A Description of the Foreclosure Process along with
Comments on Wrongful Foreclosure Suits and Post-Foreclosure Eviction
DAVID J. WILLIS ATTORNEY
Copyright © 2011. All rights reserved worldwide.
Foreclosure is the procedure by which a lender obtains both possession of and title to real property or, if the bidding is sufficiently high, liquidates its interest in the property entirely by means of a sale to a third party. The remedy of foreclosure is available to lenders if the borrower defaults. Defaults may be monetary (non-payment) or technical (e.g., failure to pay taxes or keep the property insured). In order to determine if there has been a “default,” the loan documents – the note, the deed of trust, the loan agreement, and so forth – must be carefully examined. Specified notice and opportunity to cure requirements contained in these documents must be strictly followed if the foreclosure is to be valid.
Foreclosures may be judicial (i.e., ordered by a court following a judgment in a lawsuit) or non-judicial (done without court involvement by auction “on the courthouse steps”). Most foreclosures are non-judicial. These are governed by Sec. 51.002 et seq. of the Texas Property Code and are held on the first Tuesday of each month between the hours of 10:00 a.m. and 4:00 p.m. at the courthouse of the county in which the property is located. The effect of the foreclosure is to cut off and eliminate all junior liens, including mechanic’s liens, but not tax obligations. The objective is to satisfy the debt and cut off all competing claims to or against the property.
Required Notices to the Borrower
Notices must be given in accordance with the deed of trust. The content of foreclosure notices is technical and must be correct to insure a valid foreclosure that cannot later be attacked by a wrongful foreclosure suit. Client’s often protest when the lawyer advises re-noticing the debtor – “But I’ve already sent them an email telling them they are in default.” Not good enough.
Usually, two certified mail notices to the borrower are required, the first being a “Notice of Default and Intent to Accelerate” which gives formal notice of the default and affords an opportunity for the borrower to cure it (at least 20 days for a homestead, although if the deed of trust is on the FNMA form, 30 days notice of default must be given). Note that SB 766 and SB 472, which did not make it out of committee in the 81st Legislature, would have extended the 20 day period. It is likely this legislation will be revived in the 2011 legislature.
After the cure period has passed, a second letter known as a “Notice of Acceleration and Posting for Foreclosure” must be sent at least 21 days prior to the foreclosure date. “Acceleration” is defined as the declaration by the lender that the entire amount of an installment debt is now fully due and payable.
The second letter must also specify the location of the sale and a three-hour period during which the sale will take place. A notice of foreclosure sale should be enclosed. This notice is also filed with the county clerk and physically posted at the courthouse location that is specified for this purpose by Commissioners Court. If there is going to be a change in trustees it is also necessary to file a written appointment of substitute trustee.
Notices are addressed to the last known address of the borrower contained in the lender’s records (this is the legal requirement), but it is wise for the lender to double-check this to avoid later claims by the borrower that notice was defective. It is prudent to send the notices by both first class and certified mail to all likely addresses where the borrower may be found.
Note that other lienholders (whether junior or senior) are not entitled to notice. Depending on the first lienholder’s strategy, however, it may be useful to discuss the issue with them.
If the borrower is able to cure the default, a reinstatement agreement should be executed, unless the terms of the debt have been changed (e.g., payments have been lowered) in which case a modification agreement is appropriate.
Notice to the IRS
The best practice is to do a title search prior to foreclosure in order to determine if there is an IRS tax lien or other federal lien. If so, notice must be given to the IRS and/or the U.S. Attorney at least 25 days prior to the sale, not including the sale date (26 U.S.C. Sec. 7425(c)1). If this is not done, any IRS tax lien on the property will not be extinguished by the sale. Note that the IRS also has 120 days following the sale to redeem the property. The successful bidder on an IRS-liened property is therefore not entitled to breathe a sigh of relief until the 121st day.
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (15 U.S.C. 1601 et seq.) requires that a borrower be given 30 days to request and obtain verification of the debt. The lender may give notice of default, accelerate the debt, and even post the property for foreclosure in less time, but the foreclosure sale itself should not be conducted until the 30-day debt verification period has expired.
There is also an equivalent state statute (the “Texas Debt Collection Practices Act”) contained in Texas Finance Code Chapter 392. Failure to provide verification of the debt when the borrower has requested it in writing has serious penalties under both laws.
Due Diligence by the Lender
As noted above, the lender should consider doing a title search to ascertain if there is an IRS lien. Stewart Title Services and other title companies do these searches or “down dates” for a modest fee.
In order to determine a fair bid price for the property, the lender may also wish to order a broker’s price opinion (BPO).
