Distribution of Sale Proceeds. Distribution of Sale Proceeds [p. 788] Distribution: Nonjudicial Sale. Distribution: Nonjudicial Sale

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1 Distribution of Sale Proceeds [p. 788] Liens extinguished by sale are transferred to proceeds Order of distribution ( waterfall ): First, to costs of sale Then, to unpaid balance due to foreclosing mortgagee Then (if any), to unpaid balance to subordinate lienholders (in order of priority) Then (if any), surplus paid to mortgagor In judicial foreclosure, distribution confirmed by court Distribution of Sale Proceeds Note: in a foreclosure sale by a junior lienholder, any senior lien is unaffected by the sale Thus, senior lienholder in such a sale does not have a lien (as mortgagee) against any surplus that would be due to the mortgagor [Note 3, p. 792] But, senior lienholder could assert any rights it may have acquired as a general creditor (e.g., if senior had already obtained a judgment on the senior debt, it could use garnishment to attach the sale surplus) Distribution: Nonjudicial Sale You are foreclosure trustee and just completed foreclosure sale at direction of First Bank Sale proceeds = $128,000 cash First Bank (first lienholder) claims to be owed $110, Second Bank (second lienholder) claims to be owed $30,000 As trustee, how do you distribute the proceeds? Distribution: Nonjudicial Sale Concern: as trustee, you can t be SURE that balances claimed by lienholders are correct, or that their liens are all valid (no judicial determination!) Thus, Trustee should get consent of mortgagor and lienholders to amounts to be distributed, and should have each person sign a release If mortgagor and all lienholders will not consent, Trustee should pay the sale proceeds into court and interplead the parties to get judicial determination 1

2 Equitable vs. Until a foreclosure sale occurs, the mortgagor can exercise his/her right of equitable redemption, by paying off the entire balance of the mortgage debt Redemption extinguishes the mortgage lien Right of equitable redemption is extinguished by foreclosure sale Some states: even AFTER foreclosure sale occurs, the mortgagor can exercise statutory redemption Redemption period varies by state Equitable redemption price (prior to foreclosure) = full balance of debt secured by mortgage In most states recognizing statutory redemption, redemption price is based on foreclosure sale price Redeeming mortgagor must pay foreclosure sale price plus: Interest on that amount from the date of sale, and Any sums paid by buyer after sale for real estate taxes and for repairs Example of (MN, p. 801) Foreclosure sale price = $70,000; Balance of debt = $100,000; 6-mo. redemption period; $1,000 in unpaid taxes, ultimately paid by Buyer Equitable Redemption Debt $100,000 Sale Price $70,000 Taxes 1,000 Taxes 1,000 Interest (10%) 3,500 Price $101,000 Price $74,500 Why should a state allow the mortgagor to redeem after the foreclosure sale has occurred? Why allow redemption at the foreclosure sale price (rather than full debt)? 2

3 : Rationale Last bite at the apple to recover home/farm If there are no competing bidders at sale, mortgagee can buy for low-ball bid and inflate the amount of the mortgagee s deficiency judgment (which would be collectable from the mortgagor s other assets) Statutory redemption minimizes this risk by giving mortgagee incentive to bid at least FMV of the land ( keeps the foreclosing lender honest ) Based on this rationale, why don t ALL states allow statutory redemption? : Concerns Foreclosure sale buyer doesn t have marketable title until the statutory redemption period has expired This may discourage 3d parties from bidding at foreclosures (or cause them to discount their bids to account for the additional delay posed by threat of statutory redemption) If this is true, statutory redemption may result in lower foreclosure sale prices, and higher deficiency judgments This problem is worse in some states, which allow the mortgagor to keep possession during the redemption period! Other states let buyer to take possession immediately, but: Buyer can t sell the property pending expiration of redemption period (b/c Buyer lacks marketable title); leasing it may even be difficult If the property needs improvements, foreclosure sale buyer can t safely make them (courts may say that buyer can t get credit for those improvements because buyer is attempting to drive up the mortgagor s redemption price) 3

4 Because of these concerns: A few states allow it only if mortgagee was the foreclosure sale buyer (not if buyer was a 3d party) A few states allow statutory redemption only after a nonjudicial foreclosure sale A few states allow waivers of statutory redemption Some states (e.g., MO) require the mortgagor to post a bond, prior to the foreclosure sale, if the mortgagor wants to preserve its post-sale redemption right MO: statutory redemption price = full unpaid amount of the debt (not just the foreclosure sale price) 1/2 of states = no statutory redemption at all! Reacquisition by Mortgagor After Sale: Lien Revival After a foreclosure sale occurs, the mortgagor can only reacquire the property in one of two ways By statutory redemption (if permitted), or By reacquiring land in voluntary sale transaction Majority rule: if the mortgagor reacquires the property in the future, the liens that were extinguished by foreclosure are revived to the extent that the mortgage debt(s) remained unpaid after the sale Lien Revival: Example Smith owns home, subject to two mortgages: Senior mortgage of Bank1 (debt balance = $200K) Junior mortgage of Bank2 (debt balance = $50K) Bank1 forecloses; sale price = $170K Both mortgage liens are extinguished After sale, Smith exercises statutory redemption; afterward, Smith now owns home subject to: Senior mortgage held by Bank1 (balance = $30K) Junior mortgage held by Bank2 (balance = $50K) Reasons for Lien Revival? 4

5 In housing crisis, Boston Community Capital adopted a program to buy homes at foreclosure sales and sell them back to mortgagors at the current FMV BCC and community banks would make new mortgage loans to the mortgagors so they could repurchase the homes FHFA: when mortgagors reacquired the property, that revived any liens that had been extinguished by the foreclosure What s the correct policy here? 5