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 make mortgage payments or when they fail to fulfill the obligations outlined in their mortgage agreement. The action is initiated by a public notice issued by the lender. If the mortgagor still can't bring the loan up to date, the mortgage company may go through with foreclosure proceedings, after which it can sell the property to pay down the balance of the loan.

Key Takeaways

  • A foreclosure action is a legal process initiated by a lender after a borrower defaults on their mortgage.
  • After issuing a public notice, the lender gives the borrower a grace period to allow the mortgagor to bring the loan up to date.
  • The action moves to pre-foreclosure if the borrower can't make arrangements.
  • An auction allows the lender to sell the home.
  • Enhanced protections for borrowers prohibit lenders from filing first notices before 120 days of delinquency.
  • The government put a moratorium on foreclosures and additional protections for homeowners in response to the COVID-19 pandemic, through June 30, 2021.

How Foreclosure Action Works

Most individuals don't have the money to purchase a home or property with cash. In order 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. The first step is to submit a public notice to the County Recorder’s 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, 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, the office of the trustee, or on the property itself.

Some states allow borrowers the right of redemption to bring their loan up to date up to the moment the property is auctioned.

Special Considerations

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. 

The U.S. federal government issued new rules for lenders looking to foreclose on properties following the financial crisis. 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 when they work with the borrower to avoid it. First notices can only be filed after the mortgage is 120 days delinquent.
  • Providing the mortgagor with options after they miss two payments consecutively. 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, whereby 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.

COVID-19 Pandemic

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.

On February 9, 2021, the Federal Housing Finance Agency (FHFA) announced March 30, 2021, as the deadline for its moratorium.

After taking on January 20, 2021, President Biden requested that the ban on foreclosures and evictions be extended through March 31, 2021. On Feb. 16, he requested that it be extended through June 30, 2021.