Foreclosure Filing: Meaning, How It Works, Types

What Is a Foreclosure Filing?

A foreclosure filing refers to the legal act by a mortgage lender in filing a lawsuit in court to win the right to sell the home of a delinquent mortgagor at auction. It is thus the initiation of the formal foreclosure process.

When a homeowner defaults on mortgage payments or otherwise fails to fulfill the terms of the mortgage agreement, the lender can enforce its rights through the foreclosure process. The foreclosure process is regulated by state laws, and the rights and obligations of both the borrower and the lender can vary widely from state to state.

Types of Foreclosure Filings

There are two main types of foreclosure filing:

• Judicial foreclosure, in which the lender must file a foreclosure suit in court to be allowed to resell the home.
• Nonjudicial foreclosure, wherein a lender doesn’t need to seek court approval.

Whether or not your mortgage lender will have to file a judicial foreclosure depends on the laws of your state.

Judicial Foreclosure Filing

In states with judicial foreclosure, there are typical steps that a mortgage lender must take before it can file a foreclosure suit in court. In New York state, for instance, the bank must first send a delinquent borrower an acceleration letter, which states its intention to accelerate the mortgage if the borrower does not get current on their loan by a certain date.

Accelerating a mortgage means requiring a borrower to pay the entire amount due at once. An acceleration letter is usually sent after a borrower has failed to make their mortgage payment for three months. After sending the acceleration letter, a mortgage lender in New York must also send delinquent borrowers a 90-day pre‐foreclosure filing notice, which must inform borrowers of at least five nonprofit legal counseling services in the borrower’s area.

Only after this 90-day period can a mortgagor file for foreclosure. In many states like New York, the delinquent borrower then has a period of time, typically 20 to 30 days, to file a response to the mortgage lender’s complaint. This response is the borrower’s opportunity to state if the mortgagor believes the foreclosure complaint has been filed in error or if the borrower has any other complaints about the conduct of the mortgage servicer.

Nonjudicial Foreclosure Filing

More than half of the U.S. states—30, including Arizona, California, Georgia, and Texas—primarily use nonjudicial foreclosure, also called power of sale. This type of foreclosure doesn’t require the lender to file a formal lawsuit—in fact, it does not go through the court system at all unless the homeowner sues the lender to try to stop the proceeding.

In a nonjudicial foreclosure, the power of sale clause of the mortgage contract gives the lender the right to seize and sell the property if the borrower defaults. By signing the mortgage contract, the borrower effectively agrees to this condition.

While every state that allows it has slightly different rules when it comes to nonjudicial foreclosure, the process generally includes these aspects:

• The borrower missed mortgage payments and has defaulted on the loan.
• The lender gives notice of the foreclosure.
• Eventually, the home will be auctioned by a third-party trustee at a foreclosure sale.

While they don’t require court action, nonjudicial foreclosures still mandate a series of state-sanctioned steps that lenders have to follow. Usually, borrowers have to receive a written advance warning, such as a breach letter or a pre-foreclosure notice, of the lender’s intention. Other steps include:

• A notice of default, which gives a set amount of time to make back payments and get mortgage current.
  
• A combined notice of sale and right to cure, which states unless all missed payments are received by a designated deadline, the home will be later sold on a different designated date.
  
• A notice of sale, which is a simple letter stating the lender will take possession of and sell the home.

Filing Foreclosure in Nonjudicial States

In many states with laws supporting nonjudicial foreclosure, the actual filing of a foreclosure suit is sometimes unnecessary. In these states, banks can forgo a judicial review of the foreclosure if they included a power of sale clause in the mortgage agreement.

In these states, lenders are not required to obtain a decree of foreclosure through the court system. Instead, they may alert the borrower and the public of the foreclosure through other means. These may include a notice of default followed by a notice of sale, a decree of sale specifying an auction date, or simply the publication of a notice of sale in a newspaper. In states with nonjudicial foreclosures, the foreclosure process generally operates more quickly than in states requiring a court-issued decree of foreclosure.

