Foreclosure is a legal procedure in which property pledged as security is sold to satisfy the debt. The foreclosure procedure brings the rights of the parties and all junior lienholders to a conclusion. It passes title either to the person holding the mortgage document or deed of trust or to a third party who purchases the realty at a foreclosure sale. The purchaser could be the mortgagee. At the foreclosure sale, the property is sold free of the foreclosing mortgage and all junior liens.
Methods of Foreclosure
There are three general types of foreclosure proceedings non-judicial, judicial, and strict foreclosure. One, two, or all three may be available. The specific provisions and procedures for each vary from state to state.
By Illinois statute, mortgage foreclosures may be brought about only through a court proÂceeding. As a result, Illinois is classified as a judicial foreclosure state. Under the Illinois 1987 Mortgage Foreclosure Law, the term mortgage includes:
Deed in Lieu of Foreclosure
As an alternative to foreclosure, a lender may accept a deed in lieu of foreclosure from the borrower. This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit. The major disadvantage of the “deed in lieu” is that the mortgagee takes the real estate subject to all junior liens. In a foreclosure action, all junior liens are eliminated. Also, by accepting a deed in lieu of foreclosure, the lender usually loses any rights pertaining to FHA or private mortgage insurance or VA guarantees. Usually deed in lieu of foreclosure has a negative effect on the owner’s credit rating.
A short sale is the process by which a lender accepts less than the amount owed on the property. The lender agrees to accept less because the lender may lose more money by acquiring the property through a foreclosure process and then holding the property until the lender can find another buyer.
Lenders typically reserve the right to file suit to acquire the missing amount, called a deficiency. Although few lenders actually file suit to recover the missing amount, they can. Because the borrower has received the money and has not repaid it, the borrower generally owes income tax on the deficient amount (i.e., the amount forgiven in the short sale and then receiving an IRS Form 1099). Under the Mortgage Debt Relief Act of 2007, however, taxpayers are permitted to exclude from taxable income the amount of debt reduced through mortgage restructuring as well as mortgage debt forgiven through foreclosure. The act applies to debt forgiven in the years 2007 through 2012. For specific details, be sure to consult a competent accountant.
Government Assistance Programs – Foreclosures
HAMP
The goal of HAMP is to help delinquent borrowers modify the terms of their home mortgage loan to an affordable level (i.e., no more than 31 percent of the borrower’s pretax monthly income using a combination of three factors:
Modifications are only available to owner occupants of one-to four-family dwellings with loan amounts not exceeding $729,750 for a single-family dwelling (amounts increase for 2, 3, or 4 units). HAMP is a voluntary program.
HAFA
The HAFA program provides alternatives to foreclosures by encouraging lenders and delinquent borrowers to enter into a short sale or a deed-in-lieu of foreclosure.
Redemption
Most states give defaulting borrowers a chance to redeem their property through the equitable right of redemption.
Some states also allow defaulted borrowers a period in which to redeem their real estate after the sale.
There is no statutory right of redemption in Illinois. In Illinois, a mortgagor in default who wishes to exercise the equitable right of redemption to avoid loss of the mortgaged real estate may do so for a period of seven months after the date of service on the mortgagor or after first publication date, whichever is later. This time period can currently be shortened to as little as 30 days after a judgment is entered if the property has been abandoned or is vacant. When a property is redeemed in this way, the foreclosure sale does not occur. Otherwise, the foreclosure sale is held as soon as possible after the equitable right of redemption expires.
The mortgagor generally has a right to remain in possession of the property from the time of service of summons until the entry of a judgment of foreclosure. After judgment and through the 30th day after confirmation of the sale, the mortgagor can still retain possession, but he may be required to pay rent to the holder of the certificate of sale. Thirty-one days after judgment, the mortgagor must have vacated the property or be subject to eviction. The owner of the certificate of sale receives a sheriffs deed and gains the right to possession.
While Illinois does not have statutory right of redemption, it does offer a statutory right of reinstatement. This option is applicable when the defaulting mortgagor wishes to cure the default and reinstate the loan as if no acceleration had occurred. The mortgagor has the right to exercise this statutory right for a period of 90 days after service of summons or publication date. At the lender’s discretion, expressed through an attorney, the right of reinstatement may be extended to run as long as the equitable right of redemption.
The reinstatement right usually may be exercised only once every five years. After reinstatement occurs, the suit must be dismissed by the lender, and the mortgage loan remains in effect just as before. (See the Illinois Code of Civil Procedure, Article 15; 735 ILCS 51.)
When a default is not cured by redemption or reinstatement, the entry of a decree of foreclosure will lead to a judicial sale of the property, usually called a sheriff’s sale. Each defendant to the suit must be given written personal notice of the sale, and public notice of the sale must be published in a newspaper of general circulation. The successful bidder at the sale receives a certificate of sale, not a deed. Only after the sale is confirmed by the court will the certificate holder receive a sheriff’s deed.
Deficiency Judgment
The foreclosure sale may not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest. In this case, where permitted by law, the mortgagee may be entitled to a personal judgment against the borrower for the unpaid balance. Such a judgment is a deficiency judgment. However, if any money remains from the foreclosure sale after paying the debt and any other liens (such as a second mortgage or mechanic’s lien), expenses, and interest, these proceeds are paid to the borrower.
