Insured Conventional Mortgage Foreclosure

Those creditors who do appear to present their claims are recognized and noted, and a sale of the property at a public auction by a court-appointed referee or the sheriff is ordered by means of a judgment decree. The proceeds from the sale will be used to satisfy the parties named in the judgment. In Texas the borrowers right to redeem the property continues for a reasonable time after the sale.

In a judical foreclosure, a junior lien holders interest in the property is not automatically eliminated. If the junior lien holder did not join in the foreclosure suit, the property is sold subject to the junior lien. If, however, the junior lien holder was a party to the foreclosure suit, this interest ends at the sale in the same way as the senior lien holders interest does.

Insured Conventional Mortgage Foreclosure

Under the terms of the insurance policies of most private mortgage guarantee companies (private mortgage insurance [PMI]), a default is interpreted to be nonpayment for four months. Within 10 days of default, the lender is required to notify the private mortgage insurer, who will then decide whether to instruct the lender to foreclose.

When an insured conventional mortgage is foreclosed, the lender who is insured is the original bidder at the public auction of the collateral property. Under these circumstances, the successful bidder-lender files notice with the insurance company within 60 days after the legal proceedings have transpired.

Loss Recovery

If the insurance company is confident of recovering any losses by purchasing the collateral property from the lender and then reselling it, it will reimburse the lender for the total amount of the lenders bid and receive title to the property.

If, however, the private mortgage insurance company does not foresee any possibility for recovery, it may elect to pay the lender the agreed-upon amount of insurance, and the lender retains ownership of the property. The lender then sells the property to recover any balance still unpaid.

Remember that in any and all cases of judical foreclosure and sale, any ownership rights acquired by the successful bidder at the foreclosure auction will still be subject to the statutory redemption rights of the defaulted mortgagor. A fee simple absolute title cannot vest in the bidder until these redemption rights have expired. A property title vests, or becomes valid, when you receive full ownership rights in a property. Another way to say this is that once there is a vesting of the title,your interest in the property cannot be revoked.

FHA-Insured Mortgage Foreclosure

Foreclosures on FHA (Federal Housing Administration)-insured mortgages originate with the filing of Form 2068, Notice of Default by the lender. This form must be given to the local FHA administrative office within 60 days of default. The notice describes the reasons for the mortgagors delinquency, such as death, illness, marital difficulties, income loss, excessive financial obligations, employment transfer, or military service.

In many cases involving delinquent FHA-insured mortgages, loan counselors from the local FHA office will attempt to design an agreement between the lender and the borrower for adjustments to the loan conditions in order to prevent foreclosure. The most common technique used in circumstances in which default is beyond the borrowers control, but deemed curable, is forbearance of foreclosure.

Default Not Cured

If the problems causing the default are solved within a one-year period, the lender informs the local FHA office of that fact. If not, a default status report is filed, and the lender must initiate foreclosure proceedings. If the bids at the foreclosure auction are less than the unpaid mortgage balance, the lender is expected to bid the debt, take title to the property, and present it to the FHA along with a claim for insurance, which may be paid in cash or in government securities. In some cases, with prior FHA approval, the lender may assign the defaulted mortgage directly to the FHA before the final foreclosure action in exchange for insurance benefits (we will talk about assigning in Chapter 15).

In any case, if the property can be sold easily at a price that would repay the loan in full, the lender simply would sell the property after bidding at the auction and would not apply for FHA compensation. If the FHA ends up as the owner of the property, the collateral may be sold as is.The FHA may repair or refurbish (fix up) the property if it feels the property can be resold at a higher price and minimize the losses to FHA.

VA-Guaranteed Mortgage Foreclosure

Unlike the FHA-insured mortgage, whereby a lenders entire risk is recovered from the insurance benefits, a Veterans Administration (VA) loan is similar to a privately insured loan in that a lender receives only the top portion of the outstanding loan balance, up to a statutory limit. In the event of a delinquency of more than three months on a VA loan, the lender must file proper notification with the local VA office, which may then elect to bring the loan current if it wishes.

If this occurs, the VA can come against the defaulting veteran for repayment of the funds advanced. Subrogation rights are given the lender against the mortgagor for the amount advanced. This means that the VA claim against the defaulting veteran takes priority over the rights of the lender to these funds.

Like the FHA

Much like the FHA,VA lenders are required to make every effort to help the borrower through forbearance, payment adjustments, a deed in lieu of foreclosure (more about this shortly), or other acceptable solutions. Actual foreclosure is considered only as a last resort.

In the event of a foreclosure the lender usually will be the original bidder at the auction and will submit a claim for losses to the local VA office. The VA then has the option to pay the unpaid balance, interest, and court costs, if any, and take title to the property.

Or the VA can require that the lender keep the property and will pay the lender the difference between the determined value of the property on the date of the foreclosure and the mortgage balance. The latter alternative is usually chosen when the property is badly deteriorated, reinforcing the importance for a lender to supervise the condition of the collateral property.