When a borrower defaults on a loan, what are your options? Two options are foreclosure and forbearance agreements. Read on for a discussion of foreclosures in Part I of this series.
Part I: Foreclosure 101
1. What is it?
Foreclosure is a legal action that is driven by state rules and statutes, as well as contracts signed by the parties involved. Most commonly, the parties to a foreclosure are a lending institution (such as a state or federal-chartered bank) and a borrower (a company or individual that pledged their real estate to the bank as security in exchange for a loan).
A lender will initiate a foreclosure with the ultimate goal of obtaining the property secured by the mortgage and selling it in order to satisfy some of the debt.
Depending upon the terms of the contracts and of state (and sometimes federal) laws surrounding foreclosure, notices may need to be given to a borrower before commencing legal action. Additionally, Commercial, Agricultural and Residential Foreclosures are NOT one-size-fits-all. It is imperative to utilize experienced bank counsel when considering foreclosure to ensure the proper procedures are followed and the process is streamlined.
2. What triggers a foreclosure?
Most commonly, if a borrower fails to make a payment on their loan with the bank, a “default” of the loan occurs. A non-exclusive list of potential defaults can typically be found in a Mortgage, Deed of Trust or Promissory Note.
3. What happens if the property doesn't bring enough money to satisfy the debt?
In some cases the bank may seek a “deficiency judgment” against the borrower. A deficiency judgment is a way for a bank to seek additional funds from the borrower to satisfy the debt. It is important to discuss this issue with your legal counsel and analyze how much equity you feel is in the property before you begin the action.
4. Are there different types of foreclosure?
Yes. Judicial foreclosures are a more formal legal process that takes place under court supervision. Some states have a process called non-judicial foreclosure which may be a faster method, but comes with caveats for each individual case. Your legal counsel can explain which method is a better fit for your situation after having all of the information from the bank portfolio.
5. Can foreclosure be avoided?
There are ways to avoid the foreclosure process. One of those ways is through forbearance, which will be discussed in Part II of the series.