Most people understand the basic construction of a home loan: they receive a loan from a lender and sign a “promissory note,” which is a promise to pay the lender for the principal of the loan along with interest. This promissory note is “secured” by a “deed of trust” (in Missouri) or a “mortgage” (in Illinois and most other states). The deed of trust or mortgage incorporates the terms of the promissory note and sets forth additional requirements of the borrower. Upon a borrower’s breach of the promissory note or the deed of trust or mortgage, and subject to any cure periods allowed in the loan documents, the Borrower goes into default and the lender can begin foreclosure proceedings.
The most common default is the borrower’s failure to make loan payments due under the terms of the promissory note. Other common defaults include:
- Failure to obtain or provide proof of insurance;
- Failure to pay property taxes;
- Transferring the property without the consent of the lender;
- Failure to maintain the property;
- Failure to comply with all local laws pertaining to the property; and
- Subjecting the property to additional liens or encumbrances.
Once a default occurs, the homeowner has a fairly short period of time (typically 30 days) to cure the default, whereupon the lender may initiate a foreclosure.
The Foreclosure Process
Missouri has two types of foreclosures — judicial and non-judicial — but as a practical matter, almost all Missouri foreclosures are non-judicial, which means that the foreclosure sale occurs without court process. In general, once a default occurs and any cure period has expired, the “trustee” of the deed of trust must publish and send notice of the foreclosure sale to the homeowner/borrower. The sale occurs at a public auction generally held at the courthouse in the county where the property is located and is sold to the highest bidder for cash. As a practical matter, the purchaser at the sale is usually the lender, although speculators or other private individuals may also choose to bid on the property. Once the property is sold, the buyer receives a trustee’s deed and will typically initiate an unlawful detainer action in the local court to remove the homeowner or other possessor (tenant) of the property and take possession. The entire process can take as little as three months, although six months or more is not uncommon.
Illinois foreclosures are judicial foreclosures which means that they are effective only through court and, generally speaking, are stricter in their procedural requirements. In general, this means that the lender must file a suit, serve the homeowner/borrower, and must either obtain a default (if the homeowner does not appear in court) or, assuming the homeowner disputes the lender’s right to foreclose, prove in court that it is entitled to the foreclosure. Once the court enters a judgment of foreclosure, notice is served, and the sale is conducted. The sale must then be confirmed by the court before the foreclosure becomes finalized, and the purchaser of the property at the foreclosure sale can begin eviction proceedings.
Homeowner Options
Once the homeowner is in default, the homeowner/borrower only has a few options to save his or her home or other real property.
A. Redemption:
There are two basic types of redemption: statutory and equitable. Under Missouri’s statutory redemption procedure, a homeowner may redeem the property from foreclosure by following a detailed process, which includes providing the trustee a notice of redemption within ten days before the advertised date of the sale, and posting a bond with the court (and which must be subsequently approved by the court) within 20 days after the sale. The homeowner must then pay the full amount of the loan, plus interest and fees within one year of the date of sale. For homeowners having trouble making payments, this is seldom a practical option to save their home, but they may be able to use the process to sell their home and avoid a deficiency judgment, as discussed below.
Missouri also recognizes equitable redemption, which is a remedy courts may impose if the lender engaged in fraudulent conduct or conducted the sale improperly.
Illinois has a similar redemption scheme wherein the homeowner can pay the full amount of the loan within the latter of seven months from the date the court gains jurisdiction over the debtor or three months after the entry of the judgment of foreclosure (though this redemption period may be shortened for a variety of reasons). As a practical matter, the same difficulties in redemption apply in Illinois as in Missouri; however, this redemption period (which Missouri does not have) does typically extend the foreclosure process in Illinois by a few additional months.
B. Reinstatements:
The best way to avoid foreclosure if you are recently in default is to cure the default. In most cases this will be a payment of the full amount past due, plus interest and fees in accordance with the loan documents. If you are unable to pay the full amount past due, and heading further into debt, you should contact your lender and attempt to work out a loan modification. It is imperative that you do this as soon as possible, and in Missouri, it absolutely must be done before the foreclosure sale. Illinois, by contrast, recognizes a specific 90-day right of reinstatement, wherein a defaulting debtor may bring a defaulted loan current, even if a judgment of foreclosure has been entered. Many lenders are willing to work out loan modifications if you can establish your ability to pay a modified loan. Lenders typically lose money in the foreclosure process, and so they would rather you make payments on a modified loan than become owner of your house or other real property.
C. Workouts:
As a result of the recent subprime mortgage meltdown, several government programs have been instituted to encourage workouts.
