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February 5, 2009 - by Roger H. Miller III
As Interest Rates Rise...
So Do Mortgage Foreclosures
For most of us, a mortgage assisted us in buying the house in which we live. Mortgages have also enabled many real
estate investors to purchase investment property. Oftentimes, these mortgages obtained by investors have adjustable
interest rates, sometimes with interest-only payments. Also, many sellers have agreed to take back a promissory
note and mortgage in conjunction with the sale of their property.
With the recent downturn in the real estate market coupled with the increase in interest rates, many investors are
finding it harder to sell those investment properties. Some investors are facing the possibility of foreclosure,
and sellers and lenders who financed these sales are looking to collect. Sometimes, sellers, and even employees of
institutional lenders, have misconceptions about how the foreclosure process works. Some believe that if the note
and mortgage are not paid, that they can simply “take the property back.” The truth of the matter is that the
lender may or may not get the property, depending on the outcome of the foreclosure process.
A mortgage is a security interest in property that secures the payment of a debt. The mortgage is a lien on the
property, which is the collateral securing the payment of the debt. The borrower gives the lender a promissory note
(“note”) and mortgage on the property. If the note is not paid according to its terms, the lender can foreclose the
mortgage to seek payment of the note throughthe sale of the collateral.
The note and mortgage specify how long the loan must be in default before the foreclosure process can be initiated.
This time frame can be anywhere from zero to thirty days, or longer. The note and mortgage will also dictate
whether any written notice of the default must be given to the borrower. After the time frame required under the
note and mortgage has elapsed and written notice has been given, if required, the lender can initiate the
foreclosure process.
The foreclosure process involves researching title to the property being foreclosed to determine the proper parties
to the suit. A mortgage-holder should include in the foreclosure action all parties whose interest in the property
is subordinate to that of the mortgage-holder. Parties withsubordinate interests would include second
mortgage-holders, lienors, tenants, and anyone elsethat may claim an interest in the property.
After the suit is filed, the named parties must be served with notice of the lawsuit. This requires the
mortgage-holder, or more likely its counsel, to make a diligent effort to find the defendants and to have them
served with a copy of the lawsuit. While this sounds simple, finding and serving people who do not want to be found
can be quite challenging. If after diligent effort, some or all of the defendants cannot be personally served with
the lawsuit, then the mortgage-holder may constructively serve the defendants by publishing notice of the action in
the newspaper.
After service, the defendants have 20 days to answer the complaint. The mortgage-holder then submits affidavits as
to the amount owed, its right to foreclose and its costs and attorney’s fees associated with the foreclosure
(provided the note and mortgage provide for the recovery of attorney’s fees, which they usually do). If these
affidavits are not contradicted with opposing affidavits from the borrower or other defendants, the judge enters a
final judgment awarding the mortgageholder the amount due under the note and mortgage. At that time, the
mortgage-holder turns in the original note and mortgage to the court in exchange for the judgment. If the
mortgage-holder does not have the originals, a separate count must be added to the original complaint to
reestablish the lost note and mortgage.
Once the final judgment is entered, the court sets a date on which the mortgaged property will be sold if the
judgment is not paid. This foreclosure sale date must be at least 20 days from the date of the judgment. The
foreclosure sale date is then published in the paper for two consecutive weeks. The judgment can be paid and the
mortgage redeemed at any time prior to the conclusion of the foreclosure sale. Not only can the original borrower
redeem the mortgage, but a second-mortgage holder or other party who is being foreclosed can also redeem and pay
the mortgage.
Assuming the judgment is not paid prior to the sale, the judgment-creditor (previously the mortgage- holder) has a
credit in the amount of the judgment, plus accrued interest and costs, to bid at the foreclosure sale. Therefore,
the judgment-creditor can bid on the property, without coming out of pocket, up to the amount of the judgment. If
no one at the sale outbids the judgmentcreditor, then the judgment-creditor gets the property and its judgment is
reduced by the amount it bid to acquire the property. The judgment-creditor can seek a deficiency judgment against
the borrower if it did not use all of its judgment to bid on the property, but depending on the borrower, that
judgment may be worthless.
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