Kenneth Carroll: State Foreclosure Compliance

Because a foreclosure ultimately results in someone losing a home, courts take the process very seriously. If the servicer or current holder of the mortgage loan (called the “lender”) doesn’t strictly follow state law and act in accordance with the terms of the mortgage or deed of trust, you might be able to stop the foreclosure.

Typical Foreclosure Requirements

In most foreclosures, the servicer and lender must do some or all of the following to properly foreclose. (Although, the actual procedure will vary depending on the state and whether the foreclosure is judicial or non-judicial.)

Foreclosing Party Must Meet Pre-foreclosure Loss Mitigation Requirements
During the foreclosure crisis, several states enacted pre-foreclosure loss mitigation requirements. Typically, under these laws, the servicer or lender must:

• inform the homeowner about mediation options
• provide contact information so the homeowner can explore options to avoid foreclosure, and/or
• refer the homeowner to housing counseling agencies and legal services programs.

For example, Utah law requires the servicer to personally contact the homeowner by phone or in person 30 days before recording a notice of default (the official start to the foreclosure process in that state) to assess the homeowner’s financial situation and explore options to avoid foreclosure. If the servicer can’t reach the borrower, it has to satisfy specific attempt requirements. Federal law also has specific pre-foreclosure loss mitigation requirements. A lender’s failure to comply with pre-foreclosure loss mitigation requirements might serve as a basis for challenging the foreclosure.

Mortgages and Deeds of Trusts Often Require a Breach Letter

Mortgages and deeds of trusts often contain a clause that requires the lender to send a notice, commonly called a breach letter or demand letter, informing the borrower that the loan is in default before it can accelerate the loan and proceed with foreclosure. (The acceleration clause in the contract permits the lender to demand that the entire balance of the loan be repaid if the borrower defaults on the loan.)

The breach letter generally must specify:
• the default
• the action required to cure the default
• a date (usually not less than 30 days from the date the notice is given to the borrower) by which the default must be cured, and
• that failure to cure the default on or before the date specified in the notice may result in acceleration of the debt and sale of the property.
Because mortgages and deeds of trust are contracts, the lender must strictly comply with the terms to properly foreclose. If the lender or servicer neglects to send the breach letter and you raise this issue with the court, they might have to start the process over.

The Lender Must Follow State Procedures

Based on state law, the servicer or lender must provide appropriate and timely notice of the foreclosure. As part of the foreclosure, the lender or servicer might be required to:

• mail you a notice of default in a non-judicial foreclosure
• serve you with a copy of the complaint in a judicial foreclosure
• record certain documents in the local land records office
• serve you with a notice of foreclosure sale, and
• publish notice of the foreclosure sale in the appropriate place or manner (usually for a certain number of weeks in a newspaper in the county where the property is located).

These notices all have specific time limits and specific content requirements. For example, the notice might have to describe the property that’s being foreclosed, include the amount due, state the amount necessary to cure the default, and provide information about the person who you can contact to discuss the notice.

Regularities of Sale

When a court looks at the regularities of the foreclosure sale process, it conducts an examination to determine whether proper procedures were followed or whether there was some defect in the sale. Whether the court does this in all or most cases, or only under certain circumstances, depends on state law and foreclosure procedure.

In Utah, most foreclosures are non-judicial but the court must confirm the sale if the lender wants to pursue a deficiency judgment against the borrower. As part of the hearing to confirm the foreclosure sale, the court will routinely evaluate the regularity of the sale. At the hearing to confirm the sale, the court will review whether or not the lender followed proper foreclosure procedures by looking at things such as:

• the notices that the lender sent to the borrower
• the foreclosure sale advertisement that the lender published, and
• whether there was any fraud or other irregularities in the sale.
If the foreclosure sale was not proper, the court may order a resale of the property. If a lender doesn’t comply with all of the state-specific requirements, you might be able to force the lender to go back and re-do the foreclosure, or at least correct the defect, which can provide you with valuable time to try to work out an alternative. Major violations of the law, like if the lender failed to send you a notice of default as required by state law or a breach letter as required by the deed of trust, will probably cause the lender to have to start the foreclosure over. In this type of situation, a court will usually require a restart because, if you don’t receive proper notice, the foreclosure can come as a complete surprise. You might have little time to try to cure the default or work out a deal to avoid foreclosure. In general, courts aren’t likely to allow errors that deprive you of valuable time to resolve the problem. But if the error is minor and doesn’t cause you any harm, then it probably won’t stop the foreclosure. For example, violations such as the misspelling of a name are almost always considered inconsequential in the eyes of the court. In fact, some state statutes even specifically state that certain trivial procedural errors will not affect the foreclosure.

