Foreclosure is a remedy available to lenders when borrowers default on their mortgage payments or breach other contractual obligations, such as failing to pay taxes or keep the property insured. To determine if a default has occurred, the loan documents, including the note, deed of trust, and loan agreement, must be carefully examined. The foreclosure process can be either judicial (ordered by a court) or non-judicial (conducted outside of court), with non-judicial foreclosures being more common in Texas. Texas Foreclosure Law
In Texas, non-judicial foreclosures are governed by chapter 51 of the Property Code and take place on the first Tuesday of each month between 10 a.m. and 4 p.m. at the county courthouse. Foreclosure eliminates junior liens but does not absolve the borrower of tax obligations.
Notices of foreclosure sales must be filed with the county clerk and posted at least 21 days before the scheduled foreclosure date. These notices provide essential information about the debt, property description, and the designated time for the sale. Larger metropolitan areas often have foreclosure listing services that publish monthly lists of properties scheduled for foreclosure.
Strict compliance with Property Code sections 51.002 et seq. and the deed of trust is required when giving notices to the defaulting borrower. Two certified mail notices are necessary: the first is the "Notice of Default and Intent to Accelerate," giving formal notice of the default and an opportunity for the borrower to cure it within a specific time frame (usually 20 days for a homestead). After this period, a "Notice of Acceleration and Posting for Foreclosure" is sent at least 21 days before the foreclosure date, specifying the sale location and time.
Notices are sent to the borrower's last known address in the lender's records, and it is recommended to use both first-class and certified mail for delivery. This helps satisfy Texas' mailbox rule, which presumes regular mail is delivered, whereas certified mail requires a returned receipt. The lender should send notices to all likely addresses where the borrower might be found.
For home equity loans, the foreclosure process is different. Texas law requires foreclosure of a home equity lien to be carried out through a court order with a specific sale date. Rules 735 and 736 of the Texas Rules of Civil Procedure dictate the process for lenders to seek foreclosure of a home equity loan in court, and the proceeding is limited in scope to the right of the lender to proceed with foreclosure based on the loan agreement.
In summary, foreclosure serves as a remedy for borrower defaults, and adherence to strict notice and cure requirements is crucial to ensure a valid foreclosure. Non-judicial foreclosures are common in Texas, and specific procedures apply to home equity loans.
Foreclosure Pursuant to an Executory Contract:
Before the 2005 reforms to the Property Code regarding executory contracts, buyers/tenants faced significant disadvantages with contract for deed agreements. Defaulting buyer/tenants risked losing all payments made and being evicted like ordinary tenants. However, the 2005 reforms brought equity protection under Prop. Code sec. 5.066. If a buyer/tenant has paid over 40% of the amount due or made 48 or more monthly payments, the seller/landlord must now provide a 60-day notice of default and an opportunity to cure the default. If the default remains unresolved, a trustee may be appointed to conduct a non-judicial foreclosure.
A valid foreclosure on a senior lien (also known as a 'superior' lien) extinguishes a junior lien (referred to as 'inferior' or 'subordinate') if the foreclosure sale doesn't generate enough excess proceeds to satisfy the junior lien. Mechanic's liens that arise after the date of a deed-of-trust lien generally become subordinate to the deed-of-trust lien. In cases of competing M&M liens, a perfected M&M lien is considered to have originated back to the date of its inception. Leases, including ground leases, are generally terminated during foreclosure as well.
Notice to the IRS:
Before proceeding with foreclosure, it is advisable to conduct a title search to check for any IRS tax lien or federal lien on the property. If such a lien exists, notice must be given to the IRS and/or the U.S. Attorney at least 25 days before the sale, excluding the sale date. This step is crucial to extinguish any IRS tax lien through the sale. The IRS also has a 120-day redemption period after the sale, though this is rarely exercised. Consequently, the successful bidder on an IRS-liened property must wait until the 121st day to breathe a sigh of relief.
Fair Debt Collection Practices Act:
The Fair Debt Collection Practices Act (15 U.S.C. §§ 1601 et seq.) mandates that borrowers receive 30 days to request and obtain verification of the debt. While the lender can give notice of default, accelerate the debt, and initiate foreclosure proceedings within a shorter time frame, the foreclosure sale itself should not occur until the 30-day debt verification period has lapsed. Texas has a similar statute called the Texas Debt Collection Practices Act, found in Finance Code chapter 392. Failure to provide written debt verification, when requested by the borrower, carries severe penalties under both federal and state laws.
