Foreclosure is the legal process that allows a lender or the subsequent loan owner (the “bank”) to sell a property to satisfy a homeowner’s debt. The goal of a foreclosure is to eliminate the owner’s interest in the home, as well as wipe out any junior interests in the property. So, before foreclosing, the bank will order a title search from a title company. The title search will show all of the parties with an interest in the subject property—like lien holders, judgment holders, and others. The foreclosing bank will then name the parties whose interests it wishes to foreclose as defendants in the foreclosure action to clear them off title.
What Is Clear Title?
Title defects—like unreleased judgment liens, mortgages that were paid off but not released, and other encumbrances—are known as “clouds” on title. A cloud on title could potentially invalidate or impair a property’s title, making it difficult or impossible to sell. Title searches are run to look for clouds on title. A property title that doesn’t have any clouds is considered clear.
Purpose of a Foreclosure
Homeowners occasionally face back-to-back foreclosures when the title to the property has problems after the first foreclosure. (Often, a foreclosing bank is able to amend its foreclosure complaint to add parties who were left out of the original complaint; but the bank must amend the document before the foreclosure is complete.) When a subordinate lien holder or other junior interest is omitted from a foreclosure action, its lien or interest isn’t extinguished unlike the lien or interest of a party that’s properly named and served in the lawsuit. The purchaser at the foreclosure sale (usually the foreclosing bank) then takes title to the property subject to the omitted lien or party. Unless the excluded parties agree to release their lien or sign a quitclaim deed, a court’s assistance is required to clear up the title. Without clear title, the bank can’t resell the property to a new owner. So, the bank might then (depending on state law) opt to reforeclose to deal with the parties who were inadvertently left out of the foreclosure action. The reforeclosure action cleans up the property’s title and gives the bank clear ownership. A bank might choose to reforeclose if the foreclosure sale has already taken place and, for instance:
• The title company neglected to include a junior lien on the title report after searching the public records and, as a result, the bank’s attorney didn’t include the junior lien holder in the foreclosure.
• The title company didn’t include a judgment lien in the title report after searching the public records, and, as a result, the bank’s attorney didn’t include the judgment holder in the foreclosure.
• The bank’s attorney didn’t name a particular defendant (like a non-borrowing spouse) or didn’t name the defendant correctly (such as naming a trustee as both an individual and in his or her capacity as a trustee) in the lawsuit.
• The bank’s attorney didn’t properly review the title search and therefore didn’t name all parties who have an interest in the property as defendants in the foreclosure.
How Foreclosure Generally Works
Generally, the right to foreclose passes with the property’s ownership. Because the foreclosing bank is usually the high bidder at the foreclosure sale (and becomes the home’s new owner), it will typically conduct the foreclosure. But if a third party buys the home at the foreclosure sale, that person or entity might foreclose. The foreclosure complaint (lawsuit) will allege that the omitted lien holder or other party’s interest is inferior that is, it has a lower priority than the foreclosed mortgage. The complaint will further state that the lienor or other party was inadvertently left out of the foreclosure action and, if it had it been included, the foreclosure sale would have removed it from title. Assuming the newly named defendant doesn’t answer the suit or redeem the property by paying off the mortgage, the court enters a judgment of foreclosure. The lien or other interest is then extinguished, and another foreclosure sale is held. The purchaser at the foreclosure sale gets title to the property free of the interests of all parties foreclosed in the original lawsuit, as well as those named in the reforeclosure.
Understanding The Foreclosure Process
Most of us understand that when we borrow money to buy real estate we sign a document that requires us to pay back the money over time to the bank. Most borrowers loosely refer to that debt as a “mortgage.” When our most recent market bubble burst many Americans, unfortunately, became intimately familiar with what happens when they don’t make their mortgage payments.
The Foreclosure process is different depending on the state in which you reside and the two different foreclosure processes have very different impacts and time lines.
