas
1,333
1,106
1,267
3,706
317
73
105
California
9,354
9,110
11,073
29,537
414
60
86
Colorado
3,747
4,128
5,392
13,267
138
104
96
Connecticut
772
903
828
2,503
554
-40
72
Delaware
36
19
25
80
4,288
167
-33
DC
7
7
13
27
10,179
-33
170
Florida
10,334
10,019
9,283
29,636
247
21
-14
Georgia
7,342
9,421
7,656
24,419
127
124
191
Hawaii
34
55
45
134
3,437
-17
-33
Idaho
267
280
213
760
692
37
-19
Illinois
4,530
4,569
4,592
13,691
357
32
13
Indiana
4,419
5,909
4,933
15,261
165
84
110
Iowa
382
359
237
978
1,260
33
110
Kansas
242
161
197
600
1,880
13
36
Kentucky
611
466
346
1,423
1,230
74
5
Louisiana
123
98
120
341
5,523
-31
-70
Maine
22
9
12
43
15,160
65
-14
Maryland
583
272
226
1,081
1,982
-25
62
Massachusetts
215
329
428
972
2,698
-47
58
Michigan
4,672
10,343
7,727
22,742
186
91
416
Minnesota
199
373
559
1,131
1,828
67
133
Mississippi
68
96
73
237
5,354
-15
-30
Missouri
1,252
2,209
1,553
5,014
486
65
146
Montana
85
92
140
317
1,300
11
77
Nebraska
365
229
146
740
971
1
102
Nevada
1,795
1,761
1,481
5,037
172
116
158
New Hampshire
13
8
5
26
21,039
-21
-21
New Jersey
3,474
3,278
3,708
10,460
316
-22
61
New Mexico
670
911
255
1,836
425
-18
46
New York
5,205
4,595
3,995
13,795
557
8
160
North Carolina
2,396
3,195
2,073
7,664
459
88
84
North Dakota
34
10
21
65
4,456
171
-4
Ohio
8,268
9,873
4,719
22,860
209
39
167
Oklahoma
1,715
1,646
1,366
4,727
316
41
51
Oregon
705
737
583
2,025
719
42
-4
Pennsylvania
4,190
4,382
3,683
12,255
428
42
141
Rhode Island
3
4
2
9
48,871
200
0
South Carolina
817
968
767
2,552
687
30
14
South Dakota
31
21
24
76
4,253
85
38
Tennessee
3,669
4,649
3,400
11,718
209
92
147
Texas
14,669
13,616
11,951
40,236
200
9
67
Utah
936
1,186
1,437
3,559
216
41
2
Vermont
14
2
5
21
14,018
17
40
Virginia
485
285
268
1,038
2,781
9
173
Washington
1,547
2,008
1,844
5,399
443
81
28
West Virginia
94
60
75
229
3,688
1
39
Wisconsin
398
1,060
493
1,951
1,180
39
36
Wyoming
13
17
31
61
3,670
30
27

The sudden escalation in foreclosures in Q1 continues a fixed rising drift. Foreclosures have now increased in four consecutive quarters and are on track to go above 1.2 million in 2006 that could propel the nation’s annual foreclosure rate to more than 1% of U.S. households.

It has been noted that foreclosures actually dipped 13% from February to March, an indication that the nation’s foreclosure rate could be leveling off after the long run-up. As it is, with today’s market conditions, it’s unlikely that foreclosures will return to the historically low levels they were at in recent years when interest rates hit rock bottom and home price appreciation skyrocketed in many areas of the country. However, it’s possible that foreclosures will flatten out or even move a bit lower if more buyers and investors enter the market, giving homeowners in distress a better chance of selling their properties to avoid going into default or foreclosure.

PART – II

FORECLOSURE PROCEDURE

General Outline

The essential elements of a foreclosure action consist of:

(1)  the foreclosure complaint;

(2)  the lis pendens notice;

(3)  the judicial proceedings to obtain a judgment from the circuit court;

(4)  the findings of fact, conclusions of law, and judgment which is rendered by the circuit court;

(5)  the judicial sale by the master commissioner; and

(6)  the subsequent proceedings taken to obtain a deficiency judgment.

