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Home Foreclosures: 8.10.9 Other Considerations

Change the account number: Most servicers use automated recordkeeping systems. Unless a thorough purge of the existing computer records is done, it is likely that, at some point, when the servicer generates a payment statement or history, some of the forgiven fees in the loan modification may get picked up and swept into the client’s current information. Changing the loan’s account number helps give the loan a fresh start, without the history of the fees, charges, and principal that have been forgiven in the loan modification.

Home Foreclosures: 10.1 Introduction

This chapter focuses on the issues that arise after the home is sold at foreclosure. After a completed sale, a consumer may seek to redeem the property or otherwise challenge the validity of a sale, or any deficiency judgment that arises. State law and procedure outline the consumer’s right to bring such actions, as well as to claim surplus proceeds from the sale, or damages for wrongful foreclosure. Federal bankruptcy law provides further protections for debtors seeking to set aside a sale in bankruptcy.

Home Foreclosures: 10.2.1 Purchasing the Home at the Foreclosure Sale

In every state, the consumer can redeem the home prior to the sale by paying the full amount due including various fees and expenses.1 In addition, like anyone else, a homeowner can bid on and buy the property at a foreclosure sale. The sale price may be less than the pre-sale redemption amount.

Home Foreclosures: 10.3.4.5 Sales That Are Not Complete Under State Law

If the debtor retains legal title to the property under state law until an event that occurs after sale such as delivery of the deed or confirmation of the sale, and the debtor files bankruptcy during that period and prior to the necessary event, then the debtor’s retained ownership interest comes into the bankruptcy estate. This principle is important because if an auction has been held, but the sale process is not considered complete under state law, a bankruptcy debtor may retain an ownership interest and the right to cure the default under 11 U.S.C.

Home Foreclosures: 10.2.2.1 State Statutes Described

Approximately half the states have foreclosure statutes that provide homeowners with a postforeclosure sale redemption period—a fixed period of time in which to set the foreclosure sale aside and regain title to the home by paying the foreclosure sale price, interest, and costs of the sale.5 Some states have more than one redemption law.

Home Foreclosures: 10.2.2.2 Utility of the Right to Redeem

In general, to successfully exercise the right of a post-sale redemption, the consumer should seek to comply strictly with statutory requirements.24 In judicial foreclosures, a court order will typically specify the redemption amount and the deadline for payment.

Home Foreclosures: 10.3.1 Overview

Often a homeowner does not seek legal advice until after a foreclosure has been completed. In some cases, the homeowner does not even become aware of the foreclosure until the property has been sold and the new owner brings an eviction action. This subsection summarizes the procedure for setting aside a completed foreclosure and some of the possible grounds for such an action.

Home Foreclosures: 10.3.2.2 Rooker-Feldman Doctrine

If, following completion of a judicial foreclosure process, the homeowner intends to raise objections concerning the underlying debt, such as TILA or other consumer defenses, the sale must be set aside and the foreclosure judgment must be reopened in the court that entered it. Otherwise, defenses to the debt may be precluded by res judicata or under the Rooker-Feldman doctrine.

Home Foreclosures: 10.9 Former Owners in Possession of Property Following Foreclosure

Unless the sale is set aside, the right of a former homeowner to possess the property terminates with the foreclosure sale,716 ratification,717 or at the expiration of the redemption period.718 Procedures will vary depending on whether it was a judicial or non-judicial foreclosure. Often the purchaser at the foreclosure sale (who will often be the lender) will bring an eviction action against the former homeowner and obtain a judgment.

Home Foreclosures: 10.3.3.1 Generally

In order to recover the property after a foreclosure, a homeowner must be able to assert a legal basis to invalidate the foreclosure sale after a power of sale foreclosure, or to set aside the judgment and sale after a judicial foreclosure.

Home Foreclosures: 3.4.7 Bond Requirements and Challenges to the Authority to Foreclose

In some jurisdictions, a bond requirement comes into play when a borrower seeks to enjoin a pending non-judicial foreclosure sale.250 The bond demanded could be an amount equal to the full outstanding loan balance.251 This bond is characterized as a “tender” of the underlying debt. Courts view the tender as an element of the borrower’s burden in raising an equitable challenge to a foreclosure.

