Mortgage foreclosures in Texas have been a part of the real estate industry for years, but the process can be so intricate and complex, it leaves many wondering exactly what they are and how they work. This is a critical concept for sellers, buyers, borrowers, and lenders to have. Whether you are facing a foreclosure or are an entity struggling to foreclose on a piece of real property, a knowledgeable real estate attorney is an asset you will need moving forward.
What Is a Foreclosure?
When someone buys a piece of property, they generally have to borrow money to do so either from a bank or mortgage company. Sometimes a seller will even make a loan, and then the buyer/borrower will sign a promissory note committing to make payments over a predetermined number of years and pay interest on it. Should those payments not be made, the buyer or borrower agrees their house can be foreclosed upon.
The instrument that allows a foreclosure to happen is often referred to as a deed of trust which acknowledges the real property in open records so the public can see that the lender has a lien on the property. This action protects some other lien or subsequent buyer of the property from declaring they were unaware about the mortgage or debt on the property because it is a matter of public record.
In a deed of trust there is something called a power of sale clause, which gives the holder of a mortgage the right to foreclose on a property if there is a default on the mortgage. These defaults can be considered breeches of the deed of trust and may take different forms, such as:
- Not making a required payment
- Not paying insurance on the property
- Not paying taxes on the property
- Not paying homeowners’ association dues
- Damaging or modifying the property in a way that affects the property’s value
If there is a default and the borrower and the lender have been unable to work out their differences, the lender may choose to go ahead and foreclose. If the property is a residence which is the primary residence or homestead of the owner, the mortgage company is required to give the borrower a limited window of time to cure a default. In other words, if the borrower has three payments to make up or taxes to pay, they may be able to do so in this window.
If the borrower fails to cure a default, then the mortgage company or holder of the note can accelerate the mortgage requiring the borrower to pay the entire balance of the note due immediately or else the property may be foreclosed upon in twenty-one days. At this time the lender will post the property in the county where the property is located.
How Foreclosure Sales Work
Foreclosure sales are typically set for the first Tuesday in every given month, with the exception being if the first Tuesday of the month falls on either January first or July fourth, in which case the sales would take place on Wednesday.
A foreclosure sale can in some ways be reminiscent of a wild west auction. In general, they occur in front of a county courthouse, although Harris County in Texas has been known to hold it at the Bayou Event Center. This event attracts a wide variety of people who attend with the intent to pay cash in the form of cashiers checks to the trustee or substitute trustee conducting the sale.
These sales are set within a 3-hour window usually between the hours of 10a.m. and 4p.m. on that first Tuesday of the month. A trustee will come forward and announce they have a property for sale along with some statutory required information. They will then verbally declare they will allow the property to be bid on and normally the mortgage company will start the bidding.
The mortgage company can bid the balance of their note as a credit bid, which means they do not have to come up with the money because they already have it. The balance of the note still generally includes attorney fees, interest that accrues, the principal balance of the note, other things a mortgage company may have had to do to secure or insure the property, and a reasonable commission for the trustee who sells the sale.
Once bidding opens, the high bid is often from the mortgage company. This is frequently why a property is foreclosed upon to begin with, because the property does not have enough value to cover the balance of the mortgage due to the lack of equity. If the mortgage company bids and no one else does, the trustee or substitute trustee will issue a substitute trustee’s deed to the mortgage company. The mortgage company then owns the property.
There are some cases in which after a mortgage company takes ownership that they may have to go through an eviction to take the house. However, in general, most mortgage companies do not like to hold on to houses and instead prefer to have someone fix up the property, list it with a realtor, and sell it as quickly as possible.
If there is some equity in the property and the bid by the creditor is low enough that other people want to bid too, they can. It is not uncommon to see groups of people who attend foreclosure sales every month in search of finding a property that is worth bidding on and then entering a bidding war. It is worth noting that these individuals and groups must have cash or cashiers checks ready to pay to the substitute trustee’s deed upon conclusion of the sale.
At this point, the substitute trustee must then take their commission, pay the balance due to the mortgage company, and then the excess money can go to whoever has the next claim on the property. This may be the owner if there are no other liens on the property. In some situations, in which there is a sizeable amount of money left over, a trustee may choose to enter the money into the registry of the court and name others who may be on lien or title documents to have claim to it. This may be followed by the trustee having their legal fees paid and then stepping away from the lawsuit, leaving lien holders to fight it out for the money.
How Foreclosures Can Sometimes Be Halted
Just because a lender has posted the property for foreclosure does not necessarily mean they are going to actually foreclose. There are three specific situations in which foreclosures may be halted, such as:
- A solution between the borrower and lender. It may be possible in the 21 days between the posting of the property and the actual foreclosing of the property for a borrower to work something out with the lender and either get caught up or have a buyer for the property.
- Injunctions and TROs. Should there be a dispute between the borrower and lender due to the amount of equity in the property, the borrower may have a court enter an injunction enjoining the lender from foreclosing. This can take the shape of a TRO or temporary restraining order of 14 days. This often requires the borrower to post a bond, something they are frequently unable to do if paying the mortgage was already a challenge.
- Bankruptcy. This is becoming increasingly common. On the day of or before the foreclosure, some people will file either Chapter 13, 11, or 7 bankruptcy that in turn places an automatic stay that prevents a foreclosure until the bankruptcy case is dismissed or the court enters an order to modify or lift the automatic stay.
How an Attorney Can Assist with the Foreclosure Process
Lawsuits can happen both before and after a foreclosure and typically a knowledgeable attorney’s assistance is needed to ensure a smoother process. Real estate attorneys can assist with:
- Getting temporary restraining orders
- Helping a client file bankruptcy to prevent a foreclosure
- Representing lenders if a borrower is not paying and refuses to vacate the property
- Representing buyers of loans who go through the process of negotiating with lenders and proceeding with foreclosures
- Helping with related title issues
Foreclosures do not just apply to houses, although that is the most common scenario. Foreclosures can also happen on high rise buildings, farms, raw land, oil and gas rights, or any interest in real property that is financed and has a lien on it. For assistance with all things related to foreclosure, ensure that your rights are protected with the help of a reputable attorney.
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