James R. Balmforth: Post-Foreclosure Liability For Code Violations

Federal law usually prevents the servicer from initiating a foreclosure until the borrower is more than 120 days overdue on the loan. Servicers are also, under federal law, required to work with borrowers who are having trouble making monthly payments in a “loss mitigation” process. The non-judicial foreclosure process formally begins when the trustee records a notice of default at the county recorder’s office. The notice of default gives the borrower three months to cure the default. Within ten days of recording, the trustee mails a copy of the notice of default to anyone who has requested a copy. Most deeds of trust in Utah include a request for notice, so you’ll probably get this notification. At the foreclosure sale, the property will be sold to the highest bidder, which is usually the foreclosing bank. At the sale, the bank doesn’t have to bid cash. Instead, it makes a credit bid. If the credit bid is the highest bid at the sale, the property then becomes REO.

In some states, you can redeem (repurchase) your home within a certain amount of time after the foreclosure sale. Under Utah law, however, foreclosed homeowners don’t get a right of redemption after a non-judicial foreclosure. The foreclosing bank may obtain a deficiency judgment following a non-judicial foreclosure if it files a lawsuit within three months after the foreclosure sale. The deficiency amount is limited to the difference between the borrower’s total debt and the property’s fair market value. In other states, though, you don’t have to worry about a deficiency judgment. Some states prohibit banks from suing for deficiencies under certain circumstances, like after a non-judicial foreclosure. Loans that fit in this category are sometimes called nonrecourse loans.

If a foreclosure is non-judicial, the bank has to file a lawsuit following the foreclosure to get a deficiency judgment. In a judicial foreclosure, on the other hand, most states allow the bank to seek a deficiency judgment as part of the underlying foreclosure lawsuit; a few states require a separate lawsuit. Many states have a law that limits the amount of the deficiency to the difference between the debt and the property’s fair market value. For instance, if your state has this type of law and you owe the bank $400,000, the fair market value of your home is $350,000, and the property sells at a foreclosure sale for $300,000, a deficiency judgment will be limited to $50,000 even though the bank technically lost $100,000 (the difference between the amount owed and the sales price). You might be able to wipe out your liability to pay a deficiency judgment by filing for bankruptcy. While it might not make sense to file for bankruptcy just to discharge a deficiency judgment, if you’re considering bankruptcy to deal with multiple debts—like credit card balances, unpaid medical and utility bills, and personal loans—consider talking to a bankruptcy attorney. Deficiency judgment laws vary from state to state and can be complex. If you’re facing a foreclosure, it’s important to understand how the law works in your state. To find out more, consider talking to a knowledgeable foreclosure lawyer. When homeowners decide to let their upside down properties go into foreclosure they typically stop caring for the properties physical condition. Repairs are deferred unless absolutely necessary. After a homeowner abandons his house, as is often the case in pending foreclosures, maintenance stops. Grass and weeds grow wild, electric service stops and air conditioning is turned off. Lack of grounds and building maintenance often results in violations of local building codes. Code violations can result in fines, and violations under Utah building codes often have daily penalties.

A foreclosure and subsequent bank sale resolves many assessments against the foreclosed property including real estate taxes and association dues. Code enforcement fines are not necessarily solved by foreclosure. Under Florida law, homeowners are personally liable for code enforcement fines. A homeowner who vacates his home prior to foreclosure may be exposing himself to personal liability to local government fines that follow the homeowner after the foreclosure sale. People do not want to spend money maintaining a home they are trying to give back to the bank. However, your home is your responsibility as long as legal title in your name. Allowing your home to become an eyesore will invite neighbour’s complaints, code enforcement actions, and expensive fines. Foreclosure sales can be a great find. The mortgage holder, usually a bank, doesn’t want to take the time to go through the normal property sale process. And they will commonly accept less than the property’s face value. However, with these cost savings come potential headaches. Another lender, the original borrower, or even the government can make the process of removing foreclosure title defects difficult. With the right preparation, many of these hidden foreclosure title defects can be erased relatively easily or avoided all together. But, many buyers of foreclosure properties fail to take the precautions necessary to avoid many of these common problems. As a result, what was originally a great deal turns into a stressful situation.

A foreclosure is a legal process. Essentially, a party that has filed a lien against a property attempts to recover the balance owed to the party. They do this by forcing the sale of the property. After a foreclosure complaint has been filed, the owner has 20 days to respond to the foreclosure. They must show why the property should not be foreclosed on. Once a judgment of foreclosure is rendered, the Court orders a sale of the property. After all the lien holders are paid, any remaining funds from the sale go to the property owner. Almost inevitably, the third party buyer will then be brought in as a party to the banks own foreclosure proceeding. At that point, the buyer can either pay the remaining debt on the property to prevent the bank’s own foreclosure sale (called “Right of Redemption”), or sue to get their money back. However, the buyer purchased the property before a bank could file their own foreclosure complaint. The bank then foreclosed on the property. As the Peeler case demonstrates, third party purchasers do not have a strong leg to stand on if their foreclosure sale is subordinate to another lien.