To initiate a foreclosure action, the claimant must first have a lien or interest against the real estate which is to be foreclosed upon. Basically, this type of lien or interest comes two forms. The first type of lien or interest is a lien or interest which is created voluntarily through an agreement, such as a mortgage agreement. In the mortgage agreement, the property owner conveys and transfers a mortgage interest to a lender as security for the payment of indebtedness such as a loan between the property owner and the lender.

The second type of lien or interest is a lien or interest which is created by statute, such as a mechanic or material man’s lien or a professional lien. Pursuant to statute, the lien holder is accorded a lien or interest against real estate to secure any unpaid indebtedness between the property owner and the lien claimant for labor, materials, or services which benefited the real estate. In each case, the person asserting the lien or interest must prove that the property owner had defaulted on his/her obligations to the lien holder, and that the lien holder has the right to foreclose upon his/her lien or interest against the real estate.

A foreclosure action is instituted by the filing of a foreclosure complaint. The foreclosure complaint must be filed with the circuit court located in the same county where the real estate is located. Thereafter, the foreclosure action proceeds and is finalized through proceedings before the circuit court.

Procedure in Detail

(1)

1.1 Immediately succeeding the forfeiture of property to the county treasurer, the foreclosing governmental/non-governmental unit shall kick it off with a search of records to identify the owners of a property interest in the property who are entitled to get a notice and show cause for foreclosure hearing.

1.2 The foreclosing unit may enter into a contract with one or more authorized representatives to perform a title search or may request from one or more authorized representatives another title search product to identify the owners of a property interest in the property as required or to perform other functions required for the collection of delinquent taxes;

(2) After conducting the search of records –

2.1 The foreclosing unit or its authorized representative shall determine the address reasonably calculated to apprise those owners of a property interest of the show cause hearing and the foreclosure hearing and shall send notice of the show cause hearing and the foreclosure hearing to those owners, and to a person entitled to notice of the return of delinquent taxes by certified mail, return receipt requested, not less than 30 days before the show cause hearing.

2.2 If after conducting the search of records, the foreclosing unit is unable to determine an address reasonably calculated to inform a person with an interest in a forfeited property, or if the foreclosing unit discovers a deficiency in notice, the following shall be considered reasonable steps by the foreclosing unit or its authorized representative to ascertain the address of a person entitled to notice or to ascertain an address necessary to correct the deficiency in the notice.

2.2.1 For an individual, there needs to be a search of the records of the probate court for the county in which the property is located will be and must be conducted or a search of the qualified voter file established under the specific state’s election law,

2.2.2 For a partnership, a search of partnership records filed with the county clerk.

2.2.3 For a business entity other than a partnership, a search of business entity records filed with the department of labor and economic growth.

(3) The foreclosing unit or its authorized representative or authorized agent shall make a personal visit to each parcel of property forfeited to the county treasurer to ascertain whether or not the property is occupied. If the property appears to be occupied, the foreclosing unit or its authorized representative shall do all of the following:

3.1 Attempt to personally serve upon the person occupying the property notice of the show cause hearing and the foreclosure hearing.

3.2 If a person occupying the property is personally served, orally inform the occupant that the property will be foreclosed and the occupants will be required to vacate unless all forfeited unpaid delinquent taxes, interest, penalties, and fees are paid, of the time within which all forfeited unpaid delinquent taxes, interest, penalties, and fees must be paid, and of agencies or other resources that may be available to assist the owner to avoid loss of the property.

3.3 If the occupant appears to lack the ability to understand the advice given, notify the department of human services or provide the occupant with the names and telephone numbers of the agencies that may be able to assist the occupant.