Prior to Foreclosure: Conducting Due Diligence as an Investor
Purchasing properties at foreclosure sales is a popular investment strategy, but it comes with potential pitfalls. The main objective for an investor is to acquire immediate equity by paying a relatively modest sum at the foreclosure auction. However, this apparent equity could vanish if the property is burdened with various liens. Therefore, it is essential to thoroughly examine the property's title that is up for sale. Questions to consider include whether the lien being foreclosed is a second or third lien, as the first lien (typically held by a mortgage company) will remain unaffected by the foreclosure.
First liens hold priority and are not extinguished in favor of inferior liens. It is also crucial to investigate the presence of IRS liens, improvement liens, or liens imposed by homeowners’ associations, as they could consume any potential equity in the property. If an investor is uncertain about which liens will be wiped out in the foreclosure sale, seeking advice from a real estate attorney, and providing them with copies of each lien document is advisable.
Researching the property's title can be done by visiting the county clerk's office and accessing real property records. Obtaining copies of the warranty deed, deeds of trust, or other lien instruments will aid in understanding the property's lien situation. Alternatively, a down-date report from a title company can be requested for more convenience.
To gather additional information about the property, one can contact the trustee mentioned in the Notice of Trustee's Sale. Trustees might be willing to provide more details, such as inspection reports, and in some cases, they may allow viewing of the property if it is unoccupied.
Another critical aspect to check is the military status of the borrower. Non-judicial foreclosure of a dwelling owned by active-duty military personnel or within 9 months after their active duty ends is prohibited under Property Code section 51.015. Deliberate violation of this law is considered a Class A misdemeanor.
Property Condition: It is essential for the investor to physically inspect the property if possible, though it is crucial to avoid trespassing on occupied property. Standing on public property, such as the street, and taking photos is legally acceptable.
When buying at a foreclosure sale, the property is sold "as is," making property condition an important consideration. For residential properties, specific factors like the condition of the foundation (noticing signs of settlement), flood-proneness, and potential environmental contamination should be thoroughly examined. It is generally wise to steer clear of properties with significant issues in these areas. Other expensive components that require attention are the roof and HVAC system.
In the case of hazardous substances, especially in commercial properties, potential liability can be enormous. Both Texas and federal law hold property owners, including investors, jointly and severally liable for cleanup costs along with previous owners. The Texas Commission on Environmental Quality (TCEQ) offers a website (www.tceq.state.tx.us) to research the environmental history of a property.
When participating in a foreclosure sale, it is crucial not to bid more than the property's equity, which is the fair market value minus the total dollar amount of any liens that will remain after the sale. Determining the fair market value requires obtaining accurate information. One effective method is to seek a comparative market analysis or broker price opinion (BPO) from a realtor.
Foreclosure sales can be invalidated by unexpected bankruptcy filings. To avoid potential issues, some professional investors check with the bankruptcy clerk's office on the morning of the sale to ensure that the borrower has not filed for bankruptcy under any chapter of the U.S. Bankruptcy Code. This precaution is especially important if the borrower has a history of bankruptcy filings or has threatened to do so. It can be challenging and inconvenient to reclaim funds from a trustee in the event of a voided sale. You can get free bankruptcy documents and information here.
Conduct of the Sale:
Foreclosure sales in larger counties can appear chaotic, with multiple sales happening simultaneously. There are two primary types of sales: those conducted by trustees, usually attorneys representing lenders, and those by the county sheriff for unpaid taxes. The sales take place at a location designated by the county commissioners, often at the courthouse steps or nearby.
The sale is overseen by the named trustee unless a substitute trustee has been duly appointed and their appointment notice filed. Typically, the foreclosing trustee is the lender's attorney. There is no specific script required for the trustee to follow during the auction, but they usually provide details about the note and lien, the default status, the notice given, the acceleration of the note, and that the property is now available for sale to the highest cash bidder. The trustee has a responsibility to conduct the sale fairly and impartially, ensuring they do not discourage bidding in any way (which could be considered a defect). The trustee can set reasonable conditions for the sale and specify the terms of payment, such as cash or cashier's check. However, these conditions and terms must be stated before the bidding starts for the first sale of the day conducted by that trustee.
