After successfully completing this topic, you will be able to
• explain the foreclosure process and distinguish between judicial and nonjudicial foreclosure, and
• describe the mortgagor’s and mortgagee’s rights in a foreclosure.
A borrower who signs a mortgage document guarantees to make payments on time, to pay property taxes and insurance, and to keep the property in good repair. If the borrower fails to keep these promises, the borrower in default. The lender has several options to enforce the mortgage covenants. The lender may accelerate the loan, meaning that the entire balance becomes immediately due and payable. Then the lender may foreclose the property. The first step in the foreclosure process is for the lender to file a lis pendens.
A lis pendens gives notice that there is a pending legal action against the property. It is recorded in the public records and shows the names of the parties, the legal description of the property, and a short description of the type of action that will be filed. The lis pendens is a warning to prospective buyers or lenders that the property is the subject of a lawsuit.
The borrower has equity of redemption rights. This allows the borrower to pay the total balance due to the lender, thereby stopping the foreclosure sale and getting a satisfaction of mortgage.
Florida has one of the longest foreclosure timelines in the United States. In 2020, the average foreclosure took about 200 days. A judicial foreclosure means that the lender must file a lawsuit in court, having it served to the borrower. The borrower has 20 days to file an answer. Failing that, the lender may get a default judgment from the court; the borrower loses the case.
When there is a mortgage default, the mortgagee may
• sue on the note, or
• sue for foreclosure of the mortgage.
The lender might sue on the note when the property value is much lower than the mortgage amount, but the borrower has other assets. Suing on the note is much quicker than foreclosing on the mortgage. The lender would then have a judgment lien that could be levied against other real or personal property owned by the borrower. This would also be done by the holder of a second mortgage who knew the proceeds of the foreclosure sale would be insufficient to pay off the loan. More commonly, a lender will sue for foreclosure.
The clerk of the court auctions the property to the highest bidder after a period of advertising the sale. The proceeds from the sale first pay delinquent property taxes, government expenses of the sale, then the mortgage debt. If there are junior mortgages, any excess is paid first to those mortgages and the balance, if any, to the borrower. If there are no successful bidders at the foreclosure auction, the property may revert to the lender and become REO (real estate owned).
If the proceeds from the sale do not pay all the debt, the lender may request a deficiency judgment from the court. The judgment helps the lender collect by selling other real or personal property owned by the borrower. Florida allows lenders to obtain a deficiency judgment from a foreclosure sale, a short sale, or a deed in lieu of foreclosure. The lender has one year to request a deficiency judgment from the court.
A foreclosure judgment eliminates the borrower’s rights and all liens against the property that are lower in priority than the mortgage. Those mortgagees would get any excess funds after the first mortgage is paid off. The mortgagees who are not paid may sue on the note for the unpaid balance of the loan. All parties who may lose their rights from the foreclosure must be named in the lawsuit or their claims are not extinguished.
After the foreclosure sale, the buyer gets a certificate of title from the clerk. Title passes to the buyer. There are no warranties given to the buyer, so the buyer should have a title search made by an abstractor or a title insurance company.
Sometimes a default can be settled without a foreclosure action when the borrower gives the lender a deed to the property subject to existing liens. Because it does not go through the courts, it is called a nonjudicial foreclosure. The lender will get a title insurance policy to be certain that there are no liens or judgments against the property, since they would move into first place when the lender accepted the deed and satisfied the mortgage.
Sometimes during recessions or when local market conditions deteriorate, the value of a property declines so that the property becomes worth less that the amount owed on the mortgage. When an offer comes in for a house at the distressed market value, sometimes the lender may agree to accept the proceeds, which may not pay off the debt. The lender would release the mortgage to allow the property to be sold.