How to Fight the Foreclosure

If you think the lender committed a procedural error and want to fight the foreclosure, the way you go about it depends on whether the process is judicial or non-judicial.

Judicial foreclosure: In a judicial foreclosure, the lender files a lawsuit in state court. You will receive a foreclosure complaint, petition, or similar document, along with a summons. In this type of foreclosure, you will have the opportunity to raise defenses and counterclaims in an answer to the foreclosure complaint.

Non-judicial foreclosure: With a non-judicial foreclosure, the foreclosure is typically completed completely outside of the court system. There usually isn’t a court hearing or other opportunity for you to raise defenses or counterclaims so you’ll need to file your own lawsuit to bring up any procedural errors committed by the lender

Hire a Foreclosure Attorney

Lenders and servicers often make procedural errors in the foreclosure process, yet most of the time these errors go unchallenged by the homeowner. If you’re facing foreclosure and think that the lender or servicer has not complied with legal requirements, you should speak to a qualified attorney who can advise you about what to do in your circumstances.

The Foreclosure Process Step by Step

When a borrower fails to meet its loan obligations, the lender may try to foreclose on the property securing the loan. “Foreclosure” is just the series of steps a lender has to take in order to force the sale of such property and use the sale proceeds to recover its unpaid debt. This is simple enough in theory. However, except for professionals who deal with foreclosures on a regular basis, few understand the many steps involved in the process. Given the complexity, and the fact that these steps can vary from state to state, residential or commercial property, and even depending upon the terms of agreements between individual borrowers and lenders, it isn’t surprising the process may be a bit of a mystery. Nonetheless, since compliance with the foreclosure process can greatly impact the length, cost and outcome of these actions, a solid understanding of the foreclosure process is critical.

Foreclosure Rules Vary from State to State

First of all, as with most real estate laws, foreclosure rights and procedures are different in each state. These differences can be minor variations in things such as how many times a lender must publish notice of a foreclosure sale, or the number of days a borrower has to respond to a lawsuit. They can also, however, vary significantly in terms of borrower and lender rights. For example, a borrower may or may not have the right of redemption, which is the ability to recover their property following a foreclosure sale by;
• paying the sale price, interest and other costs to the winning bidder or
• If the redemption happens before the sale, by paying the lender its outstanding debt and other costs.
Since these differences can vary so much between states, let’s take quick look at the most significant differences between states before diving into the foreclosure process itself.

Procedural Requirements

Because foreclosures result in the loss of property, including people’s homes, strict compliance with procedural items, such as the method and form various notices must take, is required. Accordingly, knowing when, where and what form notices must take (as well as all other procedural requirements) is critical to a successful foreclosure. While there may be some similarities, the procedural requirements for a foreclosure can vary widely from state to state.

Time to Complete the Process

Depending on the state, foreclosures can occur as quickly as 30 days, and up to seven months (or longer). Some states grant a borrower a right of redemption, and others do not. Generally redemption is not available in non-judicial foreclosures unless the deed of trust grants the right. Even where they are given, there is a great deal of variation among the states as to the period in which a borrower must exercise or lose its right to redeem (generally between six months and a year). Further, state laws may condition the right of redemption, or modify the time period in which it can be exercised, on different factors, such as:
• Requiring the borrower to redeem the property before the foreclosure sale
• The percentage of the unpaid loan amount at the time of foreclosure judgment
• Whether the property has been abandoned
• Whether the borrower relinquished possession to the new owner (the winning bidder at the foreclosure sale) following demand
• Whether the borrower lost its source of income following foreclosure
• In what year the mortgage was granted
• Whether a lender gets a deficiency judgment
• Whether the lender was the foreclosing buyer
• The type of property (e.g., agricultural), and
• The terms of the mortgage or deed of trust

Deficiency Judgments

Where the proceeds from the foreclosure sale aren’t enough to pay the borrower’s unpaid debt, the lender may be able to obtain a deficiency judgment against the borrower for the difference. Some states permit them, and some do not. Generally such judgments are not available where a deed of trust was used. Again, however, even where a deficiency judgment is permitted, the states can differ on their application, such as the time period in which it must occur and conditions on its availability (e.g., a borrower may be able to avoid a deficiency judgment if it agrees to a sale of the property prior to foreclosure).

