Learning that your mortgage lender has initiated foreclosure proceedings against your home is uniquely stressful and can bring about major disruptions in your financial and personal routines. Even the prospect of leaving your home for a new residence, in haste, can have a ripple effect of personal and, potentially, professional consequences. So when should you bring a lawyer in to help? Here, we'll take a look at what happens in foreclosure, and when to seek legal counsel.
Types of Foreclosure
There are two principal types of foreclosure that home lenders can pursue if you default on your mortgage. The first, and more common, is known legally as judicial foreclosure. Less common is strict foreclosure—permitted in Maine, New Hampshire, Connecticut, Indiana, Illinois and Vermont.
Under a judicial foreclosure, upon a borrower’s default on their mortgage loan, a state court can grant the borrower what is known as the "equitable right of redemption" if the borrower repays the mortgage in full. Therefore, via the foreclosure process, the lender seeks to foreclose the borrower’s equitable right of redemption and assume both legal and equitable titles to the property. The lender initiates judicial foreclosure by filing a lawsuit against the borrower. Upon final judgment in the mortgage provider’s favor, the property is subject to auction.
Under strict foreclosure, the lender owns the property until the mortgage has been paid in full. If the borrower breaches one or more conditions of the loan agreement before the mortgage is paid in its entirety, the borrower loses any right to the property and the lender will take possession of it. The lender is not obligated to sell the property according to any particular timetable.
Below are four circumstances that may arise and that could prompt you to seek legal counsel with regard to the potential foreclosure of your home:
1. When Reviewing the Loan Agreement
For varying reasons, you may wish to consult an attorney to review the loan agreement that your mortgage provider (which is typically, although not always, a bank) proposes that you sign. One important reason is so that legal counsel may scrutinize the non-recourse debt provision in the agreement (if it has been drafted to include one).
The non-recourse debt provision can have important implications on your later rights in any foreclosure proceeding. The nature of a non-recourse debt provision is such as to protect your assets (other than the home you are about to buy) during foreclosure proceedings, to the extent that those assets could provide a means of satisfying your outstanding mortgage obligation to the lender. Instead, the lender receives from the borrower a collateral pledge on your loan; and if you fail to repay the loan, your lender’s recovery is limited to its obtaining the collateral, generally through foreclosure.
In the event that you, as a borrower, default on a non-recourse loan, and if the value of your collateral is insufficient to fully satisfy the entire loan balance, the mortgage provider suffers a loss that equals the difference between the outstanding loan balance and the value of your collateral. Even where a non-recourse provision has been included in the loan agreement, the lender may try to tack on exceptions that could threaten to undermine the effect of the original provision. The lender’s loan officer might offer assurances that you should not worry about these so-called "carve-outs," but you should, and an attorney can guide you concerning which proposed carve-outs are reasonable and which ones should be rejected.
In the absence of a non-recourse debt provision, the court overseeing foreclosure may enter a deficiency judgment against you. The effect of a deficiency judgment is that it can be used to place a lien on your other property to repay any difference between the sale value of your home in foreclosure and the outstanding principal that you owe (plus the lender’s foreclosure costs). A deficiency judgment gives the mortgage provider the legal right to collect the remainder of the outstanding debt from your other assets.
2. If Your Lender Initiates a Discussion with You Concerning Loan Modification
If you fall behind on your mortgage payments, you may receive a call from your bank offering to negotiate a loan modification. It is important to consider enlisting an attorney to negotiate on your behalf at this juncture, in part because of the risk of so-called "dual tracking." When a lender engages in a "dual tracking process," the lender simultaneously discusses "loan modification" with the borrower, while also moving ahead with a foreclosure sale on the borrower’s property. This process is now prohibited under rules newly issued by the U.S. Consumer Financial Protection Bureau (CFPB) and, if you choose, you can file a complaint with the CFPB (after realizing that the lender has engaged in the practice). However, it is better to sharply reduce the likelihood that the lender will attempt to subject you to dual tracking in the first place, by retaining the services of an attorney to negotiate with the bank.
3. Upon Receiving an Acceleration Letter (Demand/Breach Letter) or Notice of Default
One not uncommon immediate precursor to foreclosure arises if you receive an acceleration letter (also known as a demand or breach letter) from your mortgage lender. Most loan agreements contain acceleration clauses. If you breach one of the terms of the loan agreement, the agreement’s acceleration clause takes effect, which can declare the entire outstanding debt payable to the mortgage provider. In the letter advising you of this acceleration, the mortgage provider must provide a payoff quote on the mortgage that is estimated 30 days from the date of the letter. Once the acceleration period has expired, the mortgage provider can proceed with the foreclosure. The court may, as an alternative, order your property sold "subject to" the mortgage, with the proceeds from the property sale being applied toward the debt owed to the lender.
Due to the short time period that you have to respond to an acceleration letter, timely legal advice can prove vital. An attorney can advise you on the potential availability of other options, including refinancing, alternate financing, a short sale, temporary arrangements with the lender, an extended payment plan or even bankruptcy.
Separately, you may receive a notice of default if you live in a state that has adopted non-judicial foreclosure. In non-judicial foreclosure jurisdictions, the legal right to foreclose and sell the property lies with a third party known as a trustee. When you take out a loan from a mortgage provider in such a jurisdiction, you sign a deed of trust, which confers upon the trustee the right to sell the home if you fail to make payments.
The foreclosure process is initiated when the lender notifies the trustee that you have failed to make agreed-upon payments on the mortgage. Upon receiving that notice from the lender, the trustee issues a notice of default to you; the notice is typically published publicly, such as in the local paper. Just as an attorney can advise and assist in negotiating with the lender in the instance of a notice of acceleration, a qualified attorney can serve the same role in the event of a notice of default.
4. Upon Being Sued
When you are sued by the lender in state court to commence a foreclosure action—occasionally, this occurs in federal court—the need for an attorney becomes glaring. Once an attorney makes an appearance in your case, the mortgage provider’s legal counsel must communicate with the attorney instead of with you directly. An attorney can advise you of any defenses that you may have available to delay or entirely defeat the foreclosure effort.
Occasionally, foreclosure actions are instituted wrongfully, i.e., when the borrower actually has maintained a good payment history or responded with payment to an acceleration letter, but the lender (through a record-keeping oversight or something else) institutes an action anyway. An attorney can ensure that your voice is heard when the court hears important issues in your case and schedules critical events relating to your foreclosure.
The above article does not provide legal advice; instead, it provides general information.