Home Equity Loan
Foreclosure
Foreclosure is the legal proceeding in which a bank or other secured creditor
sells or repossesses a piece of real property (immovable property) due to the
owner's failure to comply on its promissory note. 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 they get title to the
immovable property in return.
Other states have adopted non-judicial foreclosure proceedings, in which the
mortgagee, or more commonly the mortgagee's attorney, gives the homeowner a
legally specified notice of the default and the mortgagee's intent to sell the
immovable property. In this "power-of-sale" foreclosure, if the homeowner 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 homeowner but may be subject to any liens superior to the
mortgage being foreclosed eg. a senior mortgage, unpaid property taxes etc. The
buyer may need further legal action to obtain actual 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 run a title
search of the immovable property and to name 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.
As of September 2005, there are roughly 85,000 homes in foreclosure in the
United States.*