|Source: BasicGov / License|
The collapse of subprime, mortgage-backed securities in 2008 led to a widespread foreclosure crisis brought on by what the media termed the “Great Recession.” Today, the repercussions of the crisis continue to be felt in courtrooms across the country even as the economy has largely recovered. As result, people around the nation have received a crash course in foreclosure law. Homeowners owe it to themselves to become familiar with their state's mortgage laws, a process that can often be daunting.
The History of Foreclosure
Foreclosure law arose long after mortgages became common. Legal scholars have argued that virtually every developed society in history has had some form of a mortgage. In medieval England, mortgages were originally designed under what is known as the strict title theory, which directed profit and rent to the landowner without interest to avoid violating usury laws. It was only in the 1500s that charging interest became socially and legally acceptable. Moreover, mortgagees had few rights until the 1600s, when the principle of "equity of redemption" made it possible for mortgagees who had missed payments to regain the rights to their property by meeting their debt obligations.
Foreclosures themselves only arose in the 1800s, as English courts began limiting equity of redemption by imposing restrictions on the amount of time a borrower had to repay their mortgage debt. By the mid-19th century, foreclosures were developed as a way for lenders to ask the court to set specific dates for repayment prior to allowing property rights to revert back to the mortgagor. However, American independence led to American jurisprudence, and while several efforts were made in the 20th and 21st centuries to create a federal standard for mortgage laws, the current legal landscape is one in which each state retains its own legal process for foreclosure.
The Foreclosure Process
|Source: Taber Andrew Bain / License|
While all 50 states have different foreclosure statutes, foreclosures in the United States can generally be grouped into three different processes. The most common, “judicial foreclosure,” is available in all states, although some make it the primary method. In this process, a failure to pay leads courts to take over the property and sell it in a public auction. In several states, mortgages may include "power of sale" clauses in which mortgagors oversee auctions instead of the courts, a convenience that often saves considerable time. The third type of foreclosure, “strict foreclosure,” is used in fewer states and occurs when mortgagees owe more money than the property is worth. In a strict foreclosure, the mortgagor sues the mortgagee to set a timeline for repayment, with the mortgagor recovering the property rights immediately upon failure to repay rather than requiring an auction.
Foreclosure processes vary by state and cover aspects such as how long borrowers have before they receive notice or become subject to eviction, as well as a variety of other issues. In many respects, the processes look very similar. Mortgagors can begin foreclosure proceedings between three and six months following the last payment, after which time mortgagees receive a formal notice and a final timeline for repayment. In many states, debt repayment remains an option until the auction, although some states offer a limited redemption period after this point.
How to Avoid Foreclosure
In many respects, the easiest way to avoid foreclosure is to avoid taking on a mortgage that cannot be repaid. However, for many Americans, the loss of a job or a medical emergency might turn an affordable mortgage into an enormous financial burden. As soon as you miss your first mortgage payment, it becomes vital to seek out assistance. Many mortgagors and lenders are eager to avoid foreclosure, and working with them is vital. Arrangements can be made for repayment in many circumstances. Furthermore, the U.S. Department of Housing and Urban Development offers the assistance of housing counselors who can provide state-specific advice and help mortgagees avoid being scammed by financial services companies that prey on those in foreclosure.
Luckily, mortgagees across the nation have received numerous legal benefits thanks to legislators who have responded to the mortgage crisis of 2008. A wide variety of new laws were enacted to prevent lender abuse, encourage mediation rather than civil suits, and create new opportunities for loan modifications. One federal program, the Hardest Hit Fund, or HHF, offers financial assistance to those facing foreclosure, while other nationwide laws like the Mortgage Assistance Relief Services (MARS) protect mortgagees from deceptive practices through a variety of reforms and rules for companies offering foreclosure rescue services. Many states have also introduced stringent "ability to pay" rules to prevent lenders from entering into mortgage agreements with those who are unable to afford payments.