When owners of real estate are unable to pay their mortgage and fall behind, the lender may choose to foreclose on the property. In this situation, so long as the lender complies with the applicable law, the lender will sell the property at the foreclosure sale. If the price received at the foreclosure sale is less than the lender is owed, the borrower can be liable for the difference between the sales price and the amount owed under the note. In lieu of a foreclosure, the owner, with the approval of the lender, may sell the property via a short sale. In a short sale situation, the lender agrees that a property may be sold for less than the amount owed under the note. Even in a short sale, the owner can be liable for the difference between the sales price and the amount owed under the note.
You might ask why you would be responsible for any deficiency after a foreclosure or short sale. When someone borrows money to buy real estate, they sign both a note and a mortgage. The note is the promise to pay the amount borrowed with interest and the mortgage is the collateral for the note. When the property is sold at foreclosure or via short sale, the property passes to the new owner free of the mortgage but the debt owed under the note is not discharged and so the borrower continues to be responsible for any deficiency. The lender can exercise their right to sue the borrower for the amount still owed under the note. This is called a deficiency action.
Properties may have multiple mortgages at the same time. If there are multiple mortgages they are referred to as senior or first mortgages and junior or second or third mortgages. A junior mortgage is a mortgage that is recorded after another mortgage or when a lender agrees that its mortgage will be subordinate or junior to another mortgage. Junior mortgages are often smaller loans that the homeowner applies for when the first or senior mortgage did not provide enough money for the purchase of a property or the owner needs funds for improvements or other expenses. In the event of default, or failure to pay, if the senior mortgage forecloses they would receive the proceeds from the sale in order to satisfy the debt owned under their note. If there are excess proceeds from the sale, then the junior mortgage receives the excess up to the amount needed to satisfy their note. Since junior mortgages would receive foreclosure proceeds only when the first mortgage has been paid in full, the interest rate charged for a junior mortgage tends to be higher and the amount borrowed will be less than that of the senior or first mortgage.
Determination of what interests are senior or junior, depends on the recording statutes in your jurisdiction. For example, New Hampshire is a race-notice jurisdiction which means a lender who records their mortgage first, at the registry of deeds, without knowledge of a prior unrecorded mortgage, will be deemed senior over that prior unrecorded interest. However, in Massachusetts, it is simply a notice jurisdiction which gives priority to any mortgage or interest that is recorded without notice of another mortgage interest, despite when it is recorded. These are important differences to be aware of if you have an interest in real estate.
Finally, before a property is foreclosed, the borrower/owner will have the right of equitable redemption. This is a guaranteed right that can only be waived under limited circumstances. This means that at any time prior to the foreclosure sale, the borrower/owner has the right to “redeem the land,” or free it of the mortgage by paying off the amount due, together with any accrued interest and costs the lender has incurred. If the borrower/owner has defaulted on a mortgage or a note that contains an “acceleration clause” permitting the lender to declare the full balance due in the event of default, the full balance must be paid in order to redeem.
If you have questions about your mortgage, foreclosures or short sales, or if you are interested in purchasing a property via short sale or that is being foreclosed, the attorneys at Smith-Weiss Shepard & Spony, P.C. can guide you through this process.