Definition
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mortgage lender, or other lienholder, obtains a termination of a mortgage borrower’s equitable right of redemption, either by court order or by operation of law. Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that they can repossess the property.
Foreclosure
A foreclosure is a legal process where an authority accepts the request of a lender to take hold of a property mentioned in a mortgage agreement and then sells it to generate the amount of money lost due to failure of the borrower to pay on the principal amount as well as on the interest.
The process of foreclosure is different in various countries. The state is responsible for foreclosure in some cases while a lender, such as a bank, can also take hold of a property in many countries. Most of these controls are dependent on the financial laws of different areas as well as the conditions described in mortgage contracts.
Once a borrower starts to miss monthly payments, it is all but inevitable that they face the situation of a foreclosure. Lenders start to add up late fees for delayed payments and these entire amounts end up creating a situation where the borrower believes that the best way to clear up the debt is to part ways with the property.
Process of Foreclosure
The process of foreclosure starts with bankruptcy declaration of a borrower. It is often the best way out for a person in debt, although it may not provide the best situation to recover money for the lender, such as a bank. Lending institutions try their best to keep people involved in paying their loans. They are often ready to provide them with revised plans for this purpose.
This is mainly because banks find it hard to make better profits from foreclosures and this option is opted as the last resort as a result. Once a bankruptcy occurs though, the regional sheriff in the United States is responsible for holding an auction, and selling the property to the highest bidder in a transparent fashion.
Judicial and Non-Judicial Foreclosure
Foreclosure in many states occurs through the legal system of courts where a lender submits the application of foreclosure in the relevant branch of the judiciary. A lot of administrative costs are attached to this process and parties tend to avoid such closures.
On the other hand, there are many states in the United States that allow for non-judicial foreclosures. The foreclosures are faster and often termed as the Power of Sale. It is also important to remember that most foreclosures occur when payments have been due on loans for over a period of around two years.
Further Reading
- From the subprime to the exotic: excessive mortgage market risk and foreclosures – www.tandfonline.com [PDF]
- The foreclosure crisis, foreclosed properties, and federal policy: Some implications for housing and community development planning – www.tandfonline.com [PDF]
- The impact of interstate foreclosure cost differences and the value of mortgages on default rates – onlinelibrary.wiley.com [PDF]
- The impact of single-family mortgage foreclosures on neighborhood crime – www.tandfonline.com [PDF]
- Race, gender, power, and the US subprime mortgage and foreclosure crisis: A meso analysis – www.tandfonline.com [PDF]
- An analysis of the relationship between housing foreclosures, lending practices, and neighborhood ecology: Evidence from a distressed county – www.tandfonline.com [PDF]
- The contagion effect of foreclosed properties – www.sciencedirect.com [PDF]
- Related risks: foreclosure, health problems and economic insecurity in the USA – www.tandfonline.com [PDF]
- The conditional probability of foreclosure: An empirical analysis of conventional mortgage loan defaults – onlinelibrary.wiley.com [PDF]
