Foreclosure is used to describe a legal process taken by the lender to repossess the property which held by the borrower who is in default. The borrower is said to be in default when the repayment terms stipulated in the contract such as when a promissory note is not fulfilled. It is the result of a borrower failing to make payments as required in the contract. The borrower’s loan becomes a non performing asset, at which time it is no longer earning interests. And if the loan is not earning interests, it is not producing income for the lender. It will cost the lender more money as the result of the lost earning power of the assets and myriad legal and administrative costs associated with collecting the loan or repossessing the property. When the process is complete, the lender can sell the property and the proceeds will be used to pay off its mortgage and legal costs. If the promissory note was made with a recourse clause and if the proceeds of the sale were not enough to pay the existing balance of principal and fees, then the mortgagee or lender can file a claim for a deficiency which includes the principal, interest and attorney fees less the cost spent at the foreclosure sale.
Lenders such as banks and mortgage companies are in the business of loaning money. They are not in the business of managing real estate unless forced upon them out of necessity such as the case of foreclosures. The properties that go into default represent losses to a lender. It is unquestionably in their best interests, as well as to the shareholders to do everything within their power to allay those losses.
Judicial Sale and Nonjudicial Sale
In the United States, there are two types of foreclosure: Judicial Sale and Nonjudicial Sale.
Judicial sale or foreclosure is the sale of the foreclosed property under the court’s supervision. The lender will initiate the legal action by filing a lawsuit against the borrower. All parties shall be notified of the foreclosure, and the judicial decision will be rendered after the exchange of pleadings ate the hearing in a local or state court. If final judgment favors the lender, the property is subject to auction by the officer of the court. Banks and institutional lenders may bid in the amount of the owed debt at the sale and if no other buyer the lender receives title to the real property in return. The sheriff then issues a deed to the winning bidder at auction. Then the proceeds of the sale shall satisfy the mortgage, then the lien holder, lastly to the borrower.
Nonjudicial or foreclosure by power of sale it involves the sale of the property by the mortgage holder without the supervision of the court. Generally, it is faster and cheaper compare to judicial sale. It is authorized by many states if a power of sale clause is included in the mortgage or in a deed of trust instead of an actual mortgage. The mortgagee does not need to file an actual lawsuit to initiate the foreclosure. The lender can bid for the property at the auction and will be the only bidder that can make a "credit bid" while other bidders immediately present cash or a cash equivalent. The highest bidder becomes the owner of the real property but may be encumbered by liens superior to the foreclosed mortgage such as a senior mortgage, unpaid property taxes, or demolition liens. If the former occupant fails to vacate, a legal action of eviction may be necessary to obtain possession of the property.
There are numerous reasons properties are foreclosed on by lenders, a common thread that runs among most of them can be described as distress. This term is used to refer to a condition of being in a need of immediate assistance, such as in the case of a property owner who has failed to meet the mortgage or tax obligations within the term specified, he or she stands to have the property foreclosed. The common reasons of the foreclosure are job transfer or relocation, separation and divorce, loss of job or income, bankruptcy, retirement, illness or permanent disability, deceased family member, investor burnout, functional and economic obsolescence, and property tax obligations.