3.4 If the foreclosing unit or its authorized representative is not able to personally meet with the occupant, the foreclosing unit or its authorized representative shall place the notice in a conspicuous manner on the property and shall also place in a conspicuous manner on the property a notice that explains, in plain English, that the property will be foreclosed unless forfeited unpaid delinquent taxes, interest, penalties, and fees are paid, the time within which forfeited unpaid delinquent taxes, interest, penalties, and fees must be paid, and the names, addresses, and telephone numbers of agencies or other resources that may be available to assist the occupant to avoid loss of the property. If the state is the foreclosing unit within a county, the department of treasury shall perform the personal visit to each parcel of property on behalf of this state.

(4) If the foreclosing unit or its authorized representative discovers any deficiency in the provision of notice, the foreclosing unit shall take reasonable steps in good faith to correct that deficiency not later than 30 days before the show cause hearing, if possible.

(5) If the foreclosing unit or its authorized representative is unable to ascertain the address reasonably calculated to apprise the owners of a property interest entitled to notice, or is unable to notify the owner of a property interest, the notice shall be made by publication. A notice shall be published for 3 successive weeks, once each week, in a newspaper published and circulated in the county in which the property is located, if there is one. If no paper is published in that county, publication shall be made in a newspaper published and circulated in an adjoining county. This publication shall serve the purpose instead of notice.

(6) The owner of a property interest is entitled to notice of the show cause hearing and the foreclosure hearing if that owner’s interest was identifiable by reference to any of the following sources before the date that the county treasurer records the certificate required:

(a) Land title records in the office of the county register of deeds

(b) Tax records in the office of the county treasurer

(c) Tax records in the office of the local assessor

(d) Tax records in the office of the local treasurer

(7) The notice required shall include all of the following:

(a) The date on which the property was forfeited to the county treasurer

(b) A statement that the person notified may lose his or her interest in the property as a result of the foreclosure proceeding

(c) A legal description or parcel number of the property and the street address of the property, if available

(d) The person to whom the notice is addressed

(e) The total taxes, interest, penalties, and fees due on the property

(f) The date and time of the show cause hearing

(g) The date and time of the hearing on the petition for foreclosure and a statement that unless the forfeited unpaid delinquent taxes, interest, penalties, and fees are paid on or before the entry of a judgment foreclosing the property, or in a contested case within 21 days of the entry of a judgment foreclosing the property, the title to the property shall vest absolutely in the foreclosing unit and that all existing interests in oil or gas in that property shall be extinguished except the following:

(i) The interests of a lessee or an assignee of an interest of a lessee under an oil or gas lease in effect as to that property or any part of that property if the lease was recorded in the office of the register of deeds in the county in which the property is located before the date of filing the petition for foreclosure

 (ii) Interests preserved

(h) An explanation of the person’s rights of redemption and notice that the rights of redemption will expire immediately succeeding the entry of a judgment foreclosing the property, or in a contested case 21 days after the entry of a judgment foreclosing the property.

(8) The published notice required shall include all of the following:

(a) A legal description or parcel number of each property

(b) The street address of each property, if available

(c) The name of any person or entity entitled to notice that has not been notified

(d) The date and time of the show cause hearing

(e) The date and time of the hearing on the petition for foreclosure

(f) A statement that unless all forfeited unpaid delinquent taxes, interest, penalties, and fees are paid immediately succeeding the entry of a judgment foreclosing the property, or in a contested case within 21 days of the entry of a judgment foreclosing the property, the title to the property shall vest absolutely in the foreclosing unit and that all existing interests in oil or gas in that property shall be extinguished except the following:

(i) The interests of a lessee or an assignee of an interest of a lessee under an oil or gas lease in effect as to that property or any part of that property if the lease was recorded in the office of the register of deeds in the county in which the property is located before the date of filing the petition for foreclosure

(ii) Interests preserved as provided

(g) A statement that a person with an interest in the property may lose his or her interest in the property as a result of the foreclosure proceeding and that all existing interests in oil or gas in that property shall be extinguished except the following:

(i) The interests of a lessee or an assignee of an interest of a lessee under an oil or gas lease in effect as to that property or any part of that property if the lease was recorded in the office of the register of deeds in the county in which the property is located before the date of filing the petition for foreclosure.

