Foreclosure Action

What Is Foreclosure Action?

The term “foreclosure action” refers to legal proceedings initiated by a lender after a borrower defaults on their mortgage. Lenders can enforce their rights through a foreclosure when borrowers fail to either make mortgage payments or fulfill the obligations outlined in their mortgage agreement.

Foreclosure action is initiated by a public notice issued by the lender. If the mortgagor still can’t bring the loan up to date, then the mortgage company may go through with foreclosure proceedings, after which it can sell the property to recoup the balance owed.

How Foreclosure Action Works

Most individuals don’t have the money to purchase a home or property with cash. To finance the purchase, consumers need to get a mortgage. A lender takes several considerations into account before approving a loan, including a borrower’s credit history and income, as well as the property value. If approved, the lender and borrower sign a mortgage contract, which outlines the payment frequency and amount.

But what happens if the borrower can’t fulfill their obligations? When a borrower defaults—at least four months in arrears—or doesn’t live up to the conditions of the contract, their lender may initiate a foreclosure action after all other avenues are exhausted and payments are more than 120 days past due. The first step is to submit a public notice to the County Recorder’s Office (or similarly titled county government office). This notice indicates that the borrower defaulted on the mortgage. In some states, the notice is called a Notice of Default, while other states call it a lis pendens.

At this point, the borrower enters pre-foreclosure. This is a grace period that allows the homeowner to either come up with the money to stay current on their loan or arrange a sale of the home. If the borrower still can’t come up with the funds or another arrangement, then the lender can proceed with the foreclosure process.

The next step involves setting a date for the foreclosure auction. The lender records a Notice of Trustee’s Sale at the County Recorder’s Office, advertises the property, and notifies the borrower of the impending sale. The auction normally takes place at the county courthouse, at the office of the trustee, or on the property itself.

Foreclosure Action Rules

Very specific and detailed statutory procedural requirements apply to foreclosures and must be complied with to avoid the invalidation of a foreclosure sale. Proper notice of the foreclosure sale must be given to the debtor and the general public, but the exact procedures can vary by state. 

After the Great Recession, the U.S. government issued new rules for lenders looking to foreclose on properties. Established by the Consumer Financial Protection Bureau (CFPB) in 2013, these new rules served homeowners who are on the brink of foreclosure and protects them from predatory lending. These rules include:

• The restriction of dual tracking. This occurs when the lender proceeds with foreclosure while they simultaneously work with the borrower to avoid foreclosure. First notices can only be filed after the mortgage is delinquent for 120 days.
• Providing the mortgagor with options after they miss two consecutive payments. These options include alternatives to foreclosure.
• Exploring all alternatives to foreclosure before taking any such action on the part of the lender.

These rules were expanded in 2016. The CFPB instructed lenders to provide more protections to borrowers more than once over the course of the loan. The agency also included surviving family members of a deceased borrower and requires lenders to advise borrowers when loss mitigation applications—lenders’ attempts to work with borrowers—are exhausted.

Types of Action in Foreclosure

Foreclosure processes differ by state, but they come in two basic types. About half of U.S. states mandate one type, with the other type in the other half. Some states allow both.

Judicial foreclosure is the norm in 22 states. Basically, it means that the lender has to file a formal lawsuit and get a court’s permission to foreclose on you. As with any legal action, you must receive formal written summons and complaint of the suit and be given a chance to respond and contest it.

Nonjudicial foreclosure means that a lender doesn’t have to go through the courts. Rather, it can foreclose by invoking what’s called a power of sale clause in your mortgage contract, which authorizes it to seize and sell your property if you have defaulted on the loan. Lenders like nonjudicial foreclosure because it goes much faster and is cheaper than judicial foreclosure, obviously—but they still must carefully follow a series of steps described in the state statutes to complete the process.

How to Contest Foreclosure Action

Fighting a foreclosure action is possible. The procedure varies, depending on whether the foreclosure is judicial or nonjudicial.

Dealing with a judicial foreclosure is a little easier and straightforward: Since the lender has had to file suit in court against you, and send you a written notice, you simply have to respond to the complaint within a certain amount of time (the summons will indicate the period—it’s usually 20 to 30 days). You must do so in writing. While the burden of proof is on the lender, you need to file a detailed and delineated defense.

Your answer should include responses to each of the claims that the lender makes in its complaint, in the same order. You can also mount an affirmative defense, pointing out any errors on the lender’s part (like a failure to issue earlier warnings or notices) or arguing that the suit shouldn’t have been brought in the first place.

With a nonjudicial foreclosure, you have to be more proactive. Because nonjudicial foreclosures proceed outside of court, you’ll have to file a lawsuit to get a judge to halt the proceedings. And the burden of proof will be on you, because the right to foreclose will have been part of the mortgage contract that you signed.

Technically, when filing your suit, you’ll ask for two things: a motion for a temporary restraining order, and a preliminary injunction to stop a foreclosure sale while your case is being litigated. Usually, homeowners also ask the court for a permanent injunction. At the preliminary injunction hearing, you’ll present your side—similar to the arguments that you would mount in your response to a judicial foreclosure summons—with any supporting documents.

Foreclosure and the Pandemic

The economic downturn of 2020 sparked by the COVID-19 pandemic affected homeowners around the world. The federal government put additional protections in the United States under the Coronavirus Aid, Relief, and Economic Security (CARES) Act by announcing a moratorium on foreclosures and financial relief for homeowners. These rules protect homeowners who have federally backed mortgages or those that are backed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

The government placed a moratorium on foreclosures, allowing homeowners to stay in their homes during the health crisis. Borrowers must approach their lenders to find out their options. Some lenders may offer borrowers forbearance, which allows them to hold or reduce their payments. Another option is payment relief, allowing mortgagors to defer payments for a certain period of time. Payments that are missed due to forbearance and those that are deferred aren’t eliminated. Instead, they must be paid after the period ends.

After taking office on Jan. 20, 2021, President Biden requested that the ban on foreclosures and evictions be extended through March 31, 2021, and subsequently extended several times, with the final extension occurring on June 24, 2021, to extend through July 31, 2021.

The Bottom Line

A foreclosure action refers to legal proceedings initiated by a public notice issued by the lender after a borrower defaults on their mortgage. After issuing the public notice, the lender gives the borrower a grace period to allow the mortgagor to bring the loan up to date. If the mortgagor still can’t bring the loan up to date, then the mortgage company may go through with foreclosure proceedings, after which it can sell the property to recoup the balance owed. 

In response to the economic downturn of 2020, the U.S. government extended a moratorium on mortgage foreclosures to help struggling homeowners through July 31, 2021, and allowed the enrollment period for mortgage forbearance to extend through Sept. 30, 2021.