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Foreclosures - the New 'F' Word



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By : Jacquelyn Marks    99 or more times read
In the United States, there are two types of foreclosures, Strict or Judicial foreclosure, and Nonjudicial foreclosure.


Judicial Foreclosure

In the first type of foreclosure, the lender usually must sue the borrower in a state court. Usually the technical “taking of title” of the property satisfies the entire debt that incurred or is outstanding at the time of foreclosure (under contract).

Appointed is a county sheriff or another officer of the court to hold a public auction of the property in question (which would normally be collateral security against the loan). If the realized amount is more than the debt, the difference is given back to the borrower and the foreclosure stands completed or “retired”.

However, if the realized amount is lower than the outstanding debt, the loss has to be taken by the lender with no further penalty on the borrower.

In the event that no buyer steps forward at auction, the title is transferred to the lender in full satisfaction and closure of the outstanding debt.


Nonjudicial Foreclosure

For various reasons a large majority of foreclosure proceedings have gone uncontested by the borrowers. This has prompted the lobbying for a faster process of foreclosure that does not go through the legal system.

The U.S. financial industry has opined that the nonjudicial process would allow them to lower their interest rates and fees due to the lower cost of this process. They also argue that this process is actually less traumatic for the borrower as they do not have to go through a full-fledged lawsuit.

Many states have adopted the nonjudicial foreclosure process based on the above arguments. In this type form of foreclosure, the lender provides the borrower a notice of default on a prescribed form.

If the borrower fails to cure the debt, otherwise settle it, or use any other legal process to stall the foreclosure, and after a specified amount of time has passed, the lender may auction the property publicly. The highest bidder becomes the owner of the property free of any interest or fees of the previous owner/lender.

At the auction, it is interesting to note, that the lender itself can be a bidder. Furthermore, it is the only entity that is allowed to make a “credit bid” – a bid that is made against the outstanding debt. This is advantageous to the lender, as all other bidders have to pay in real funds to obtain the property. The lender can then take its time to get market value for the property rather than “auction value”.

In this type of foreclosure, which is, for the most part, “nonjudicial”, it may be necessary to use certain legal procedures in any event. For example, if the borrower does not voluntarily give up physical possession of the property, the lender may have to go through an eviction process through the court system.

It may be noted that both types of foreclosures are essentially a “repossession” process – a repossession of property that has been pledged as collateral security against a loan or other debt.
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