Default by Borrower

The foreclosure process begins when a borrower defaults on its loan, whether by failing to make timely payments or meet its other obligations under the loan documents (e.g., failing to maintain property insurance). Evidence of the default is the linchpin of a lender being able to establish it has the right to foreclose.

Notice of Default

Following default, the lender sends a notice to the borrower that includes a description of the default and the time period in which the default must be cured. For example, if the default is a failure to timely pay loan amounts, the notice will state the amount due and when it must be paid. If the default is not cured before this period expires, the lender may begin the foreclosure process. Under certain circumstances, typically for commercial properties where the loan documents permit, the notice of default may also include a demand that the borrower sends the lender all rents from the property it currently has, and those rents it collects through the foreclosure process which aren’t used for certain property expenses approved by the lender.

Foreclosure Workout

Though not an actual part of the foreclosure process, in an effort to avoid the time, cost and other negative consequences of a foreclosure, following the default notice the parties may attempt a workout, or a restructuring of the loan terms, to avoid further defaults. Common workouts include forbearance, loan modification, a repayment plan, deed in lieu of foreclosure or short sale.

Acceleration Demand

If the borrower fails to cure the default before the period stated in the notice, the lender demands an acceleration of the loan. Acceleration means the amount due is no longer the missed payments, but rather the total amount of unpaid debt. The right to demand acceleration is granted in the loan documents, and the time required between the default notice and acceleration demand varies.
Lender Files Complaint / Trustee Issues Notice of Default
The next step depends on whether or not the state is a judicial foreclosure state or a non-judicial foreclosure state. Let’s walk through both scenarios.

Judicial Foreclosure: Complaint

In a judicial foreclosure action, if the borrower is unresponsive to the demand and acceleration letter, and no workout has been negotiated, the lender will begin the foreclosure lawsuit by:
• Filing a complaint or petition for foreclosure with the courts,
• Issuing summons to the borrower and all interested parties notifying them of the suit and stating the time period in which they must contest the foreclosure, and
• Recording in the county records a lis pendens (this is done to give notice to the public, subsequent lien holders and potential purchasers of the foreclosure).

The suit is filed in the county where the property is located, and asks the court for a judgment of foreclosure, an order for sale of the property, and in some cases a deficiency judgment. The complaint will name the borrower and all other interested parties. These can include, for example, guarantors to the loan, holders of second mortgages or other liens junior to the lender’s mortgage, or the IRS if a tax lien encumbers the property. The lender must notify each defendant separately by summons according to form, method and timing under state law. The complaint sets forth the lender’s argument that it is entitled to the relief it seeks. Typically a complaint will include the mortgage, all loan documents, state the default and amount due, and identify the property. Some states require the lender to file an affidavit of fact with the complaint, which affidavit attests to the amounts due, the amount of the unpaid principal balance, unpaid interest due, late fees, attorney fees, and other costs. Further, a person with personal knowledge of the affidavit’s contents must sign it. This means that no automated signatures are permitted. In some states, where the foreclosure is on commercial property, the complaint may also include a request that the court issue an order requiring the borrower to deposit all rents from the property into the court or other depository. Generally, in order to protect the value of the property securing the loan during the pendency of the foreclosure action, the court may use these rents to pay expenses relating to the operation of the property and make payments on the loan.

Non-Judicial Foreclosure: Notice of Default

In a non-judicial foreclosure, a third party referred to as the “trustee” handles the foreclosure instead of a court. The trustee, named in the deed of trust, is a neutral third party who owes a fiduciary duty to both lender and borrower. The procedure detailed in the deed of trust and loan documents will be followed so long as they meet the minimum borrower protections afforded under state law. Generally this begins with the lender notifying the trustee of the borrower’s default and how it may be cured. The trustee then issues a notice of default by:
• Sending all interested parties notice of the proceeding, the foreclosure sale and its date
• Recording a notice of the default in the county records, and
• Publishing notice in newspapers, posting on the property, or as otherwise required in the deed of trust and state law.

Foreclosure Attorney Free Consultation

When you need legal help with State Foreclosure Compliance, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.