Strict Foreclosure

As we noted on the What Is A Foreclosure? webpage there are several types of foreclosures.  We discussed a Foreclosure by Judicial Sale (also known as a Judicial Foreclosure), Strict Foreclosure, Foreclosure by Power of Sale, and Deed in Lieu of Foreclosure.  This page will be dedicated to speaking about Strict Foreclosure.  However, we want to briefly reiterate the other types of foreclosure.

Foreclosure by Judicial Sale (Judicial Foreclosure) - is the process of the bank (lender) launching the legal process to sell the borrower’s home under the supervision of the court because of the homeowner’s failure to comply with terms and conditions of the loan agreement (paying their monthly mortgage) signed by both parties upon purchase of the home. 

Foreclosure by Power of Sale (Non-Judicial Foreclosure) – Foreclosure by power of sale occurs when the borrower defaults on his/her loan and the lender, per terms of the contract, initiates the right to sell/auction the home without going through the judicial process. 

Deed in Lieu of Foreclosure- When a borrower voluntary files for foreclosure on their home.

The founding fathers of our country and other persons who helped develop the laws we follow in the United States based it upon our predecessor’s laws.  Prior to declaring our independence we were overseen and inhabitited by Britain.  As such when great Americans such as John Adams studied law they were studying British law, thus when he and others developed our founding laws there were British influences.  Strict foreclosure was one of the outcomes of these British laws on the American legal system.

The basis of a strict foreclosure is the lender owns the property until the borrower has paid the lender the amount of the note in full.  Therefore, if the borrower defaults at anytime the lender has the right to reclaim their property.  By the lender owning the property it allows them to sell the property instead of going through the procedures of a foreclosure auction.  This minimizes the time and court costs both the borrower and lender incur during a foreclosure.  Generally, for a strict foreclosure to obtain approval the equity in the property or the “value” of the property has to be less than the mortgage note.  If the borrower owes the bank $200,000 and the value of the property is only $150,000 then a court may rule a strict foreclosure is acceptable.

Once a court rules in favor of a strict foreclosure the judge will set a “law day” which allows the borrower a specified period of time to pay off the debt required by the court.  If the borrower does not pay the debt by the “law date” set by the court then lender takes over the home and the redemption of a home is unable to be made by the borrower.

It should be noted only handful of states allow a strict foreclosure.  Most states have to meet the requirements of a non-judicial foreclosure or deed in lieu of foreclosure to obtain a deed to a home and not sell it as an auction home.

When the lender obtains the rights to the home they place the property on the market to be sold.  Upon the sale of the property the lender evaluates the amount of money the lost on the sale based upon the following Scenario:

Johnny purchased a home which his primary residence in 2007 for $250,000 in the state of Maine.  Over the past two years Johnny paid down the principal of the mortgage by $25,000.  He owes the bank $225,000.  Due to hard times Johnny was laid off from his job.  He has not paid his mortgage in three months therefore he is in default.  The bank followed all the correct procedures (see below) and obtained approval for a strict foreclosure on his home.  The bank hired an independent appraiser to evaluate Johnny’s property.  The appraiser determined Johnny’s home was worth $230,000.  The lender hired an experienced local licensed real estate agent and the sold the home for $215,000. 

The above scenario suggests the lender would have lost $10,000 ($225,000-$215,000) on the sale of the home.  The lender has the ability to bring a lawsuit against the borrower for amount of money they lost on the strict foreclosure sale which is called a deficiency judgment. 

A deficiency judgment is separate court case from the strict foreclosure.  In a deficiency judgment case the borrower has the right to obtain a lawyer or on their own behalf prepare a defense on why they should not have to pay a deficiency judgment.  Note that some states allow the lender to sue for the difference between the remaining mortgage balance and sale price of the property or the difference between remaining mortgage balance and the fair market value of the property ($5,000 ($230,000-$225,000)), which every difference is greater.

As noted above only a handful of states (Vermont, Connecticut, and Maine) still accept a strict foreclosure.  For the lender to be approved for a strict foreclosure they still have to meet specific requirements.  The requirements are as follows:

  • As stated before the borrower has to be in default which means they must have not paid their mortgage for 30 to 90 days.
  • The lender must obtain approval from the courts to enforce a strict foreclosure.
  • The mortgage balance the owed on the property must be greater than the equity of the property.
  • To determine the equity/value of the property the lender (and the borrower should get an independent evaluation) must obtain an independent land appraiser.
  • Junior liens have to be subtracted from the value and equity in the property when evaluating it.
  • Time must expire on the court ordered “law day” set by the court.  The law day grants the borrower a specific amount of time to pay off the court ordered balance.  The court may grant a law date that is less than a month to a date greater than eight months.  Payment may include legal fees and court costs.
  • Once the law day has expired the lender then has to offer the lien holders the right to purchase the property and pay off any debts.  This must be done in order of their lien position.

After all these requirements are met the title of the home reverts to the lender and they may sell the home on the market.  After the sell the home they may sue the borrower for a deficiency judgment as we discussed above.

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