(ii) Interests preserved as provided.

(9) The owner of a property interest who has been properly served with a notice of the show cause hearing and the foreclosure hearing and who failed to redeem the property shall not assert any of the following:

(a) That notice was insufficient or inadequate on the grounds that some other owner of a property interest was not served

(b) That the redemption period provided was extended in any way on the grounds that some other owner of a property interest was not served.

(10) The failure of the foreclosing unit to comply with any provision shall not invalidate any proceeding if the owner of a property interest or a person to whom a tax deed was issued is accorded the minimum due process required under the state constitution of 1963 and the constitution of the United States.

As used, “authorized representative” includes all of the following:

(a) A title insurance company or agent licensed to conduct business in a state.

(b) An attorney licensed to practice law in a state

(c) A person accredited in land title search procedures by a nationally recognized organization in the field of land title searching

(d) A person with demonstrated experience searching land title records, as determined by the foreclosing unit

(11) If a petition for foreclosure is filed not later than the date of the hearing, the foreclosing unit shall file with the clerk of the circuit court proof of service of the notice of the show cause hearing, proof of service of the notice of the foreclosure hearing and proof of the personal visit to the property and publication

(12) A person claiming an interest in a parcel of property set forth in the petition for foreclosure may contest the validity or correctness of the forfeited unpaid delinquent taxes, interest, penalties, and fees for one or more of the following reasons:

(a) No law authorizes the tax

(b) The person appointed to decide whether a tax shall be levied under a law of the state acted without jurisdiction, or did not impose the tax in question

(c) The property was exempt from the tax in question, or the tax was not legally levied.

(d) The tax has been paid within the time limited by law for payment or redemption.

(e) The tax was assessed fraudulently.

(f) The description of the property used in the assessment was so indefinite or erroneous that the forfeiture was void.

(13) A person claiming an interest in a parcel of property set forth in the petition for foreclosure and who desires to contest that petition shall file written objections with the clerk of the circuit court and serve those objections on the foreclosing unit prior to the date of the hearing required

(14) If the court determines that the owner of property subject to foreclosure is a minor heir, is incompetent, is without means of support, or is undergoing a substantial financial hardship, the court may withhold that property from foreclosure for one year or may enter an order extending the redemption period as the court determines to be equitable. If the court withholds property from foreclosure, a taxing unit’s lien for taxes due is not prejudiced and that property shall be included in the immediately succeeding year’s tax foreclosure proceeding.

(15) The circuit court shall enter final judgment on a petition for foreclosure filed at any time after the hearing but not later than the hearing with the judgment effective on the date immediately succeeding the hearing for uncontested cases or 10 days after the conclusion of the hearing for contested cases. All redemption rights to the property expire immediately succeeding the entry of a judgment foreclosing the property or in a contested case 21 days after the entry of a judgment foreclosing the property. The circuit court’s judgment shall specify all of the following:

(a) The legal description and, if known, the street address of the property foreclosed and the forfeited unpaid delinquent taxes, interest, penalties, and fees due on each parcel of property.

(b) That fee simple title to property foreclosed by the judgment will vest absolutely in the foreclosing unit, except as otherwise provided, without any further rights of redemption, if all forfeited delinquent taxes, interest, penalties, and fees are not paid on or before the date immediately succeeding the entry of a judgment foreclosing the property or in a contested case within 21 days of the entry of a judgment foreclosing the property.

(c) That all liens against the property, including any lien for unpaid taxes or special assessments, except future installments of special assessments and liens recorded by the state or the foreclosing unit pursuant to the natural resources and environmental protection act are extinguished, if all forfeited delinquent taxes, interest, penalties, and fees are not paid on or before the date immediately succeeding the entry of a judgment foreclosing the property or in a contested case within 21 days of the entry of a judgment foreclosing the property

(d) That, except as otherwise provided, the foreclosing unit has good and marketable fee simple title to the property, if all forfeited delinquent taxes, interest, penalties, and fees are not paid on or before the date immediately succeeding the entry of a judgment foreclosing the property or in a contested case within 21 days of the entry of a judgment foreclosing the property.

