(Please understand that the answers to these questions are general in nature and may not cover every individual situation.)
As I have been in contact with bank attorneys recently regarding a host of situations surrounding the foreclosure decisions a bank can make when a loan goes delinquent, I want to carefully review those options from a bank’s perspective. Remember when dealing with a bank, who is in the business of working with money, it will always do what is in its best interest; what makes it the most money or least loss. This may sound obvious, but most debtors think that the bank will cut them some slack just out of principal or because the borrower has been a great customer for many years. Not so, unless it is in the bank’s own best interest to do so. That is why a delinquent loan (after some attempts to cure are made by the loan officer), is given to a new collection agent who has no relationship with the customer.
When a borrower fails to make a monthly payment, the lender can do the following:
- Work informally to resolve the problem; letters, meetings, and negotiations to bring the payments current, or extend or otherwise forebear on other collection options. The bank will generally always take this step first out of common sense to keep the loan a producing one.
- Accept a Deed-in-lieu of foreclosure from the debtor. This will occur when the bank believes the debtor has no ability to pay any deficiency and the title to the property is otherwise clean of other clouds on title. In other words, it is in the bank’s best interest to save the costs associated with foreclosure because it won’t be able to recoup them from the debtor. A Deed-In-Lieu of Foreclosure is a contractual agreement that gives the property to the bank without requiring it to go through the foreclosure process in return for releasing the debtor from further collection efforts by the bank. If the debtor either has assets or the foreclosure needs to be done regardless to clear title to the property, the bank will probably not accept this solution, as it closes out an option to go after a deficiency later.
- File a Notice of Default and proceed with a non-judicial foreclosure. This is the nearly universal procedure performed in Utah. It is much cheaper and faster to accomplish than a judicial foreclosure, it does not require using the court system, and it gets the bank a clear title within a few months for resale. After the filing of a Notice of Default, the debtor has 90 days to bring the debt current, including the reimbursement to the bank of its costs in filing. If this is done, the loan is reinstated as if the loan was never in default. If the loan is not brought current within the 90 days, the bank can notice the property for sale. This generally takes at least five or six weeks, depending on how fast the bank notices the sale. During this time, the debtor can still work with the bank to get something worked out, but the bank isn’t required to. If nothing is worked out, a sale at the county courthouse occurs and the property is auctioned off to the highest bidder, which is often the bank itself. Whether the bank can then sue for deficiency goes beyond the scope of this article, but it only has three months to decide. If the bank does not sue for a deficiency within that short of a window, the debtor is released from further liability on the loan.
- Begin a lawsuit and bring a judicial foreclosure. A century ago, this was the only avenue available. It is slow, expensive, and rarely used. At the end of the lawsuit, a sheriff’s sale occurs and the property is sold to the highest bidder. The debtor then has six months to redeem the property by paying the purchaser the amount it bid plus 6%. This procedure keeps the property from being sold too cheaply (in theory) because if the sales price is too low, the debtor will redeem it. The property cannot be resold until the six-month redemption period is over (because who will buy it without a clear title?). In my experience, the only time a judicial foreclosure is used is if there are legal issues to do with title, or other complex sets of issues that cannot be resolved with a non-judicial foreclosure.
Real estate foreclosure statutes and the case law surrounding them is a very complex area of law. There are many pitfalls in the process. We as experienced real estate attorneys can provide advice and insight on these topics.