Improper Home Foreclosure – Know Your Rights
Knowledge of the rules, regulations and laws governing Texas home foreclosures can help homeowners protect their interests from an improper or irregular foreclosure. Foreclosures may be judicial (ordered by a court following a judgment in a lawsuit) or non-judicial (done without court involvement by auction “on the courthouse steps”). Most foreclosures are non-judicial.
Among other things, a proper foreclosure’s involve three core conditions:
1. real estate lien note executed by the mortgagor (borrower) at closing for the balance of the purchase price;
2. deed of trust signed by the buyer at closing giving the mortgagee (lender or its successor(s)) a security interest in the property being purchased; and
3. pertinent Texas statutory and case law.
Generally, a foreclosure is proper if it complies with the procedure outlined in the deed of trust. Texas law is relevant only where the deed of trust is silent on a mandatory statutory issue or where the deed of trust conflicts with Texas law.
To initiate a foreclosure the borrower must, among other things, default on a periodic payment required by the real estate lien note as described in the note and deed of trust. The lender then has the option of accelerating the collection of the remaining balance of the note. The entire amount of remaining indebtedness, not just the periodic payment in arrears, may then become immediately due and payable in full. This is known as the acceleration clause.
If the collateral securing the note is the debtor’s residence, the lender may not accelerate the not immediately following default. Instead, the lender must give the debtor at least a 20-day written notice (unless the deed of trust is on the FNMA form, then 30 days notice of default must be given) to cure the payments in arrears thereby reinstating the Note. The notice must be sent by certified mail, return receipt requested. This notice cannot be waived and is required in all instances.
The Fair Debt Collection Practices Act requires that a borrower be given 30 days to request and obtain verification of the debt. The lender may give notice of default, accelerate the debt, and even post the property for foreclosure in less time, but the foreclosure sale itself should not be conducted until the 30-day debt verification period has expired and only then with proper statutory notice to the Debtor. There is also an equivalent state statute (the “Texas Debt Collection Practices Act”) contained in Texas Finance Code Chapter 392. Failure to provide verification of the debt when the borrower has requested it in writing has serious penalties under both laws.
If the debtor does not make the payments in default during the 20 or 30-day period, the lender may accelerate the debt by sending notice of the acceleration to the debtor.
If the collateral serves as the debtor’s residence, the lender must give the following notice via certified mail unless they are waived in the deed of trust:
1. A demand notice for the installment in arrears and thereafter affording the debtor an opportunity to remedy the default;
2. A clear and unequivocal notice of the lender’s intent to accelerate the debt after the debtor has been given a reasonable time to cure the installment in arrears;
3. A final notice that acceleration has in fact occurred.
It has been held proper to combine the first notice concerning the default with the second one involving the intent to accelerate.
The trustee is the central character in the foreclosure process. The trustee has the sole authority to sell the property and to convey title to a Buyer. The debtor grants this authority to the trustee in the deed of trust. Texas statutes restrict, to some degree, persons eligible to serve as trustees or substitute trustees. Dual functions under the security agreement disqualify an individual to serve as a trustee. Likewise, the person cannot be a debt collector.
Lenders may authorize a mortgage servicer to appoint a substitute trustee or trustees to serve under the deed of trust. The name and street address of the substitute trustee or trustees must be disclosed on the appointments and in the notices timely posted and filed at the courthouse and sent to the debtor.
Conditions stated in the deed of trust for the appointment of a substitute trustee must be strictly followed. Unless the deed of trust provides otherwise, a trustee or trustees need not formally resign before another is appointed. If the original trustee has posted, filed and sent the required notices, the substitute trustee or trustees should postpone the sale.
The sale may occur only on the first Tuesday of each month occurring 21 days after the new notices have been properly posted, filed and sent. Generally, the sale is conducted at the courthouse steps.
The trustee is the only one who can conduct a valid sale. However agents of the trustee may sign, post, file and send the notices.
After notice has been posted, filed and sent and the required 21-day period has elapsed, the trustee may proceed with the sale on the first Tuesday of the following month anytime between 10:00 a.m. and 4:00 p.m., but within three hours after the time designated in the notices.
A mortgage servicer has the same authority as a lender as long as these conditions are met:
1. the lender grants the current mortgage servicer the administrative authority to act on its behalf in the servicing agreement;
2. all notices, filings and postings preceding the foreclosure sale show that the mortgage servicer represents the mortgagee under the service agreement between the two; and
3. the notices, postings and filings preceding the foreclosure contain the name and address of the mortgagee or the name and address of the mortgage servicer if the lender has granted the mortgage servicer the authority to service the mortgage.
As of May 20, 2009 a new federal statute impacts the possession date of rental property purchased at foreclosure. If the foreclosure involves a federally related mortgage on a dwelling or residential property, the purchaser must give any bona fide tenant in possession at least 90 days notice to vacate. The term bona fide tenant is defined as one who acquired the lease at an arms-length transaction where the rent is not substantially less than the fair market value for the area.
Inadequacy of the consideration at a foreclosure sale can be grounds to have the sale set aside under federal bankruptcy laws. If the sales price does not equal or exceed 70 percent of the property’s fair market value, the sale can be voided as a fraudulent transfer if the debtor files for bankruptcy within one year of the sale.
An action to set aside a sale must be initiated within four years.
If the debtor does attack the foreclosure sale under Texas law because of an irregularity, the attack most likely will be for damages and not to rescind. To set aside the sale, the debtor first must repay or offer to redeem the property from the purchaser at the price brought at the foreclosure sale. If the debtor was in possession of such resources, the foreclosure probably would not have occurred.
It is, therefore, imperative that one seeking to attack foreclosure do so “before” rather than “after” a sale to maximize probability of a good result.