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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

Home Foreclosures: 10.4.1 Deficiency Judgments Defined

In most states, if the foreclosure sale price is not enough to pay off the loan balance and any allowable foreclosure expenses, the lender may sue the borrower for the balance—the “deficiency.” A deficiency judgment can be satisfied by garnishing wages or attaching other non-exempt property. Though a lender may decide not to sue for a deficiency when it seems unlikely that the homeowner will have any assets to satisfy the judgment, foreclosed homeowners should at least be aware of the possibility of a deficiency action after a foreclosure.

Home Foreclosures: 10.4.2a Statute of Limitations for Deficiency Claims

Because a foreclosure sale is a precondition to a deficiency claim, the statute of limitations for a deficiency claim runs from the time of the foreclosure sale, or shortly thereafter, and not from an acceleration or the time of the default.299 A borrower cannot raise a statute of limitations defense until the plaintiff commences a legal proceeding for a deficiency judgment.300

Home Foreclosures: 10.4.4 Creditor Must Prove the Deficiency Amount

When a creditor seeks a deficiency, the creditor must prove its right to that amount.345 Scrutinizing all aspects of the sale and accounting is critical, particularly in a non-judicial foreclosure state. A valuation of the property, for example, can be contested on the grounds that it is not supported by sufficient evidence.346 In a judicial sale, the judgment order itself tells the official how to distribute proceeds from the sale.

Home Foreclosures: 10.4.5 Deficiency Claims Are Unsecured

If a family is obligated for a deficiency, keep in mind that this debt generally is not secured by any of the family’s remaining property until a judgment lien is obtained.351 The family at this point could file bankruptcy and discharge the deficiency as an unsecured debt. Moreover, even if the creditor obtains a court judgment for the deficiency, it still cannot seize exempt property to satisfy the deficiency.

Home Foreclosures: 10.5.1 Procedure

If the foreclosure sale yields more than the amount owed to the foreclosing mortgage holder, a surplus is available for distribution, first to pay off junior liens on the property, and the balance to the former owner. There is significant variation among state procedures as to how and when sale proceeds, including surpluses, are distributed.