Understanding Bankruptcy

Mortgages

A written instrument giving a creditor interest in real property as security for payment of a debt

 

• Mortgage foreclosure
• Deficiency judgment
• Redemption rights

 

For most people, buying a home will be their biggest investment. Mortgage is a written instrument giving a creditor interest in real property as security for payments made on debt acquired. Without mortgages, the dream of homeownership will be limited to a much selected few because the majority of the population can, at the most, afford only a limited down payment. Mortgages are recorded in the county where the real property is located. This recording acts as written proof of interest in favor of the creditor.

Mortgages are also part of the US financial system. Packaged in accordance with stock market regulations, mortgage packages are sold to different types of investors, especially to pension funds and insurance companies. This is very important to the American banking system in order to free funds which then can be used to lend other consumers creating more mortgage backed assets.

Due to the amount involved, debtors who acquire mortgages are expected to default in higher rates (reflected in loan origination cost and fees). To remedy the risk and insure proper handling of debtor’s rights, the US legal system created the process of foreclosure. Every state has its own rules in addition to federal regulations under TLSA and RESPA. The process starts after the debtor fails to make payments and the creditor tries to contact the debtor. Creditor goes to court and obtains a judgment sale. Proceeds cover sale fees, court fees, and the amount owed after. In case of the presence of junior lien, the first mortgage takes priority even if the junior lien holder initiates the foreclosure procedure first.

Most of the time, the property will be sold for less than what the mortgager (debtor) owned. The mortgagee (creditor) can file suite and demand payment. Court will issue a deficiency judgment in favor of the mortgagee for the difference in the amount owed against any property owned by the mortgager within the county limits. Most states have limitations to protect the debtor, and some states prohibit deficiency judgment against foreclosed homes.

At the same time, debtors can redeem their properties anytime before the foreclosure sale. In this situation, debtors become liable for any fees acquired by the creditor during the foreclosure process in addition to paying the full amount owed. This is identified as “equity of redemption”. Some states will allow debtors to still regain their properties after foreclosure sale. Known as “statutory period of redemption”, it provides debtors with extra time to regain their homes. In those states, property’s deed is only delivered to the new owner after the passing the statutory period.