Alternatives to Foreclosure Filings

When a homeowner undergoes financial difficulties, there are a variety of ways to avoid any negative consequences of foreclosure filings. A lender or borrower may opt for a variety of other solutions, such as:

• Loan Modification: This option involves negotiating with the lender to modify the terms of the existing mortgage. Changes may include reducing the interest rate, extending the loan term, or adding missed payments to the end of the loan.
• Refinancing: Homeowners can explore refinancing their mortgage to obtain a new loan with more favorable terms, such as a lower interest rate or longer repayment period. This can help lower monthly payments and make them more manageable.
• Repayment Plan: Homeowners can work with their lender to develop a repayment plan that allows them to catch up on missed mortgage payments over an agreed-upon period. This involves spreading out the overdue amount and adding it to regular monthly payments.
• Forbearance Agreement: In a forbearance agreement, the lender temporarily suspends or reduces mortgage payments for a specific period. This option is often used during times of financial hardship, such as job loss or medical emergencies.
• Short Sale: A short sale involves selling the property for less than the outstanding mortgage balance with the lender's approval. This option allows homeowners to avoid foreclosure and mitigate the impact on their credit, although it requires lender cooperation and may result in financial implications
• Mediation Programs: Some jurisdictions offer foreclosure mediation programs where homeowners and lenders can engage in facilitated negotiations to find mutually beneficial solutions. Mediation can help borrowers and lenders reach agreements and potentially avoid foreclosure.
• Government Assistance Programs: Government-sponsored initiatives, such as the Home Affordable Modification Program (HAMP) or the Hardest Hit Fund (HHF), provide additional resources and financial assistance options for homeowners facing foreclosure.
• Reverse Mortgage: For eligible homeowners aged 62 or older, a reverse mortgage can provide funds from the equity in the home, which can be used to pay off the existing mortgage or alleviate other financial hardships.
• Bankruptcy: While it should be considered as a last resort, filing for bankruptcy may provide temporary relief by halting foreclosure proceedings and allowing homeowners to reorganize their debts. Bankruptcy laws and eligibility criteria vary, so consulting a bankruptcy attorney is essential.

Economic Factors Influencing Foreclosure Filings

Foreclosure filings are influenced by various economic factors. In many cases, high unemployment rates and income instability can lead to foreclosure filings as individuals lose jobs or face reduced income. By extension, economic downturns and recessions also contribute to foreclosure filings.

Housing market conditions also significantly impact foreclosure filings. With a slump in property values leaving homeowners with negative equity, it may be difficult to refinance or sell their homes. Additionally, a surplus of available housing inventory can increase competition, potentially driving down home prices and exacerbating foreclosure risks.

Interest rates and mortgage affordability play a crucial role in foreclosure filings. Homeowners with adjustable-rate mortgages may face challenges as their monthly mortgage payments increase. Plus, limited access to credit or reliance on subprime lending can contribute to higher foreclosure rates, and subprime borrowers often have higher rates that drive higher payments.

Lastly, government interventions and foreclosure prevention programs can help mitigate the impact of economic factors on foreclosure filings. In addition, loan modification initiatives, refinancing options, and foreclosure moratoriums provide temporary relief. Should any of these programs or initiatives be paused or disallowed, foreclosure filings may be impacted by economic repercussions.

Foreclosure Filings and Moratoriums

When public policy puts a moratorium on foreclosure filings, there are several downstream effects. This was witnessed during the COVID-19 crisis when the Federal Housing Finance Agency issued and then extended COVID-19 forbearance and eviction moratoriums. The repercussions of a foreclosure moratorium may include but aren't necessarily limited to:

• Suspended New Filings: During a foreclosure moratorium, new foreclosure filings are generally suspended or prohibited. This means that lenders or servicers cannot initiate new foreclosure actions against delinquent borrowers during the moratorium period. As a result, the number of new foreclosure filings reported during this time decreased significantly.
• Delayed Proceedings: For foreclosure cases already in progress when a moratorium is implemented, the proceedings may experience delays. This delay can be due to court closures, restrictions on evictions, or the suspension of foreclosure auctions. As a result, the overall timeline for completing foreclosure actions is extended, effectively pausing the progression of these cases.
• Temporary Relief for Homeowners: Foreclosure moratoriums provide temporary relief to homeowners facing financial hardships. The suspension of foreclosure filings gives homeowners a respite from immediate foreclosure threat.
• Financial Hardship for Institutions: Foreclosure moratoriums can pose challenges for financial institutions, such as banks and mortgage servicers. With the temporary suspension of foreclosure filings, lenders may experience liquidity issues as the expected cash flow from foreclosures is delayed or halted.
• Backlog After Moratorium: Extended moratoriums or the lifting of a moratorium may lead to a backlog of foreclosure cases. Once the moratorium is lifted, there may be a surge in foreclosure filings as lenders resume initiating new actions and processing delayed cases.
• Market Stability: Foreclosure moratoriums aim to stabilize the housing market by preventing a sharp decline in property values and minimizing the negative impact of widespread foreclosure filings.

The Bottom Line

A foreclosure filing refers to when a mortgage lender files a lawsuit in court to win the right to sell the home of a delinquent mortgagor at auction. The process of foreclosure is regulated by state laws, and the rights and obligations of both the borrower and the lender can vary widely from state to state.