(e) That all existing recorded and unrecorded interests in that property are extinguished, except a visible or recorded easement or right-of-way, private deed restrictions, interests of a lessee or an assignee of an interest of a lessee under a recorded oil or gas lease, interests in oil or gas in that property that are owned by a person other than the owner of the surface that have been preserved as provided or restrictions or other governmental interests imposed pursuant to the natural resources and environmental protection act, if all forfeited delinquent taxes, interest, penalties, and fees are not paid on or before the date immediately succeeding the entry of a judgment foreclosing the property, or in a contested case within 21 days of the entry of a judgment foreclosing the property

(f) A finding that all persons entitled to notice and an opportunity to be heard have been provided that notice and opportunity. A person shall be deemed to have been provided notice and an opportunity to be heard if the foreclosing unit followed the procedures for provision of notice by mail, for visits to forfeited property, and for publication under or if one or more of the following apply:

(i) The person had constructive notice of the hearing by acquiring an interest in the property after the date the notice of forfeiture is recorded

(ii) The person appeared at the hearing or filed written objections with the clerk of the circuit court prior to the hearing

(iii) Prior to the hearing, the person had actual notice of the hearing.

(g) A judgment entered is a final order with respect to the property affected by the judgment and except as provided shall not be modified, stayed, or held invalid after the date immediately succeeding the entry of a judgment foreclosing the property or for contested cases 21 days after the entry of a judgment foreclosing the property

(16) Except as otherwise provided, fee simple title to property set forth in a petition for

foreclosure filed on which forfeited delinquent taxes, interest, penalties, and fees are not paid on or before the date immediately succeeding the entry of a judgment foreclosing the property or in a contested case within 21 days of the entry of a judgment foreclosing the property, shall vest absolutely in the foreclosing unit, and the foreclosing unit shall have absolute title to the property, including all interests in oil or gas in that property except the interests of a lessee or an assignee of an interest of a lessee under an oil or gas lease in effect as to that property or any part of that property if the lease was recorded in the office of the register of deeds in the county in which the property is located before the date of filing the petition for foreclosure, and interests preserved as provided. The foreclosing unit’s title is not subject to any recorded or unrecorded lien and shall not be stayed or held invalid except as provided.

(17) The foreclosing unit or a person claiming to have a property interest in the property foreclosed may appeal the circuit court’s order or the circuit court’s judgment foreclosing property to the court of appeals. An appeal is limited to the record of the proceedings in the circuit court and shall not be de novo. The circuit court’s judgment foreclosing property shall be stayed until the court of appeals has reversed, modified, or affirmed that judgment. If an appeal stays the circuit court’s judgment foreclosing property, the circuit court’s judgment is stayed only as to the property that is the subject of that appeal and the circuit court’s judgment foreclosing other property that is not the subject of that appeal is not stayed. To appeal the circuit court’s judgment foreclosing property, a person appealing the judgment shall pay to the county treasurer the amount determined to be due to the county treasurer under the judgment on or before the date immediately succeeding the entry of a judgment foreclosing the property or in a contested case within 21 days of the entry of a judgment foreclosing the property together with a notice of appeal.

(18) If the circuit court’s judgment foreclosing the property is affirmed on appeal, the amount determined to be due shall be refunded to the person who appealed the judgment. If the circuit court’s judgment foreclosing the property is reversed or modified on appeal, the county treasurer shall refund the amount determined to be due to the person who appealed the judgment, if any, and retain the balance in accordance with the order of the court of appeals.

(19) The foreclosing unit shall record a notice of judgment for each parcel of foreclosed property in the office of the register of deeds for the county in which the foreclosed property is located in a form prescribed by the department of treasury.