Title Theory vs. Lien Theory
Simply put the foreclosure process your state follows can depend on whether the state laws subscribe to the idea that a loan is simply a lien against your property “lien theory” or that a loan is a conveyance of title to the lender until the borrower pays back the loan in full “title theory.” English mortage law follows title theory, therefore when our country began, the mortgage laws required title “ownership” of the home be transferred to the lender until the debt was paid off.
Mortgage vs. Trust Deed
Although many Americans call the loan against their property a mortgage, many of them actually agree to a different instrument with their lenders – a Trust Deed. The differences include both the number of parties involved in the transaction, who technically holds title to the property, and ultimately how the foreclosure process will proceed. A mortgage is an actual document that borrowers sign and convey to their lender in order to secure a debt on their home. It involves two parties, the borrower (mortgagor) and the lender (mortgagee), and creates a lien against the property that is normally recorded in public records. This lien prevents the borrower from transferring title or ownership until the debt (mortgage) is paid in full and the lien released.
The title holder during the loan period can be either the borrower or lender depending on which custom is practiced in the state where the property is located – “title theory” or “lien theory.” As discussed above, the borrower conveys title to the lender during the loan term in a “title theory” state and continues to hold title in “lien theory” states. When a mortgage is the security instrument, the lender usually has to go through a court action to foreclose. This is called a judicial foreclosure. Unlike a mortgage, a trust deed (aka deed of trust) involves three parties – the borrower (trustor), the lender (beneficiary), and the trustee. The purpose of the trustee is to act as a neutral third party holding title until the debt is paid in full. Who is eligible to be a trustee varies from state to state although most often trustee services are provided by either a title company or an attorney. Actually, trust deed agreements include two documents, the trust deed which conveys title to the trustee and the promissory note between the lender and the borrower, outlining the terms of the agreed upon loan.
Another significant difference is in the foreclosure process. When a deed of trust is involved, foreclosure is faster, less expensive, and less complicated than when a mortgage is the security instrument. If the loan becomes delinquent, the trustee has the power to sell the home (as conveyed in the trust deed itself). As protection to the borrower, the lender must first provide the trustee with proof of delinquency and request that foreclosure proceedings be initiated, then progress according to law and as dictated by the deed of trust. This type of foreclosure does not have to go through the court system and is commonly referred to as a non-judicial foreclosure.
Judicial vs. Non-Judicial Foreclosure
Perhaps the most vexing position to hold as a lender is to be plaintiff in a lawsuit against the unfortunate family, in financial hardship, facing the prospect of losing their family home. In many states across the country foreclosure proceedings still take place in a court of law, sometimes in front of a jury, to decide whether or not a lender can take back real estate in the foreclosure process. Limited to lien theory states, the timely and arduous process provides defaulted borrowers opportunity to defend their ownership and requires lenders to meticulously follow procedural laws. The judicial foreclosure process begins with the lender filing a complaint and recording a notice of Lis Pendens (it’s important to note both the predure and form will vary by state). The complaint will state what the debt is (amount and the real estate by which it’s secured), and why the default should allow the lender to foreclose and take the property pledged as security for the loan. The homeowner is given a notice of the complaint (NOC) either by mail, direct service, or publication of the notice, and will have the opportunity to be heard before the court. If the court finds the debt valid and in default, it will issue a judgment for the total amount owed, including the costs of the foreclosure process. After the judgment has been entered, a writ will be issued by the court authorizing a sheriff’s sale. The sheriff’s sale is an auction, open to anyone, and is held in a public place, which can range from in front of the courthouse steps, to in front of the property being auctioned. Sheriff’s sales usually require cash to be paid at the time of sale; however they may sometimes allow a substantial deposit with the balance paid later that same day or up to 30 days after the sale. At the end of the auction, the high bidder will be the owner of the property, subject to the court’s confirmation of the sale (another key difference between judicial and non-judicial sales). After the court confirms the sale a sheriff’s deed is prepared and delivered to the highest bidder, when recorded, the high bidder becomes the new owner of the property.