Hope for Homeowners was initiated in 2008 and will run until 2011. In that program, lenders and homeowners voluntarily agree to refinance by converting into a new, federally insured, 30-year fixed mortgage. Thus far, however, lenders have not been willing to agree to the program, and few applications have been filed.
The Making Home Affordable Program, by contrast, has had some success. Although this is also a voluntary program, homeowners who are current on their payments can refinance their Fannie Mae or Freddie Mac loans into newer loans with a lower interest rate. Other homeowners who are struggling and meet certain financial requirements may receive loan modifications. The federal government provides certain incentives to encourage lenders to cooperate in the program.
Bankruptcy and mortgage cram-downs. Bankruptcy’s clearest benefit in a foreclosure process is its automatic stay, which prohibits a lender from proceeding in a foreclosure action or sale without permission of the bankruptcy court, which typically delays a foreclosure by a few months. However, more recently in the news, Congress has been debating a “mortgage cram-down” bill, which, if passed, will allow bankruptcy judges discretion to rewrite the terms of your debt, including both principal and interest. Naturally, this bill and other government programs continue to evolve as the government acts to address the mortgage crisis and stabilize housing.
In addition to these federal programs and laws, depending on your area, state and local services may also be available to provide counseling or other services.
D. Deed in Lieu of Foreclosure and Short Sales:
If you know you cannot keep up your mortgage payments, even with a workout or loan modification, you may want to consider a deed in lieu of foreclosure or a short sale. Both deeds in lieu and short sales may be less damaging to your credit than a foreclosure sale. Additionally, both Illinois and Missouri allow the lender to sue a defaulting homeowner for a “deficiency,” which is the difference between the balance of the loan (plus interest and fees) and the sale price at the foreclosure sale. If you negotiate a deed in lieu or a short sale with your lender, you should make sure that the lender agrees to release you from any deficiency.
In a deed in lieu of foreclosure situation, a lender accepts a deed from you instead of going through a trustee’s (or a foreclosure) sale. This saves the lender the expense of the sale, but it does not clear off junior liens and encumbrances. In general, lenders want to avoid taking ownership of the property except as a last resort.
Lenders oftentimes prefer short sales, wherein a defaulting homeowner finds a buyer for the property. The lender consents to a buyer purchasing the property for less than the balance of the loan; however, the defaulting homeowner/borrower should confirm that they will be released from any deficiency liability. Lenders oftentimes prefer this route since it may minimize their loss, and they can avoid taking direct ownership of the property (which requires them to sell it themselves, thereby incurring additional costs).
One clear limitation to deeds in lieu and short sales is that the lenders must voluntarily agree to the terms. Additionally, if you have more than one mortgage on your property from different lenders, short sales and deeds in lieu become much more difficult or impossible to work out since each lender has competing interests and, typically, each lender must agree to the arrangement.
E. Other Defenses:
Once the property has been sold in a foreclosure sale, the homeowner/borrower’s options become much narrower. As discussed above, the homeowner can seek equitable redemption by bringing a lawsuit if the lender committed fraud, failed to comply with the loan documents or conducted the sale improperly. However, the cost of such a suit may be more than the borrower can afford, as proving a fraud case is generally very difficult.
Another defense that has had success in some states is arguing that the lender does not have “standing” to bring the foreclosure action. In short, this means that only parties that have proved an interest in the mortgage and the loan may foreclose on the mortgage. This seems to be an obvious point, but given the development of securitized mortgages, this may prove to be a stumbling block for many lenders.
In a typical securitized mortgage arrangement, the homeowner takes out a loan from a local bank or a local branch of a national bank. This bank then sells the loan to another entity, usually a trustee of a trust, which holds the loan. The trust bundles the loans together and sells them as securities to investors. The trustee of the trust (who is a different party than the trustee of the deed of trust—this is getting complicated!) oversees the trust and contracts a loan servicer to collect payments and otherwise manage the loan. The loan servicer is the party who actually collects your payments, engages in workouts, and oftentimes, will initiate the foreclosure sale. With so many different parties, it is confusing and difficult to determine who owns what rights in the loan and who has the right to initiate a foreclosure sale, and lenders may have difficulty gathering the documents together to prove their interest in the loan.
Although this argument has had success in some state courts, it is unclear to what extent Illinois and Missouri (particularly with Missouri’s non-judicial foreclosures) courts will permit this argument as a defense to a foreclosure. At best, it seems apparent that this tactic will only delay the foreclosure until the lender can obtain the necessary paperwork to prove its interest.
Conclusion
When you find yourself in default under your loan with your bank, time is of the essence, and you must act quickly to protect your rights and your home or other real property