Foreclosure

Foreclosure is a specific legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

Formally, a mortgage lender (mortgagee), or other lien holder, obtains a termination of a mortgage borrower (mortgagor)'s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).

Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that (s)he can successfully repossess the property.

Therefore, through the process of foreclosure, the lender seeks to foreclose (in plain English, immediately terminate) the equitable right of redemption and take both legal and equitable title to the property in fee simple.

Other lien holders can also foreclose the owner's right of redemption for other debts, such as for overdue taxes, unpaid contractors' bills or overdue homeowners' association dues or assessments.

The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust." Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien." If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment. In many states in the United States, items included to calculate the amount of a deficiency judgment include: the loan principal, accrued interest and attorney fees less the amount the lender bid at the foreclosure sale.

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Foreclosure Crisis Likely 5 More Years

Despite a decline in the total number of foreclosures across the U.S., the foreclosure crisis is likely to last another 5 years as it takes lenders that long to formally take back homes tied up in legal squabbles, according to a leading real estate research firm.

Lender Processing Services (LPS) found major differences in foreclosure pipelines in states with judicial and non-judicial foreclosures. Judicial foreclosures require courts to approve foreclosures before property can be formally repossessed by a lender.

“On average pipeline ratios – the rate at which states are currently working through their existing backlog of loans either in foreclosure or serious delinquency are almost twice as high in judicial states than non-judicial states,” said LPS analyst Herb Blecher. “At today’s rate of foreclosure sales, it will take 62 months to clear the inventory in judicial states as compared to 32 months in non-judicial states.

“A few judicial states – New York and New Jersey in particular – have such extreme backlogs that their problem-loan pipelines would take decades to clear if nothing were to change.”

CoreLogic counted 767,000 U.S. foreclosures in 2012. Formal foreclosures were down almost 30% than a year ago at the end of February, according to RealtyTrac, the lowest since 2007. Some 45,000 homes were foreclosed in February, less than half when the foreclosure crisis peaked in March 2010.

Financial incentives provided by the federal government to banks to cooperate with mortgage holders in short sales, growing employment levels, lower home prices and near record low mortgage rates are helping to push the housing recovery forward.

However, delays related to Congress approving a new mortgage financing system to replace or redesign Freddie Mac and Fannie Mae and more than 2-million homes that are in the shadow inventory but not yet formally repossessed trouble the housing market. Seven years after the housing market bubble bust, the foreclosure crisis, still stands as the largest block to a full-fledged economic recovery in housing.

Before the bust, formal foreclosures averaged 21,000 each month from 2000 to 2006. But since the financial crisis hit its peak in the summer of 2008, an estimated 4.3 million foreclosures have taken place across the nation, according to CoreLogic. Although the total number of foreclosures varies between real estate research firms tracking the totals, foreclosures are still the major problem hurting the housing market.

Five states account for almost half of all foreclosures in CoreLogic’s tabulation of foreclosures during 2012. The hardest hit states in the crisis include California, estimated to be more than 100,000 residential properties. Florida was second (98,000), followed by Michigan (74,000), Texas (57,000) and Georgia (49,000).

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