The lender should check the military status of the borrower, since Sec. 51.015 of the Property Code prohibits non-judicial foreclosure of a dwelling owned by active duty military personnel or within nine months after active duty ends. Knowingly violating this law is a Class A misdemeanor.
Foreclosures can be rendered void by last-minute bankruptcy filings. Some professional investors will check with the bankruptcy clerk’s office the morning of the sale to make sure that the borrower has not filed under any chapter of the U.S. Bankruptcy Code before bidding on the property. Note that the clerk’s office opens at 9:00 a.m. and bidding begins no earlier than 10:00 a.m. This is especially wise if the borrower has previously filed or threatened bankruptcy. It can be cumbersome and inconvenient to get money back from a trustee on a void sale.
Buyers at foreclosure should also do due diligence in order to determine if there are superior liens or tax indebtedness that will not be extinguished by the sale. It is also prudent to do a last-minute bankruptcy check, since it is not uncommon for borrowers to file bankruptcy on the morning of the sale.
Conduct of Sale
Foreclosure sales in the larger counties can seem chaotic, with more than one sale going at once. There are two general types of sales: sales by trustees for individual and institutional lenders; and sales by the county sheriff for unpaid taxes. Sales are held at the location designated by the commissioners of the county where the property is located – usually the courthouse steps.
The sale is conducted by the person named as trustee in the deed of trust, unless a substitute trustee has been duly appointed and notice of this appointment has been filed of record. As a practical matter, the foreclosing trustee is usually the attorney for the lender. There is no standard or required script for a trustee to follow in auctioning property; however, the trustee has a duty to conduct the sale fairly and impartially and to not discourage bidding in any way (this can result in “chilled bidding,” which is a defect). A trustee may set reasonable conditions for conducting the foreclosure sale and may set the terms of payment (e.g., by cash or cashiers check). However, these conditions and terms must be stated prior to the opening of bidding for the first sale of the day held by that trustee.
Bidding at the Sale
The lender often bids the amount of the debt plus accrued fees and costs. Lenders often acquire the property in this way. If the sale generates proceeds in excess of the debt, the trustee must distribute the excess funds to other lienholders in order of seniority and the remaining balance, if any, to the borrower.
If the successful bidder is a third party, payment must be made “without delay” or within a mutually agreed-upon time. In order to be prepared, seasoned bidders often carry with them some cash plus an assortment of cashiers checks in different amounts made payable to “Trustee.” If the high bidder is for any reason unable to complete the purchase, then the trustee will re-open the bidding and auction the property again. The successful bidder will, within a reasonable time, receive a trustee’s deed or substitute trustee’s deed which conveys the interest that was held by the borrower in the property – no more, no less.
Prop. Code 51.009 states that a buyer at a foreclosure sale “acquires the foreclosed property ‘as is’ without any expressed or implied warranties, except as to warranties of title, and at the purchaser’s own risk; and is not a consumer.”
The effect of the foreclosure process is to scrub the title clean of all junior liens except those for unpaid taxes.
Compared to other states, Texas is fortunate to have a streamlined non-judicial foreclosure process that is nearly as quick as an eviction. The minimum amount of time from the first notice to the day of foreclosure is 41 days, unless the deed of trust is a FNMA form, in which case the time is 51 days – although it is never wise to cut these deadlines that close. Why risk a void sale or give the borrower a possible wrongful foreclosure claim?
The advantage of a foreclosure over an eviction is that there are no effective defenses to the foreclosure process except for the borrower to block it with a temporary restraining order or file bankruptcy. For either option, the buyer needs money and an attorney.
In the unlikely event that the proceeds of the foreclosure sale exceed the amount due (including attorney’s fees and expenses), then surplus funds must be distributed to junior lienholders and the balance, if any, to the borrower.
More often, however, the price at which the property is sold is less than the unpaid balance on the loan, resulting in a deficiency. A suit may be brought by the lender to recover this deficiency any time within 2 years of the date of foreclosure (Prop. Code Sec. 51.003). Federally insured lenders have 4 years. As part of a defense to a deficiency suit, the borrower may challenge the foreclosure sales price if it is below fair market value, and receive appropriate credit if it is not. Any money received by a lender from PMI (private mortgage insurance) is credited to the account of the borrower. One case states that the purpose of this “is to prevent mortgagees from recovering more than their due.”
For borrowers, deficiencies can be as significant a loss as the foreclosure itself since the IRS deems the deficiency amount to be taxable ordinary income. A deed in lieu of foreclosure can eliminate this unpleasant result. See our article Deeding Property to the Lender in Anticipation of Foreclosure.