Bidding at the Sale:
During the foreclosure sale, the investor should actively engage with the trustees until they find the right property. However, it's essential not to let the excitement of the sale lead to exceeding the predetermined maximum bid.
The lender typically bids the amount of the debt plus accrued fees and costs, which can be expected. If the sale generates proceeds beyond the debt, the trustee distributes the excess funds to other lien-holders based on seniority, and any remaining balance goes to the borrower.
Once the investor becomes the successful bidder, they should be ready to make the payment promptly or within the agreed-upon time. Experienced bidders usually carry cash and various cashier's checks made payable to the trustee. In case the high bidder is unable to complete the purchase, the trustee will reopen the bidding and auction the property again.
The buyer acquires the foreclosed property "as is" without any expressed or implied warranties, except for warranties of title, as per Property Code section 51.009. This prevents any consumer claims under the Deceptive Trade Practices Act (DTPA).
Texas has a streamlined non-judicial foreclosure process, which is relatively quick, usually taking 41 to 51 days from the first notice to the day of foreclosure. However, it is wise not to cut deadlines too close to avoid potential issues like void sales or wrongful foreclosure claims.
If the proceeds from the foreclosure sale exceed the amount due on the note, surplus funds must be distributed to the borrower. However, in most cases, the foreclosure sale price is less than the unpaid loan balance, resulting in a deficiency. The lender can then bring a deficiency suit to recover the shortfall within two years (or four years for federally insured lenders).
As part of a defense against a deficiency suit, the borrower can challenge the foreclosure sales price if it is below fair market value and receive appropriate credit if necessary. The fair market value is generally determined by reference to the foreclosure sales price, unless the borrower requests a court determination.
Any money received by the lender from private mortgage insurance is credited to the borrower's account, ensuring the lender does not recover more than what is due.
For borrowers on non-homestead properties, deficiencies can be a significant loss, as the IRS deems the deficiency amount to be taxable ordinary income.
Service-members Civil Relief Act:
The Service-members Civil Relief Act (SCRA), enacted in 2003, significantly expands protections for those serving in the armed forces. Unless ordered by the court, landlords are prohibited from evicting service-members or their dependents from their homestead during military service. The SCRA imposes criminal penalties on individuals who knowingly violate its provisions.
Right of Redemption:
In Texas, there is generally no right of redemption for borrowers after a foreclosure. However, there are limited circumstances where redemption is possible:
1) Sale for unpaid taxes: After foreclosure due to unpaid taxes on homestead or agricultural property, the former owner has a two-year right of redemption. The investor is entitled to a redemption premium of 25% in the first year and 50% in the second year, along with certain recoverable costs. For non-homestead properties, the redemption period is 180 days, and the redemption premium is limited to 25%.
2) HOA foreclosure of an assessment lien: Homeowners have the right to redeem the property until no later than 180 days after the HOA mails written notice of the sale. A lien-holder also has the right to redemption within 90 days of receiving the written notice, but only if the homeowner has not redeemed the property before. These provisions are part of the Texas Residential Property Owners Protection Act, which aims to regulate the powers of HOAs. Notably, an HOA cannot foreclose on a homeowner solely for fines or attorney fees.
Investors should be prepared to hold the property and avoid significant improvements or reselling until any applicable rights of redemption have expired. Careful consideration of redemption issues is essential for investors.
After foreclosure, the new owner obtains title to the property and must take steps to gain possession. This involves issuing a standard 3-day notice to vacate and filing a forcible detainer petition in the justice court. Following a judgment, the new owner must wait for the constable to post a 48-hour notice on the door before forcibly removing the former borrower if they refuse to leave.
It is advisable for investors to include eviction costs in their budget from the beginning. Hiring an attorney for the initial evictions is recommended, as it will provide valuable experience for handling future cases independently. However, conducting an eviction appeal to county court should never be attempted without the assistance of an attorney.
It is a common misconception that lawyers can easily halt a foreclosure with a simple phone call or letter. In reality, attorneys lack the authority to stop foreclosure proceedings by mere communication. The only surefire way to stop a foreclosure is to file a lawsuit and obtain a temporary restraining order (TRO) from a judge before the sale occurs. Once the sale has taken place, the available remedy is a suit for wrongful foreclosure, but the relief may be limited, particularly if the property was sold to a third party for cash (a bona fide purchaser or "BFP").
