Foreclosure and Real Estate

A foreclosure of real estate occurs when the borrower of a mortgage loan (or similar loan designated for the purchase of residential real estate) cannot pay the loan back in the specified period of time. The inability to pay off a mortgage in the appropriate time agreed upon causes the borrower to forfeit his right to home ownership, and upon foreclosure the lender is granted the property or cash value of the property to make up for the loss of his investment. This is referred to as the lender’s “right of redemption,” meaning that he has the right to redeem the original funds he issued. Foreclosures are court-ordered and come with the official termination of the original mortgage loan.

Usually, foreclosure occurs if the lender has obtained security interest, or especially if the lender has obtained official securitization on the loan. Real estate foreclosures are generally dealt with in courts of equity, as redemption is considered an equitable right. During the process of foreclosure, which can take varying amounts of times depending on the location and value of the property, the borrower has the option to pay back the loan if possible. If he can pay back the loan prior to foreclosure, his real estate will be returned to him. If he cannot, foreclosure will take place and the real estate will be repossessed by the state or will be auctioned off. Because of the volatile nature of the real estate market, many lenders don’t make back the amount of money they originally loaned upon auctioning off the property. When this occurs, they are free to file an additional legal claim that may end up in the liquidation of the borrower’s assets to pay back the loan.

There are two major types of foreclosures carried out on residential real estate and the process generally varies by state. A foreclosure by judicial sale occurs under the supervision of a state or local court after the lender has initiated a lawsuit against the borrower. Upon auctioning or selling the property in question, the money made goes first to cover the rest of the mortgage as given by the lender, then any extra money is given to cover the lender’s cost of process (for example, court costs), and finally, if there is still money left over, that goes to the borrower. A foreclosure by power of sale is usually known as non-judicial sale and it happens privately if the mortgage in question was actually a deed of trust, like most houses in California are under. Deeds of trust are faster and less expensive to obtain to begin with, but they do not come with legal supervision. Should foreclosure take place, the entirety of profits made off of the property are granted to the lender. A third, less common, type of foreclosure is a strict foreclosure, which occurs when the current value of the property is less than the amount of money loaned. These foreclosures are seen in some northeastern states, like Vermont, New Hampshire and Connecticut.