Wrongful Foreclosure Suits
A suit for “wrongful foreclosure” can be filed if there are grounds for alleging that the loan documents (e.g., the note and deed of trust) were defective in some way; if the notices leading up to the foreclosure were defective; or if there was some impropriety in the sale itself. Note that there is no requirement that the sales price be fair. A sale cannot be set aside because the consideration paid is allegedly inadequate because it is less than market value (Sauceda v. GMAC Mortg. Corp., 268 S.W.3d 135, 139 [Tex. App. – Corpus Christi 2008, no pet.]). To prevail in a suit based on inadequate sale price, three elements must be proven: (1) grossly inadequate consideration; (2) defective foreclosure notices or sale; and (3) a causal connection between the defect and the inadequate consideration. The bottom line is that if the notices and sale were correctly done, then the sale will be valid even though the sales price was lower than market value.
As a general rule, it is far better for a borrower to obtain a restraining order to stop a foreclosure than it is to bring a wrongful foreclosure suit after the fact. Texas law favors the finality of foreclosures, making wrongful foreclosure suits an uphill battle. Note also that if the property was sold to a third party who has no knowledge of any claims or alleged defects there is little chance that the borrower will get the property back. The third party is a protected bona fide purchaser. The borrower’s remedy will therefore likely be limited to monetary damages.
If a wrongful foreclosure suit is being considered, it should be filed quickly so that notice of the suit (called a “notice of lis pendens”) can be filed in the real property records. If the lender was the successful bidder, this notice may effectively prevent the lender from transferring the property to a bona fide purchaser. Again, once that transfer to a BFP takes place, it is unlikely that the borrower will ever recover the property.
A related but different court action is available under Prop. Code Sec. 51.004 which provides that a borrower “may bring an action in the district court in the county in which the real property is located for a determination of the fair market value of the real property as of the date of the foreclosure sale.” If the court finds that the fair market value is greater than the sale price, then the borrower is entitled to an offset against any deficiency claimed by the lender.
For more information, see our companion article Wrongful Foreclosure Suits in Texas.
Protecting Tenants at Foreclosure Act of 2009
This important legislation modifies the usual eviction process for tenants who remain in possession following a foreclosure sale. If the tenant has a lease, then the tenant may stay until the expiration of 90 days after the sale or until the lease expires, whichever is longer. If the tenant does not have a lease (i.e., is residing in the property month to month) or has a lease that is terminable at will, then the Act permits the tenant to remain in the property for up to 90 days, after which time the tenant may be evicted in the customary manner. Section 8 tenants may have additional rights.
Tenants with a lease should be prepared to show this document to the lender’s foreclosure attorneys or, if an eviction has been filed, to the Justice of the Peace in order to confirm their right to stay in the property.
After the extension of time provided by the Act expires, or for mere “occupants,” the usual eviction procedure applies: the new owner must give a 3 day notice to vacate, file a “forcible detainer” petition in justice court, get it served, get it heard by the Justice of the Peace, and then wait 5 days for a final judgment and a writ of possession. The owner must then wait until the constable posts a 48 hour notice on the door and then forcibly remove a borrower who is otherwise unwilling to leave. Elapsed time? Three to four weeks, unless there is an appeal to county court. For more information on evictions, see our companion article on this site, Evictions in Texas.
Servicemembers Civil Relief Act (SCRA)
The SCRA (50 U.S.C. App. Sec. 501) passed in 2003 completely rewrites the Soldiers and Sailors Civil Relief Act of 1940 by expanding many of the previous law’s protections for those serving in the armed forces. Except by court order, a landlord may not evict a servicemember or his or her dependents from the homestead during a period of military service. The SCRA provides criminal sanctions for persons who knowingly violate its provisions.
Right of Redemption if Property Sold for Taxes
There is no general right of redemption by the borrower after a Texas foreclosure, i.e., the right of redemption is strictly limited. In cases where the property was sold for unpaid taxes, there is a 2 year redemption period for homestead property and 6 months for non-homestead property.
Foreclosures by Homeowners Associations
Also, if a homeowners association forecloses an assessment lien, Prop. Code Sec. 209.011 provides that the homeowner may redeem the property until no “later than the 180th day after the date the association mails written notice of the sale to the owner and the lienholder under Sec. 209.101.” A lienholder also has a right of redemption in these circumstances “before 90 days after the date the association mails written notice . . . and only if the lot owner has not previously redeemed.” Note that an HOA is not permitted to foreclose on a homeowner if its lien is solely for fines assessed by the association or attorneys fees. These provisions are part of the Texas Residential Property Owners Protection Act designed to reign in the once arbitrary power of HOA’s (Chapter 209 of the Code).
Legal Fees for Foreclosures
This office charges $750 for residential foreclosures and $1,500 for commercial foreclosures, not including the cost of a title search, filing fees, and any other costs.
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.
Copyright © 2011 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com.