Foreclosure is when a real estate lender, whether an institutional real estate lender or a private real estate lender, takes the title to a property away from the borrower in lieu of receiving mortgage payments. Stated more formally, when all else has failed, a real estate lender will pursue allowed legal prerogatives to recover the collateral for the real estate loan in order to sell it and recoup their loan proceeds.

The definition of foreclosure is to shut out, exclude, bar, or deprive a person of the right to redeem a mortgage. Foreclosure is not only a process to recover a lenders collateral but also a procedure whereby a borrowers rights of redemption are eliminated and all interests in the subject property are removed.

Power of Sale Foreclosure

A power of sale foreclosure is based on the terms of the deed of trust or the mortgage contract, giving the lender, or the trustee, the right to sell the collateral property without being required to spend the time and money involved in a court foreclosure suit.

Texas

In Texas, for example, these nonjudical, power of sale foreclosures are more common than judical foreclosures (lawsuits in court). The right to exercise the power of sale must be created in writing and is usually part of the deed of trust, which must clearly state that there is a right of non-judical foreclosure.The power of sale foreclosure is popular in Texas because it allows the trustee to sell the property more quickly and thus recover the lenders collateral in a timely manner.

In Texas the trustee named in the deed of trust has the power to sell the defaulted mortgaged property upon the request of the real estate lender or beneficiary of the trust deed. The trustee must then carefully follow the terms and conditions stated in the deed of trust for the foreclosure. The foreclosure sale must also follow the legal procedures of the state of Texas.

Texas Property Code

The Texas Property Code contains the following procedures for nonjudi-cal foreclosure. You can check what your state procedures are by contacting a real estate attorney or your local title insurance company.

1. The trustee must notify the debtor of the foreclosure sale at least 21 days before the date of the sale. This notice is to be sent by certified mail to the debtors last known address.

2. Notice must be posted at the courthouse door of the county in which the property is located and filed in the county clerks office where the sale is to be held.

3. The sale must be a public auction held between 10:00 a.m. and 4:00 p.m. on the first Tuesday of the month.

4. The sale must take place in the county where the property is located.

5. The holder of the debt on residential property must give the debtor at least 20 days to cure the default before the entire debt can be accelerated and declared due and the notice of sale given.

At the Foreclosure Sale

At the foreclosure sale, the trustee has an obligation to act impartially and can take no action that would discourage bidders. This is to be a public auction open to all persons, including the lender and the trustee.

There is no requirement in Texas that the auction generate fair-market value; therefore, the property will go to the highest cash bidder. The purchaser of the foreclosed property takes the title without any covenants through an instrument called a trustees deed.

The proceeds from the sale will be used to pay the trustee and any expenses of the trustees sale.Then the lender who is foreclosing will be paid. If there is money still left, those creditors who had filed liens against the property will be paid. Finally, any surplus monies must be returned to the borrower/debtor.

In Texas, as in every other state, if a senior lien holder forecloses, all junior lien holders interests terminate. If a junior lien forecloses, they get the title to the property subject to the senior lien holders interest in the property.

Judical Foreclosure and Sale

Judical foreclosure and sale is a legal procedure that involves the use of the courts and the consequent sale of the collateral. Foreclosure by court order is an alternative method that may be used in Texas and other states, although it is not favored by commercial lenders. It is the only remedy if a deed of trust does not contain a power of sale provision.

How It Works

The delinquent mortgagors are notified of the default and the reasons for it. They are also informed that an immediate solution is required and that all their efforts must be expended to solve the problem as quickly as possible.

However, if all attempts fail, a complaint is filed by the lender in the court for the county in which the property is located, and a summons is issued to the borrowers. This initiates the foreclosure process.

Simultaneous to this activity, a title search is made to determine the identities of all the parties having an interest in the collateral property, and a lis pendens (literally, a legal action pending) is filed with the court, giving notice to the world of the pending foreclosure action.

Notice is sent to all parties having an interest in the property, requesting that they appear in court in order to defend their interests, or else they will be foreclosed (the literal definition we mentioned earlier) from any future rights by judgment of the court. It is vitally important for the complainant lender to notify all junior lien holders of the foreclosure action so they will not be enjoined from participation in the property auction. If junior lien holders are not given proper notice, they acquire the right to file suit on their own at some future time.

Jurisdiction

Depending on the number of days required by the presiding jurisdiction for public notice to be given to inform any and all persons having an unrecorded interest in the subject property that a foreclosure suit is imminent, and depending on the availability of a court date, the complaint is eventually aired before a presiding judge. In most instances, the defendant borrower does not appear in court unless special circumstances are presented in defense of the default.