Foreclosure and Action for Foreclosure
When a house is in foreclosure then all doesn’t seem well. Foreclosure is something every real estate investor naturally tries to avoid especially when the investor’s real estate acquisition thrives on mortgage. In this article we explain what foreclosure means and how it is effected.
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 (mortgagee), or other lien-holder, obtains a termination of a mortgage borrower (mortgagor)’s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).
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 successfully repossess the property.
Therefore, through the process of foreclosure, the lender seeks to foreclose (in plain English, immediately terminate) the equitable right of redemption and take both legal and equitable title to the property in fee simple. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes or unpaid contractors’ bills and other fees
The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust.”
Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien.”
If the promissory note was made with a recourse clause then if the sale does not bring enough to pay the existing balance of principal and fees the mortgagee can file a claim for a deficiency judgment.
Comparatively, an action for foreclosure is a judicial procedure by which the mortgagee acquires the mortgaged property for himself free from the mortgagor’s equity of redemption. It is a more effective remedy available to the mortgagee in urgent need of his capital which he cannot realize from the rents and profits accruing from the mortgaged property, or which in fact, is non – existent.
As a result of the foregoing constraints, the courts which jealously protect the equity of redemption, allow a mortgagee to destroy the equitable right to redeem with its own assistance.
A foreclosure order will not be made until the contractual date has passed with the principal and / or interest remaining unpaid after a demand and a reasonable time allowed to lapse without compliance.
However, suffice to say that an action for foreclosure should not be granted by the courts where the interest of the mortgagee is the only outstanding money that has remained unpaid. If the principal money has already been paid, the mortgagor should be allowed to redeem his property provided he devises no other means to pay the mortgagee his interest.
But the only problem here is that at times, the accrued interest ends up being higher than even the principal sum itself, in which case, the mortgagee many indeed have to end up succeeding in a foreclosure action against the mortgagor.
A notice of foreclosure once given and received, remains valid and in force until the exercise of the mortgagee’s power of sale; and the mortgagee is not bound to make any concession or to suspend the exercise of his power of sale. An action for foreclosure being an action to recovery accrued, i.e the date fixed for payment of the principal, otherwise, it becomes statute barred.
A legal mortgage created in the East, North or in Lagos State (as examples) already conveys a legal estate to the mortgagee subject to cessar on redemption by the mortgagor.
As such, an order of foreclosure upon default by the mortgagor makes absolute the title initially vested in the mortgagee subject to cessar on redemption.
There is no transfer in any form and Governor’s consent is not required since the mortgagee by the initial conveyance has the property vested in him, and what happens is that upon the destruction of the mortgagor’s right in the property consequent upon the order of foreclosure absolute, the mortgagee takes free of it.