Non-judicial foreclosures, on the other hand, are processed without court intervention, in accordance to the foreclosure procedures established by state statutes. When a loan default occurs, the homeowner will be mailed a default letter, accompanied by the filing of a Notice of Default (NOD). If the homeowner does not cure the default within the time-lines specified by the state where the property is located a Notice of Trustee Sale (NOTS) will be mailed to the homeowner, posted in public places, recorded at the county recorder’s office, and published in area legal publications. After the legally required time period has expired (21 days), a public auction called a Trustee Sale will be held the highest bidder becomes the owner of the property, subject to their receipt and recordation of the deed. Auctions of non-judicial foreclosures will generally require cash or a cash equivalent either at the sale, or very shortly thereafter. Although each state dictates their own foreclosure procedures, all foreclosure actions follow either a judicial or non-judicial method. Which method typically depends on the legal theory (lien or title) practiced in the state and which instrument (mortgage or trust deed) is used to secure the debt. The implications of these actions can determine other key factors in the foreclosure process such as deficiency judgments or rights of redemption.
Do I Need Title Insurance on a Bank-Owned Foreclosed Property?
When banks and other lenders foreclose homes, they repossess and usually attempt to sell them at foreclosure auction. However, many properties end up on the books of their foreclosing lenders after they’re repossessed and become what are commonly called bank-owned, or real estate owned properties. Generally, the titles of bank-owned properties sold to buyers are free of liens or other encumbrances. However, bank-owned foreclosures can sometimes be risky and foreclosing lenders may not catch all potential title problems, making obtaining title insurance important. Bank Foreclosures and Title Insurance Title insurance is designed to protect property buyers from title issues, such as old, unnoticed liens or potential competing ownership claims. Before selling a bank-owned foreclosure, the lender typically has the property’s title searched for liens and other encumbrances and will eliminate them. As the buyer of a bank-owned foreclosure property, you’ll also generally receive a title insurance policy paid for by the seller. You should never assume, however, that the title to any bank-owned property has been fully searched and then cleared by the lender.
Ordering a Title Search
At minimum, when purchasing a bank-owned property, you should conduct a search of public records that contain information about liens and outstanding property taxes. You can also order a title search on the property from a title company, although no title company will ever deliver a 100 percent guarantee that a property’s title is free defects. However, title companies conduct thorough title searches and provide a fairly reliable abstract of title, or recitation of a property’s ownership history.
Mortgage Lender Title Insurance
There are two types of title insurance, one for owners and one for lenders. A lender’s title insurance policy protects only the mortgage lender, not the property owner. If you’re using a mortgage to purchase a bank-owned property, the lender may require you to purchase lender’s title insurance on its behalf. Lender’s title insurance covers the amount of the mortgage loan, and the premium price is based on the loan’s initial amount.
Lender’s Title Insurance Costs
Title insurance policy costs vary by location and other factors, such as a mortgage loan’s amount. If you’re using a mortgage to purchase a bank-owned property and the seller provides owner’s title insurance, you’ll only need to pay for a lender’s policy. Other title-related fees such as deed recording and closing services may also be part of your closing costs when buying bank-owned property.
Lien Survivability
Seniority rankings on property titles give property liens their ability to survive foreclosures. Except for property tax liens, which are superior to all other liens, first mortgage liens occupy superior positions on property titles. When a mortgage lender forecloses after its borrower defaults. it’s doing so to satisfy its mortgage lien only. Subordinate liens on property titles frequently aren’t paid off during first mortgage foreclosure and could remain attached to a foreclosed property’s title.
Clearing Liens
Surviving foreclosed property title liens could be paid off from the property’s sale proceeds. Of course, the simplest way to eliminate foreclosed property liens that you’ve become responsible for is to pay them yourself, though the cost might be significant. Another common method for eliminating liens on property titles is through use of ‘quiet title’ lawsuits. If lien holders don’t object or if they lose in court, a quiet title lawsuit can effectively eliminate existing liens on a property’s title.
Foreclosure Lawyer
When you need legal help for a foreclosure in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you with real estate law, foreclosures, quiet title actions, real estate opinion letters and more.
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