FAQ - Advantages and Disadvantages of a Real Property Foreclosure
This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).
FAQ # 14 - What are the advantages of a real property foreclosure?
- Biggest advantage is that foreclosure extinguishes all liens that are subordinate or inferior to the lender's lien. However, not all liens will be inferior. State law differs and the facts surrounding the creation of each lien will differ. For example, in some states, mechanics liens are NOT extinguished by a foreclosure; and property taxes typically are NOT extinguished.
- Sometimes the cost may be less than a deed in lieu transaction (which can involved title insurance premiums, and significant legal fees if negotiated)
FAQ #15 - What are the disadvantages of a real property foreclosure?
- Receipt of a foreclosure notice by a borrower could encourage the borrower to file for bankruptcy—which will halt the foreclosure and impact the lender's chance of being fully repaid
- In a non-judicial foreclosure, the lender must strictly comply with all statutory legal requirements, or else the foreclosure can be overturned and the lender may be liable to the borrower for damages for wrongful foreclosure
- Depending on the law of the state where the property is located, non-judicial foreclosure may take more time than the lender is willing to accept. So, in those states, taking the property back via a deed in lieu is a common strategy.
- While this probably shouldn't be called a "disadvantage," it is a practical problem: even though a foreclosure might legally extinguish a mechanics lien, the lender's motivation to quickly sell the property (after the foreclosure) might cause the lender to negotiate a settlement of the mechanics lien. Sure, legally the lender could go to court for an order "removing" the lien from the real property records, or the lender could pursue a claim under the loan title policy, but both take time (and going to court results in legal fees).
To read the entire Tough Times FAQ series, please click here
Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers
If you have thoughts, suggestions or questions on this topic, please post a comment below.
