The current economic climate has led to a dramatic increase in the number of foreclosures nationwide, which has increased the attention paid to foreclosure processes and lender practices. It seems that almost every month there’s another settlement with a lender attempting to take title to a person’s home without following the law. It’s no longer true that only foreclosure specialists and debtor/creditor rights practitioners need to know about foreclosures. Today, most general practitioners need to be familiar with foreclosure law and understand what courts are scrutinizing.
Regardless of where you practice, there are several key points you need to understand about foreclosure law. While some of these points may seem rudimentary and involve basic law school principles, they can easily be overlooked.
1. The law of the state wherein the property is located applies. Foreclosure is a creature of state statute, and thus, you must follow the laws of the particular state in which the property is located. This is true regardless of where the lender is located.
2. You should always confirm that the loan is in “default” as defined in the security instrument. We all know that a lender cannot foreclose on real property without an actual security interest in the land. Generally, this security interest can be found in a mortgage or deed of trust that has been executed to secure payment under a note. Just like any other contractual relationship, both the lender and debtor will be bound by its terms.
As an attorney you should always review the language in the mortgage or deed of trust to confirm that the borrower is actually in “default”’ as that term is defined in the contract. Believe it or not, in some cases non-payment alone may not constitute default, particularly if the security instrument requires that certain notice be given before default can occur. Without a default, there can be no foreclosure.
3. In the states that allow non-judicial foreclosure, the security instrument must include a power of sale provision. A lender may only initiate a non-judicial foreclosure action if the mortgage or deed of trust contains a power of sale provision (i.e., a clause stating that in the event of default, the lender has the right to sell the property). Although rare, there have been instances in which mortgages or deeds of trust have not included this language, and non-judicial foreclosure was not an available remedy.
4. The security instrument must include an accurate legal description. You should also review the security instrument and make sure it contains an accurate legal description. The simple rule is that a lender may only foreclose on the property in which it has a security interest. If the mortgage or deed of trust does not identify the property at all or does not include an accurate legal description, this defect will, in many cases, be fatal to the foreclosure. Some states will allow a lender to reform the mortgage or deed of trust to include an accurate legal description. However, reformation takes time and costs additional money, and in the end there’s no guarantee that the court will allow it.
5. The foreclosing entity must be the holder of the note. Whoever has physical possession of the note is considered the holder. Today’s courts are intently focused on whether a foreclosing entity can prove that it’s the holder. Often the foreclosing entity is not the original lender but has purchased the note through securitization. In many cases, the new institution cannot produce the original note, and in others it cannot produce an endorsement or assignment that effectively transferred the rights of the original lender. Because courts are paying more attention than ever to this issue, absent proof that the foreclosing entity is the holder, it will almost be impossible to foreclose.
Young lawyers interested in learning more about foreclosure law in their particular state should contact their state and local bar associations to learn about upcoming continuing legal education courses.