However, even if the purchased property does not have a superior mortgage, there is other less common and unexpected title defects that can arise when a third party seeks to purchase a foreclosed property. Even if all the proper parties are listed in the lender’s foreclosure suit, the purchaser must still make sure the plaintiff lender has used the procedures set out to supply notice to any unknown heirs or spouses of the pending foreclosure action while also ensuring an Administrator Ad item has been appointed. The foreclosing plaintiff’s failure to appoint an Administrator Ad Litem or follow the proper notice procedures are common mistakes that can drag out the foreclosure process and thus prolong a purchaser’s receipt of title for the property. Also, this process of representing the interests of unnamed parties would further assist in any quiet title action to further eliminate anyone else’s claim to the property. If the property has any of these liens, title for any purchaser in a foreclosure action cannot be secure until these time periods have elapsed. A public records search using the borrower’s name (or preferably social security number if available to avoid any overlap with similar names) should show any outstanding federal liens and allow a purchaser to dodge a major headache. Up until 2013, local municipalities could pass ordinances making liens based on municipal code violations superior to mortgages, regardless of the order they were filed. This was important because the relevant city could record a lien on a property after the Lis Pendens (the official document notifying the public that there is a claim against a certain property) has been recorded, but before the purchaser received the Certificate of Title.

Prior to 2013, a property could have a large amount of fees accumulated for code violations without the purchaser’s knowledge. And because of the priority given to these liens under the local ordinances, the foreclosure action would be delayed until the city was paid. Probably the most likely reason for a delay in a foreclosure sale are problems initiated by the borrower. Prior to the purchaser receiving the Certification of Title, the borrower can make all sorts of objections to the foreclosure sale, or worse, appeal a procedural or substantive invalidation of a valid defence. The appeals process, even if frivolous, can take time and money that could defeat the purpose of purchasing the property. Until the sale is complete, the borrower can also use bankruptcy as a way to delay the foreclosure process. If a borrower were to declare bankruptcy, an automatic stay occurs which can freeze lawsuits filed against a foreclosed upon property. Although the foreclosure process will likely conclude eventually, bankruptcy can delay the foreclosure process almost indefinitely. Similar to a borrower appealing a court’s decision to overrule an objection to a foreclosure sale, bankruptcy gives the borrower the ability to interfere with a foreclosure sale. Although the purchaser would likely win the fight, the delay and costs may make the fight not worth having. While the deck may be slightly stacked against a third party purchaser, all is not lost. For example, if the borrower filed bankruptcy after the sale of the foreclosed upon property, the automatic stay would not affect the sale of the property. But, if bankruptcy was properly filed before the sale of the property was completed, the purchaser would only be entitled to receiving whatever funds were given prior to the declaration of bankruptcy. Regardless, a person interested in purchasing a foreclosed upon property would be wise to include the possibility of prolonged litigation while doing their cost/benefit analysis of whether to invest in the property. Before purchasing a foreclosed property, make sure you have the full chain of title in front of you.

A simple public records request will show the current liens on the property. Also, it can help you know if the lender properly brought in all relevant parties in the foreclosure action. A purchaser should always confirm they are buying a marketable title to alleviate any issues with superiority from other liens.

Non-Judicial Foreclosure

A judicial foreclosure occurs when a court allows a lender to seize and sell a borrower’s collateral when the borrower has failed to repay the lender. The term is most often associated with real estate.

How Does Non-Judicial Foreclosure Work?

In general, there are events involved in a foreclosure (in this example, we assume the borrower has obtained a mortgage for a house from the lender).
• The borrower signs a contract agreeing to repay the lender over a period of time, usually in predetermined installments.
• The borrower misses one or more payments.
• The lender sends the borrower one or more notices of delinquency.
• The borrower and the lender try to adjust the repayment schedule so that the borrower is more likely to make at least some of the payments until he or she gets back on his feet. (This process is called special forbearance or mortgage modification.)
• The borrower still misses payments.
• The lender sends the borrower a notice of default and initiates foreclosure proceedings.
• In a judicial foreclosure, a court confirms the amount owed to the lender and gives the borrower a set amount of time to pay up (“cure the default”).
• In a non-judicial foreclosure, the loan document authorizes the lender to sell the property to recover the loan balance.

• The lender puts the property up for sale and publishes a notice of the sale in the local paper. The notice includes a description of the property, the name of the borrower, and other information. The borrower might file Chapter 13 bankruptcy to stop the foreclosure temporarily.
• A public auction occurs during business hours, and the highest bidder is usually entitled to buy the property. At that point, the borrower cannot get the property back unless he or she buys it back.

Why Does Non-Judicial Foreclosure Matter?

Non-judicial foreclosures happen when a mortgage agreement has a “power of sale” clause that gives the lender the right to foreclose on a property by itself. Without that clause, the lender has to take the borrower to court in order to foreclose; hence the term. Many states require judicial foreclosures. The foreclosure process can take several months if not years, and it does long-term damage to a person’s credit report. It is important to note that foreclosure laws vary by state, and they affect the order or duration of these steps. It is also important to note that the federal Fair Debt Collection Practices Act affects foreclosure proceedings by stipulating the methods lenders can use to go after bad debts.