26. Foreclosure (DFA)

Question 1

What is the procedure for foreclosure?

Answer 1

1) Foreclosure sale
- Judicial (all states)
- Non-judicial (some states) (under power of sale)

2) Auction (generally)
- Lender can bid

3) Property is sold to highest bidder

4) Proceeds are used to satisfy the mortgage (in whole/part)
- Debtor’s interest in the property is terminated

Question 2

What is the order of priority in distributing proceeds of sale?

Answer 2

1) Expenses
- Foreclosure
- Attorney
- Court

2) Principal + Interest (accrued) on foreclosed loan

3) Junior interests included in foreclosure action (necessary parties) => Wiped out by foreclosure
- NOT senior interests (Buyer is subject to senior interest; Senior interest can foreclose later; Buyer should pay off Senior asap)
- NOT junior interests NOT included in foreclosure action (preserved)

4) Debtor (NOT Buyer)
- Debtor receives any surplus
- Junior has priority over Debtor => Debtor pays any deficiency to Junior

Question 3

How is priority of interests determined?

Answer 3

1) Senior
- Interest on land BEFORE foreclosed interest was placed on land

2) Buyer
- Buyer takes title as when foreclosed interest was placed on land

3) Junior
- Interest on land AFTER foreclosed interest was placed on land

Question 4

What type of interests can be wiped out by foreclosure?

Answer 4

Easements

Liens

Leases

Mortgages

Question 5

How can junior interests avoid being wiped out by foreclosure?

Answer 5

Pay off Senior interest in default BEFORE foreclosure => Redeem land

Question 6

How may priority of interests be modified?

Answer 6

(NO additional requirements)

Recording Acts
- Failure to record

Subordination agreement
- Senior subordinates priority to Junior

Purchase money mortgage (PMM)

• Lender gives loan to purchase house (title transferred to Debtor)
• PMM < Mortgage/Lien AFTER Debtor obtained title
• PMM > Mortgage/Lien/Claim BEFORE Debtor obtained title
• PMM > PMM (whoever signed first)
• PMM > TP

Equitable subrogation (Junior loan used to pay off existing Senior loan)

• Junior takes over Senior loan > Other existing Senior
• UNLESS NOT fair

(ADDITIONAL requirements)

Modification of Senior AND Impair Junior’s rights
- Junior > Senior

Option future advance made by Senior (after Junior’s loan) AND Junior has notice
- Junior > Senior

Question 7

What is required for Debtor to redeem by statute?

Answer 7

1) Pay foreclosure price (NOT debt amount)
2) AFTER foreclosure (usually 6 months - 1 year)

(ONLY recognised in half states)

Question 8

What is the difference between statutory and equity redemption?

Answer 8

Equity redemption
- Redeem BEFORE foreclosure

Statutory redemption
- Redeem AFTER foreclosure

Question 9

What options are available for Buyer defaulting in instalment land contracts?

Answer 9

NO foreclosure

• Equity of redemption: Buyer can pay full balance during grace period before foreclosure
• Restitution: Buyer can forfeit + Seller can refund amounts to Buyer that exceed Seller’s damages

Foreclosure
- Treat contract as mortgage

Question 10

How may deficiency judgments be calculated?

Answer 10

Difference between;

• Loan value
• Foreclosure price/Upset price (minimum foreclosure price required)