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What is foreclosure?

Posted by attorney Margery Golant

What is a mortgage ?

A mortgage is a debt agreement that is made between a person who wants to borrow money and a lender. The major difference between mortgages and other sorts of debts is that the borrower gives real estate as collateral. This collateral can be property which the borrower already owns, or it can be a property the borrower wants to buy. Using real estate the borrower already owns as collateral is generally referred to as a refinance, because in most cases the new loan replaces an existing, smaller mortgage. However, the term refinance is generally applied to already owned real estate, whether or not there was a mortgage in place which is being replaced. A mortgage loan used to acquire new property is referred to as a purchase money mortgage. It is not at all unusual for a borrower to obtain multiple mortgages on the same collateral at the same time. If this occurs, the rights of the holders of each mortgage are relative to all those ahead of them. While there are other documents involved, the key documents in a mortgage transaction are a note and a mortgage or deed of trust. The language of the note looks very much like that involved in a car loan; it states the total amount borrowed, the interest rate, the length of time over which the loan must be paid back and any other details of the transaction. The note is the actual debt. The second part of the transaction is the mortgage or deed of trust. Some states use mortgages, others use deeds of trust. Normally, states which utilize deeds of trust provide for non-judicial foreclosure, while those utilizing mortgages utilize judicial foreclosure. The differences between the two are very important. When a borrower who owns or is acquiring property gives the lender a mortgage, that mortgage document gives the lender a lien on the mortgaged property, which serves as collateral for payment of the debt and for compliance with the other obligations which the borrower agrees to in the Note. If the borrower defaults in any of the Note terms, the lender can commence judicial foreclosure. This will be explained in more detail in the next section. When a borrower who owns or is acquiring property gives the lender a deed of trust, that document gives the lender ownership of the mortgaged property which serves as collateral for payment of the debt and for compliance with the other obligations which the borrower agrees to in the Note. Provided the deed of trust contains a power of sale, the lender can exercise that ownership if the borrower defaults and sell the property. The deed of trust is held by the lender as "trustee" until either the loan is paid off or enforcement action is necessary. If the borrower defaults, the lender can commence non-judicial foreclosure. Some states permit both. The mortgage or deed of trust is the security instrument that pledges the mortgaged property as collateral for the debt represented by the Note. Until recent years when mortgage lending became very lax, standard procedure required all owners of a property which was going to be collateral for a mortgage to be parties to the entire mortgage transaction; they were required to commit to the obligations of the Note and also to sign the security instrument (mortgage or deed of trust). However, this has changed recently, and it became commonplace for the loan to be made to only one of the owners of the property. In such a case, the borrower would be the only party signing the Note. The other owners though would still have to sign the mortgage or deed of trust, since their property was either being liened or conveyed to the lender, and this could not happen without their agreement. In many states, non-owner spouses are also required to sign the mortgage or deed of trust in order for the lender to have a valid lien or conveyance. So, it became commonplace for someone to be "only on the deed and not on the Note". What that means is that that person is one of the owners of the property, but is not actually obligated to repay the debt. However, that person would also have to have signed the mortgage or deed of trust, thereby agreeing that if the borrower did not pay, the property could be foreclosed upon to raise money to apply to the debt. When an owner did not sign the Note, he or she did not become liable for the debt. It should not appear on his or her credit report, and if done properly, a foreclosing lender could not come after such a person personally; as to him or her, it would be limited to recovery of the property.

What is foreclosure?

Foreclosure is the process in which the lender takes control of the collateral property and sells it to raise money to pay on the debt created by the Note. The foreclosure process is very different depending on whether it is judicial or non-judicial. Non-judicial foreclosure is quite straightforward and quick. Since the lender already owns the property, it needs to do very little to sell it. The exact details vary from state to state, but generally involve the sending of a Notice of Default, advising the borrower that he or she is in jeopardy of having his or her property sold unless he or she brings the loan current by the date stated. In most states that utilize this procedure, the Notice of Default is also published in the newspaper and often it is required that it be posted on the property itself. The length of time which must be given to the borrower to cure is determined by state law, typically 60 or 90 days. If the default is not cured as required by the terms of the Notice of Default, the lender then can proceed to issue a Notice of Trustee's Sale. Again, the time until sale can occur is set by state law, usually in the vicinity of 21 days. In California, the largest non-judicial state, the minimum time to the actual sale from the Notice of Trustee's sale is 21 days, and the borrower can reinstate by paying the delinquency in full up to 5 days before the sale. There is normally no court involvement in a non-judicial foreclosure. If a borrower feels that there is something wrong or improper occurring, in order to raise these issues, he or she would have to file a lawsuit to try to obtain an injunction stopping the process. Judicial foreclosure is a lawsuit, similar to other kinds of lawsuits. It is formal and much more complex, and generally takes longer than non-judicial foreclosure. The point of a judicial foreclosure is for the lender to obtain from the court a judgment in foreclosure, and the right to hold a sale of the mortgaged property. The court is involved in the foreclosure process all the way through. So, if a borrower feels there is something wrong or improper occurring, he or she can raise those issues within the judicial foreclosure proceeding.

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