Real
Estate Finance Notes
Foreclosure
Here
we have the foreclosure of the equity of redemption. There is a period after default where there
can be an acceleration (assume that there is).
So then you have the equity of redemption. The mortgagor still has the right to pay off
the mortgage and then own the property unencumbered by it. How long does that right exist? That equity of redemption exists until it is
foreclosed. Typically, the time at which
it is foreclosed is the foreclosure sale.
There is a bit of a delay between the foreclosure auction and the foreclosure
of the equity of redemption because the sale must be confirmed by the court. This is pretty much perfunctory, but it does
take some time. In
There
are mainly three types: (1) judicial sale, (2) power of sale, and (3) strict foreclosure. In every state that has power of sale foreclosure,
it is a mere alternative that exists along with judicial foreclosure. Both involve sales, but one involves a court
proceeding at the courthouse (the judicial sale). The process begins with a lawsuit and
proceeds the same way a regular lawsuit proceeds. Power of sale simply allows the trustee to
advertise for some period of time, and then the property is sold. This typically takes place at the property. The third and least significant method of foreclosure
is strict foreclosure. For our purposes, there are only one or two
states that still allow this. The
problem with strict foreclosure is that it denies the mortgagor the surplus of
the equity that the mortgagor has in the property. Under strict foreclosure, you have no
sale. Default occurs, a lawsuit is
commenced, the order is not an order that the property be offered for sale,
rather, it’s a decree that the mortgagee owns the property. Is the cost of a judicial foreclosure worth
the effort?
Judicial foreclosure
What’s
the purpose of a foreclosure? What are
the necessary parties? You need to join
all the parties needed to get rid of all the mortgages. But just who is that? It could be people other than just mortgagees. It could be easement holders. It could be people who own condominiums where
the condos are located on the property being foreclosed. Basically, anyone who holds a lien against
the property or claims to own an interest that would be lost as a result of the
foreclosure is a necessary party. We’re
looking to eliminate all these junior interests. There are also proper parties. The senior mortgagee
is a proper but not necessary party. How should junior leases be treated if the
lessee isn’t joined? What if you don’t
join? Maybe the lease is at a
below-market rate. What happens when the
senior mortgagee forecloses but fails to join the junior mortgagee? Why would this happen on purpose? It’s hard to imagine. But it can happen by mistake.