Defaulting on mortgage payments may lead to defaulter’s property being seized and sold at a public auction to realize the debt in part or in full. This is termed foreclosure.
The Process of Foreclosure
It involves the following steps:
- Pre-Foreclosure: Defaulting on two or three mortgage payments by the property owner, qualifies for pre-foreclosure, a kind of warning. Once the pre-foreclosure is declared, the creditors raise full and immediate payment of loan that includes both the legal and late fees. If the property owner fails to make the said payments, foreclosure process is initiated.
- Notice of Default: If the loan is not repaid even after 90 days by the property owner, foreclosure is turned into a legal process. This involves issuance of notice by the bank to the local sheriff for delivering to the property owner. This notice of default is recorded by the government agency that than allots a date for foreclosure auction.
- Foreclosure Auction: This is nothing but an open auction of the property on which the payment had been defaulted and is won by the highest bidder. The property owner’s creditors are also at a liberty to purchase the property and sell it privately. At this stage, the property owner is supposed to vacate the property. Failure to do so may attract unlawful detainer charge meant to evict the property owner.
If the auction of property fails to bring in enough proceeds to satisfy the foreclosed debt, the creditor can bring personal action against the property owner for such shortfall.
Legal Defenses Against Foreclosures
The property owner, who is at the receiving end of a foreclosure, has several legal defenses available:
- Error in Mortgage Agreement: If there is a glaring mistake in the mortgage agreement, it will have a direct bearing on the foreclosure claim.
- Signing Mortgage Agreement by Coercion or Fraud: Signing a mortgage agreement is a voluntary action and cannot be forced upon the property owner. If coercion or threat of any kind is proved, the agreement stands nullified.
- Predatory Lending: At times creditors exploit the desperation of property owner looking for loans or mortgage and obtain the property without paying its fair value. If the property owner fails to pay back the loan, the creditors retain the property and sell it for a higher value than the loan. Such predatory lending is illegal.
- Violation of Statutory Laws: If the creditor violates any of the laws, the property owner can use it as his or her defense. Even delay in sending notice of default, that needs clear 30 days before initiating foreclosure process, counts towards such violation.
- Submission of Original Promissory Note: Only the original creditors of the property owner can initiate foreclosure process. Once it is set in motion, they are required to provide evidence of original promissory note that explains the payments.
Foreclosure is a process by which the creditors seek return of loan from the property owner. However, the property owner can take recourse to a foreclosure defense out of several mentioned above to stall such a foreclosure.