Real Estate Finance Notes 11/5/04

 

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 Ohio, the equity of redemption is not actually foreclosed until the sale is approved.

 

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, itís a decree that the mortgagee owns the property.Is the cost of a judicial foreclosure worth the effort?

 

Judicial foreclosure

 

Whatís 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.Weíre 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 isnít joined?What if you donít 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?Itís hard to imagine.But it can happen by mistake.

 

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