(20) After the entry of a judgment foreclosing the property, if the property has not been transferred to a person other than the foreclosing unit, a foreclosing unit may cancel the foreclosure by recording with the register of deeds for the county in which the property is located a certificate of error in a form prescribed by the department of treasury, if the foreclosing governmental unit discovers any of the following:

(a) The foreclosed property was not subject to taxation on the date of the assessment of the unpaid taxes for which the property was foreclosed

(b) The description of the property used in the assessment of the unpaid taxes for which the property was foreclosed was so indefinite or erroneous that the forfeiture of the property was void

(c) The taxes for which the property was foreclosed had been paid to the proper officer within the time provided under this act for the payment of the taxes or the redemption of the property

(d) A certificate or other written verification authorized by law was issued by the proper officer within the time provided for the payment of the taxes for which the property was foreclosed or for the redemption of the property

(e) An owner of an interest in the property entitled to notice was not provided notice sufficient to satisfy the minimum requirements of due process required under the state constitution of 1963 and the constitution of the United States

(f) A judgment of foreclosure was entered in violation of an order issued by a United States bankruptcy court.

(10) A certificate of error submitted to the county register of deeds for recording need not be notarized and may be authenticated by a digital signature of the foreclosing unit or by other electronic means.

PART – III

ALTERNATIVES TO FORECLOSURE

When a loan has defaulted, which is normally prescribed as being 90 or more days delinquent, both the borrower and the lender still have several options available to them besides proceeding directly to foreclosure. Like for example, the borrower can sell the home before foreclosure commences and use the proceeds to settle the mortgage, a pre-foreclosure sale. This is particularly appealing and beneficial if the homeowner has positive equity in the home and can cover the outstanding loan amount through sale of the property. In fact, even in negative equity situations lenders often permit a short-sale (transaction price is less than the unpaid balance on the loan), because it is a fact and lenders are very well aware of it that the foreclosure process can take a long period of time and can be extremely costly. Thus, a short-sale scenario would be generally desirable in states that necessitate foreclosures to be conducted or processed through the state’s judicial system.

Another alternative, though a rarely used option, is to find a homebuyer who is willing to assume the mortgage. In this case a new borrower, who is more probably identified as being likely to make future payments than the current borrower, resumes payments. As is also true with a pre-foreclosure sale, the defaulted borrower has avoided a major deficiency on their credit history record and has reduced the cost of borrowing in the future. This is primarily a viable option when the outstanding mortgage is smaller than the value of the property.

When the value of the property is a lot bigger than the outstanding mortgage other options can be looked into. One is to modify the existing mortgage arrangements. The lender can lower down the interest rate on the loan, change the product type, or extend the term of the loans while capitalizing the delinquent payments into the new loan. The objective here is for the lender to obtain the whole amount owed but still making the loan payments more affordable for the borrower, even when the borrower is in a negative equity situation. Obviously, the lender is betting or hoping that the borrower will be able to make the payments in the future, even though the borrower has failed in the past.

One more alternative is for the borrower to declare bankruptcy anytime during or before the foreclosure process. The foreclosure is stayed (cancelled or at least postponed) until lifted by the

bankruptcy court. The investor or lender can then file a motion for relief, which is typically granted if the outstanding mortgage is larger then the value of the house, referred to as a negative equity (Nemeth & Van Horn, 1994).

Still another option is for the borrower to hand over the deed of the property to the lender. The lender then agrees not to proceed with the foreclosure. While the lender does end up owning the property and, therefore, must sell it, this approach typically reduces the time it will take to settle the issue and solve the default and the expenses, relative to foreclosure. When the lender receives the deed or title, such lender becomes responsible for any other matters and questions attached to the title such as second liens, mechanics liens, or unpaid taxes. In consequence, deeds in lieu of foreclosure are apt to include borrowers in better financial conditions or borrowers who are more concerned with the stigma of foreclosure and credit deficiencies.

