FORECLOSURE SALES
If sellers are unsuccessful in their attempts to sell their property privately, or if the lender/servicer determines that there is no reasonable likelihood that a loan workout or short sale is feasible, then the lender/servicer will proceed with a foreclosure action. Technically, there are two types of foreclosure proceedings available in North Carolina, a judicial proceeding and a nonjudicial proceeding. However, judicial proceedings are used only when the deed of trust securing the indebtedness, i.e., the promissory note, does not contain a power of sale clause, which is very rare. Judicial proceedings are commenced by the filing of a complaint and summons setting forth the claim for relief asserting why the plaintiff is entitled to a court order directing that the property be sold. Once the complaint is served on the defendants and their answer period has expired, generally thirty days, which may be extended to sixty days, and a hearing is held before a judge at which point each party states their claim or defense, an order is entered directing that the property be sold at public auction (assuming that the plaintiff prevailed). Notice of the auction is then posted, the auction is held, and the highest bidder acquires the property, assuming that no upset bid is filed within the ten day period following the auction. Title is conveyed to the new purchaser pursuant to an Order entered by the Clerk of Court.
Non-Judicial Foreclosure
Again, judicial proceedings are almost never used anymore, as virtually all deeds of trust contain a power of sale clause which authorizes the trustee to sell the property in the event the borrower defaults in meeting his/her obligations under the promissory note. Once the borrower defaults, the servicer notifies the trustee to proceed with foreclosure under the power of sale and the trustee or substitute trustee merely files a preliminary Notice of Sale indicating the property address, the date, time and place of sale. Recall, however, that the servicer must first send a notice to the borrower 45 days in advance of initiating any action if the underlying loan is a “subprime loan” and must file certain information with the Administrative Office of the Courts. As of January 1, 2009, all servicers seeking to foreclose on a mortgage loan must first provide written notice to the borrower itemizing payments in default, any other charges necessary to bring the loan current, etc. 45 days prior to initiating any action.
If the deed of trust specifies a particular place or manner of sale, then that procedure must be followed. Otherwise, after the preliminary notice is filed, a hearing is held before the Clerk of Court (not a judge) who will determine whether a sale may take place. If the Clerk finds that a sale is warranted, then the Clerk will issue a Notice of Sale. The Notice of Sale must name the borrowers, the lenders, provide a description of the property and state the date, time and place of the sale. The Notice must be mailed to the borrower by first class mail at least twenty (20) days prior to the sale date. (Note, certified mail is not required.) If the property has less than 15 residential rental units, then notice also must be mailed to each tenant advising each of the impending foreclosure and informing each of his/her right to terminate leases entered into or renewed on or after October 1, 2007.
The Notice of Sale must also be published in a newspaper of general circulation in the county where the property is located once a week for two successive weeks with the last advertisement published not less than ten (10) days prior to the sale. Lastly, the Notice of Sale must be posted on the courthouse door for twenty (20) days prior to the sale. The sale must be conducted at the courthouse in the county where the property is located between the hours of 10:00am and 4:00pm. The property will be sold to the highest bidder, although upset bids may be filed with the Clerk within ten days of the foreclosure sale. Each time an upset bid is filed, a new ten day upset period commences and continues until such time as no further bid is filed within the ten day period from the last bid at which point the sale becomes final. An upset bid must exceed the last bid by at least five percent (5%), but no less than $750.00. A sale may be postponed by announcing the need to postpone at the time and place the original sale was to occur and a notice of the new date and time must be posted on the courthouse door.
Deficiency Judgments
Lenders may initiate a separate lawsuit against the borrower seeking a judgment for the costs of sale and for any remaining balance due under the note which was not satisfied by the proceeds from the foreclosure sale. This is known as a deficiency judgment. There are two exceptions to the right to sue for a deficiency judgment. One is where the deed of trust secured a purchase money mortgage held by the seller. Where the seller finances all or a portion of the sales price and takes a deed of trust securing that note, s/he will not be entitled to pursue a deficiency judgment against the borrower for any remaining sums not satisfied by the proceeds of the foreclosure sale.
The other exception is where the lender is the high bidder, but obtains the property by bidding less than the amount owed the lender, but the fair market value of the property exceeds the amount owed. For example, the outstanding principal balance and accrued interest under the note is $120,000.00, but the lender bids only $100,000.00 and is the high bidder. The fair market value of the property is $150,000.00. The lender should not be allowed to obtain a deficiency judgment against the borrower for the $20,000.00 difference between what the lender was owed and what it bid, as it now holds title to property worth $150,000.00 and can be made more than whole by selling the property to a third party. However, if the lender attempts to sue the borrower for the alleged $20,000.00 deficiency, the borrower must affirmatively raise the argument in defending against the lender’s suit. Had the property been sold at the foreclosure sale to a third party, not the lender, for only $100,000.00, then the lender would be entitled to obtain a deficiency judgment against the borrower for the $20,000.00 difference.
Borrower’s Right of Redemption
Borrowers retain the right to redeem their property and regain title by paying in full all principal and accrued interest due under the note even after the foreclosure sale during any upset periods until the sale becomes final, which is when no further upset bids are filed within the ten day period. Typically they may accomplish this only when they can borrow sufficient sums or obtain a new loan from another lender. However, it may be possible, particularly as in the last example where the fair market value of the property exceeds the amount of the remaining indebtedness, i.e., $150,000 fair market value versus $120,000 owed. In reality, such a property most likely would be sold through a voluntary private sale long before foreclosure occurred.
If you have any questions or need additional information, please contact Bill at 704-944-4260 or bgallagher@superiorschoolnc.com. Bill Gallagher teaches a real estate continuing education course on Foreclosures, Short Sells, REO’s and Auctions.
To view a schedule of classes in North Carolina, please visit www.ssore.com/classes.php.
By: Bill Gallagher
President/Owner, Superior School of Real Estate
