The process of law by which a mortgagee or anyone having interest in a MORTGAGE (such as a mortgage bondholder), when the conditions of the mortgage have been violated, may compel the mortgagor to redeem the pledge or to forfeit his right of redemption. It is a privilege given to the mortgagee upon default in the payment of interest or principal of a mortgage to enforce payment of the debt by terminating the right to redeem the property which it secures. In a few states the property covering the mortgage may be sold under a power contained in the mortgage itself, but in most states the mortgagee must apply to equity courts to foreclose and to sell the pledged property at public auction to pay off the debt. The proceeds of sale or mortgaged property are applied first to the indebtedness secured by the mortgage and the foreclosure expenses, and the balances is paid to the mortgagor.
Strict foreclosure involves the lender's petitioning the court of equity to terminate the mortgagor's right of redemption; if the petition is granted, the mortgagor forfeits all interest in the property to the mortgagee after a period of time granted by the court to the mortgagor in which to pay the debt. There is no judicial foreclosure sale of the property.
Judicial foreclosure, found in most states, involves the lender's petitioning the court of equity to foreclose (cut off) the mortgagor's right of redemption and to sell the pledged property at public foreclosure sale.
It is not always possible in a foreclosure sale to realize a sufficient sum to satisfy the mortgagee in full. In this event the mortgagee generally has a claim against the mortgagor for the deficiency based on the latter's personal liability on the bond (promissory note). Such deficiency judgments have been eliminated in a few states.
Other foreclosure processes include (1) by advertisement, (2) by entry and possession, and (3) by writ of entry. When the foreclosure is by advertisement, the mortgagee -notifies the mortgagor of default and advertises that the property will be sold at public auction. The purchaser at the auction receives an ownership certificate instead of legal possession of the property. The purchaser then brings an action for ejectment which dispossesses a defaulted borrower from the premises after a court hearing. When the foreclosure is by entry and possession (Maine, Massachusetts, New Hampshire, and Rhode Island), the mortgagee petitions the court for the right to take physical possession of the pledged collateral on a defaulted loan. The entry must be peacable, made before witnesses, and attested to by filling a certificate with the court. The mortgagee obtains ful legal ownership after a period of time during which the mortgagor may redeem the property by repaying the mortgage lien plus costs. In a foreclosure by writ of entry (Maine, Massachusetts, and New Hampshire), a mortgagee begins a court action to obtain a writ of entry. If the debt is not paid within the time allowed in the writ, the mortgagee receives full legal title to the property.
Obtaining mortgage insurance at the time a mortgage loan is originated is routine for most banks when making high loan-to-value ratio mortgage loans. Before a residential insured loan risk turns into a loss covered by mortgage insurance, the borrower must default in the periodic payments; the borrower surrenders title to the property securing the mortgage through foreclosure or by deed in lieu of foreclosure; and the value of the property, or the proceeds realized from the foreclosure sale, must be insufficient to offset fully the lender's investment in the property. Once these conditions are met, a valid claim can be submitted to the mortgage insurance company.
OXENHAM, L. The Modern Mortgage Banking Guide, 1988.
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