Reinstatement negotiations with the lender, involving multiple phone calls and messages, are unlikely to prevent a scheduled foreclosure. Without full payment of the arrearage and a signed reinstatement agreement, the foreclosure will proceed as planned. Phone calls alone hold no weight in this matter.
Clients sometimes hope to secure a restraining order without actually suing the lender, but this approach is not feasible. A TRO is a form of ancillary relief that requires an underlying lawsuit to provide a basis for the request. Simultaneous filing of the lawsuit and TRO application is possible, and a hearing can usually be obtained swiftly.
Pre-Foreclosure TRO as a Better Remedy:
It is generally more advantageous for borrowers to obtain a restraining order before the foreclosure sale rather than attempting legal action afterward. Texas law favors the finality of foreclosures, making wrongful foreclosure suits an uphill battle. If the property was sold to a third party unaware of any claims or defects, the chances of recovering the property are slim. Such third parties enjoy protected status as BFPs, leaving monetary damages as the primary remedy for the borrower. To avoid these complications, filing suit and seeking a TRO to stop the foreclosure sale is a wiser course of action. You can get a Temporary Restraining Order (TRO) here.
Challenges in Wrongful Foreclosure Suits:
Wrongful foreclosure suits face numerous hurdles from the outset. Financial constraints often hinder borrowers from initiating legal action due to the significant retainer fees required for litigation. Even if a lawsuit is filed, success is far from guaranteed, and the process can be lengthy and costly. The burden of proving defects in loan documents, foreclosure notices, or sale improprieties is considerable, making it challenging to prevail in such cases. Moreover, demanding the production of the original note as a tactic is generally ineffective in Texas.
It is essential for borrowers to understand the difficulties involved in wrongful foreclosure suits and to weigh their options carefully before pursuing such legal action. While the system may be perceived as biased, borrowers must navigate the legal landscape with caution and consider the financial implications of litigation.
Many clients share their experiences of engaging in lengthy negotiations with lenders to modify their existing loans before a foreclosure sale. These negotiations are typically conducted over the phone, and no signed written agreement exists that would legally bind the lender to halt the sale. As a result, there is often no viable basis for pursuing a wrongful foreclosure suit. It is uncertain whether lenders intentionally employ this strategy to create an impression of willingness to be reasonable while actually favoring foreclosure as a more advantageous option. Opinions on this matter differ among individuals.
On December 30, 2011, the Texas Supreme Court made significant amendments to the Texas Rules of Civil Procedure 735 and 736, which govern the foreclosure of specific liens. These amendments came into effect on January 1, 2012.
The changes in the rules introduce new requirements regarding the form and contents of the application for a foreclosure order on home equity loans, reverse mortgages, and home equity lines of credit. Additionally, the scope of the rules has been extended to include foreclosures of transfer tax or tax loan liens and certain property owner association assessment liens.
Some key procedural modifications include the obligation for separate citations to be issued for each respondent and occupant by the clerk of court, with service and returns handled by the court clerk. Previously, the applicant was responsible for preparing and sending the required notices to respondents.
The amended rules mandate specific contents for the application and supporting affidavit. The application must now include details of the default, such as the number of months in default, the amount needed to cure the default, and the amount required to pay off the lien. If the default is non-monetary, the affidavit must establish the facts leading to the default, and all relevant lien documents and notices must be attached to the affidavit.
Furthermore, the new rules set definitive time frames for court actions. If a response is filed, the court must schedule a hearing within 20 to 30 days after any party's request for a hearing. However, if no response is received, the court cannot require a hearing. In cases of a motion for default, the court must grant the order within 30 days if the application and returns comply with the rules.
An important change relates to the automatic stay of a foreclosure sale. When an order allowing foreclosure is granted, respondents no longer need to file a last-minute temporary restraining order. The sale will automatically be stayed if the respondent files a separate suit related to the application before 5:00 p.m. on the Monday preceding the scheduled foreclosure sale. Any sale conducted after the automatic stay is in effect will be void. However, if the court has not signed an order when the suit is filed, the court must dismiss the pending proceeding upon the respondent's timely motion.
These amendments emphasize adherence to procedural guidelines and timelines for both applicants and the courts. Notice procedures have been substantially changed, requiring separate citations issued by the clerk of court for each respondent and occupant. Applications must now include all documents relevant to the lien, along with required notices and proofs of mailing. These changes are expected to streamline the application process, leading to quicker, more efficient, and potentially less costly procedures for both applicants and courts that comply with the new rules.