Legal Issues
There is substantial variation across the country on how states treat the rights of the borrowers and lenders during the foreclosure process. Capone (1996) and Pence (2003) provided an extensive summation of the variations in foreclosure state laws. Following Pence’s (2003) depictions, three foreclosure classifications are used — 1) twenty-one states require a judicial foreclosure process so that the lender must proceed through court to foreclose, while all other states allow a non-judicial procedure called power of sale which is typically simpler, cheaper and quicker; 2) nine states allow a statutory right of redemption so that up to a year after sale of the property the homeowner can redeem the property by paying the foreclosure price plus any foreclosure expenses; and 3) nine states allow a deficiency judgment to be used by the lender to collect any losses on a foreclosure from the borrower’s other assets.

Foreclosure laws simply affect the cost of foreclosing and the time it takes for the foreclosure process to be completed, but the impact on the selling price of the home are less obvious. However, in locations where the borrower has the right to buy back the home even after foreclosure and sale of the property to a new homeowner, one would expect the selling price of the property to go down, because the new owner cannot immediately obtain clear title on the property.

Moreover, the requirement of a judicial foreclosure process may reduce the resale price of the property because it is vacant or rented for a longer period of time, which should increase the opportunity cost of holding the property under the lender’s ownership. Nonetheless, this effect is perhaps negligible compared to the effects of the right of redemption, because the new owner of the property at least has a clean title. Likewise, deficiency judgment provides more power to the lender and therefore may result in a swifter resolution of the foreclosure process, providing less time for the property to deteriorate. Again, this effect should be a lot less significant than the right of redemption in terms of house prices and the recovery from sale.

Previous research has focused on the relationship between how much of the outstanding balance on a loan is recovered and state foreclosure loans. For example, Wood (1997) finds evidence that Fannie Mae recovery rates are higher in right of redemption states and lower in deficiency judgment states, a counter-intuitive result. Overall, the econometric evidence of the relationship between foreclosure laws and recovery on sales is mixed (Crawford & Rosenblatt, 1995; Clauretie, 1989; Ciochetti, 1997; and Clauretie & Herzog, 1990).

References/Readings

Apgar, W. C. & Duda, M. (2004). Mortgage foreclosure trends in Los Angeles: Patterns and policy issues.

Capone, C. A. (1996). “Providing Alternatives to Mortgage Foreclosure: A Report to Congress.” Washington, D.C.: United States Department of Housing and Urban Development.

Ciochetti, B. A. (1997). Loss characteristics of commercial mortgage foreclosure. Real Estate Finance, pp. 53-69

Clauretie, T.M. (1989). State foreclosure laws, risk shifting, and the PMI Industry. Journal of Risk and Insurance,  56, 3, pp. 544-554.

Clauretie, T.M. & Herzog, T. (1990). The effect of state foreclosure laws on loan losses: Evidence from the mortgage insurance industry. The Journal of Money, Credit and Banking,  22, 2, pp. 221-233.

Crews Cutts, A. & Green, R.K. (2004). “Innovative Servicing Technology: Smart Enough to Keep People in Their Houses?” Freddie Mac Working Paper Series #04-03.

Fratantoni, M. (2006). “Community Solutions for the Prevention of and

Management of Foreclosures.” Statement to the House Committee on Financial

Service United States House of Representative

Garcia, R. (2003). “Residential Foreclosures in the City of Buffalo, 1990-2000.” Federal Reserve Bank of New York: 1-74.

Mortgage Bankers Association. (2006). “National Delinquency Survey: First Quarter 2006.”

Rose, D. C. (2006). “Chicago Foreclosure Update 2006.” National Training and

Information Center, Chicago: 1-20.

Nemeth, C. P. & Van Horn, G.P. (1994). Real estate foreclosure: Paralegal practice and procedure. New York: Wiley Law Publications, John Wiley & Sons, Inc.

Pence, K. M. (2003). “Foreclosing on Opportunity: State Laws and Mortgage Credit.” Presented at the Allied Social Science Association Conference in the American Real Estate and Urban Economics Association Session

Wood, C. (1997). “The Impact of Mortgage Foreclosure Laws on Secondary Market Loan Losses,” Ph.D. thesis, Cornell University.