Home Foreclosures: 10.3.3.2 Irregularity in the Conduct of the Sale

In challenging a completed non-judicial sale, advocates need to keep in mind two conflicting principles inherent in any non-judicial foreclosure system. One is the mandate for “strict compliance” with the state’s statutes and rules for conduct of non-judicial sales. A system of extra-judicial foreclosures depends on private parties adhering to certain basic objective standards when they conduct sales. Courts have a responsibility to ensure that parties who flaunt these standards are held accountable.

Home Foreclosures: 10.3.3.3 Void and Voidable Sales

The ability to challenge a completed non-judicial sale may depend upon whether a court distinguishes between foreclosure sales that are “void” and those that are “voidable.”84 Generally speaking, where a foreclosure sale is conducted under circumstances not authorized by an applicable statute, the court may find that the sale is void.85 Sales have been found void where (1) they were conducted by a party who had no right to enforce the loan documents, (2) the loan was not in default, or (3) there was

Home Foreclosures: 10.3.3.4.1 In general

In certain instances, courts will not set aside a completed foreclosure sale that is challenged solely on the basis of a procedural irregularity or a violation of a statute regulating the foreclosure process. Unless the foreclosure sale is deemed void, the courts may require that the party seeking to invalidate the sale make a showing of harm or prejudice caused by the improper conduct. In Lona v.

Home Foreclosures: 3.4.4 Burden of Proof and Burden of Pleading in Challenging Authority to Conduct a Non-Judicial Sale

In judicial foreclosures, the burden of proving all elements of a foreclosure claim is on the plaintiff-lender. The plaintiff’s conclusory allegations in a complaint that it has standing to foreclose may be entitled to a certain degree of deference.190 In judicial foreclosures, state law typically places the obligation on the defendant-borrower to raise the standing issue by way of affirmative defense.

Home Foreclosures: 10.3.3.4.2 Authority to foreclose (standing)

Non-Judicial Foreclosure Sales. As a consequence of securitization, a party with no authority to foreclose under state statutes and property law may, nevertheless, have conducted a foreclosure sale.97 Completion of a foreclosure without authority to do so should be a substantial defect under any state’s foreclosure law.

Home Foreclosures: 10.3.3.4.4 Loss mitigation

This subsection addresses the question of when a foreclosure sale may be set aside due to an error in the servicer’s loss mitigation review process. The premise of loss mitigation is that foreclosure sales cause significant harm to owners of loans and to borrowers.

Home Foreclosures: 10.3.3.5.1 In general

It is a well-settled rule that mere inadequacy of price will not justify setting aside a foreclosure sale, absent additional circumstances of unfairness or irregularity, unless the sale price is so grossly inadequate as to shock the conscience of the court.166 The benchmark for adequacy of a foreclosure sale price may not be the property’s value in a private market sale to a third party, but the likely price from a fairly conducted foreclosure sale.

Home Foreclosures: 10.3.3.5.3 Inadequate price and unfairness

A mortgage holder or trustee conducting a foreclosure sale is bound to act in good faith and to exercise reasonable diligence to protect the rights of the debtor.189 When a foreclosure sale yields a price grossly disproportionate to the property’s value, it may be an indication of bad faith or lack of reasonable diligence.190 When a foreclosing mortgage holder also attempts to become the foreclosure purchaser, they will be held to “the strictest good faith and utmost diligence” for the protectio

Home Foreclosures: 10.3.3.5.4 Practice tips

Few consistent standards emerge from these cases. Courts recognize that they are applying flexible rules: “A price that shocks the conscience of the court can never be reduced to a mathematical formula.

Home Foreclosures: 10.3.4.1.1 In general

Sales that are conducted in violation of the automatic stay206 are generally void and can be set aside on that ground alone.207 This means that any foreclosure sale conducted after a bankruptcy filing and while the automatic stay is in force is without legal effect,208 even sales completed just minutes after a bankruptcy petition is filed.209 State law determines when a forec