Legal Support For Matters Stemming From Foreclosure
Foreclosure is a statutory remedy (governed by Chapter 51 of the Texas Property Code) available to lenders in the event of a borrower’s default on a loan agreement. The foreclosure process generally requires that the lender give the appropriate notices and opportunity to cure to the borrower, seek approval to sell the property (if not previously granted by the borrower in the deed of trust), conduct a sale of the property by trustee at public auction, and evict the borrower or the borrower’s tenant from the property, if necessary.
A borrower’s default may be a monetary default – nonpayment of the “mortgage” installments – or a technical default, usually the failure to pay property taxes, to maintain property insurance, or to abide by other requirements placed upon the borrower in the deed of trust. The lender must then conduct either a judicial foreclosure or, more commonly, a non-judicial foreclosure, as explained below.
Judicial Foreclosure
The judicial process of foreclosure requires that the lender file a lawsuit to obtain a court order to foreclose on the lien. This method is therefore much more costly and time-consuming than the preferential non-judicial process. After a court orders a foreclosure of the property, the property is then sold at public auction to the highest bidder. The judicial foreclosure method is required when the deed of trust does not contain the “power of sale” clause.
Non-Judicial Foreclosure via the “Power of Sale” Clause
In contrast, when the deed of trust contains a “power of sale” clause, it authorizes the trustee to bypass the court system and conduct a streamlined non-judicial foreclosure. When the deed of trust contains this clause, the borrower has pre-authorized the sale of the property to pay the balance of the borrower’s defaulted loan.
Required Notices to the Borrower in a Non-Judicial Foreclosure
Once the borrower has defaulted on the loan, a lender desiring to conduct a non-judicial foreclosure under the “power of sale” must give the borrower two (2) notices pursuant to Section 51.002 of the Property Code: (1) a notice of default and (2) a notice of sale.
Notice of Default and Intent to Accelerate. Before notice of sale can be given, the lender must serve the borrower with written notice by certified mail stating that the borrower is in default under the deed of trust or other contract lien and giving the borrower at least twenty (20) days to cure the default.
Notice of Sale. Notice of the non-judicial sale must be given after the expiration of the 20-day cure period but at least twenty-one (21) days before the date of the sale by:
- posting at the courthouse door of each county in which the property is located a written notice designating the county of sale;
- filing the notice in the property records of each county in which the property is located; and
- serving written notice of the sale by certified mail on each borrower who, according to the records of the mortgage servicer of the debt, is obligated to pay the debt.
The notice of sale must specify the location of the sale (designated by the county commissioners court and filed in the real property records), the 3-hour period during which the sale will take place, and a special disclosure for military servicemembers. If there is a change in trustees (as is usually the case), a written appointment of substitute trustees must also be filed in the property records.
In the event that the courthouse or county clerk’s office is closed due to inclement weather, natural disaster, or other act of God, the posting and filing requirements above for the notice of sale may be delayed up to forty-eight (48) hours after the courthouse or county clerk’s office reopens for business.
The notice requirements (all of which are not detailed here) are technical in nature, and failure to follow them may be a defect in the foreclosure that could later open the lender up to a wrongful foreclosure lawsuit.
Borrower’s Address for Notice and the Texas “Mailbox Rule”
Notices sent to the borrower must be mailed to the borrower’s last known address, but it is generally recommended that the lender send such notices to all known addresses of the borrower, including the subject property being foreclosed upon. Section 51.0021 of the Property Code requires the borrower to “inform the [lender] of the debt in a reasonable manner of any change of address of the [borrower] for purposes of providing notice to the [borrower] under Section 51.002.”
While the Property Code only requires that the lender send foreclosure notices by certified mail, return receipt requested, it is also generally recommended that the lender send notices both by certified mail and first class mail. Under Texas’ “mailbox rule,” a notice that is properly deposited in the U.S. mail is presumed to be delivered; however, certified mail enjoys no such presumption unless the receipt is returned as being delivered.
Notice to the IRS Required for Federal Tax Liens
If there is a federal tax lien attached to the property, the lender must give written notice to the IRS, by registered or certified mail or by personal service, at least twenty-five (25) days prior to the sale. If this notice is not provided, the IRS tax lien will not be extinguished by the sale. The IRS may also redeem the property within the period of 120 days from the date of the sale or the period allowable for redemption under local law, whichever is longer.
Rules of the Texas Foreclosure Sale
Foreclosure sales in Texas are held between 10 a.m. and 4 p.m. on the first Tuesday of every month. The commissioners court of each county designates the area where sales in that county are to take place by recording the designation in the real property records of the county. All foreclosure sales for the county, whether by trustee on behalf of an individual or institutional lender or by the county sheriff as a result of unpaid taxes, shall be conducted in the designated location.
The foreclosure sale is conducted either by the trustee named in the deed of trust or by a substitute trustee that has subsequently appointed by filing notice of the appointment in the real property records. Prior to the opening of bids for the first sale of the day held by a trustee, he or she may set reasonable conditions for the sale, including the terms of payment. Although it is often in a trustee’s (or his or her client’s) best interests to recover the property by credit bidding for the lender up to the amount of the debt, trustees also owe a general duty to conduct the sale fairly and avoid “chilled bidding” (the suppression or discouragement of bids), a defect that could open up the lender to a wrongful foreclosure lawsuit.
To protect against claims of foreclosure sale defects, many trustees recite the details of the foreclosure from a script, including the details of the note, the date and content of notices, the date of acceleration, and the trustee’s reasonable rules for bidding (i.e., cash and cashier’s checks only). The trustee will then open the auction for bids and will often bid on behalf of the lender up to the amount of debt owed plus fees and costs. In the event that the property sells for an amount in excess of the debt, those excess proceeds are distributed to other lienholders in order of seniority. The remaining balance, if any, is then distributed to the borrower.
The highest bidder at auction will receive a trustee’s deed or substitute trustee’s deed, which conveys all of the interest that was held by the defaulting borrower. The successful bidder acquires the property “as is,” at the purchaser’s own risk, and without any express or implied warranties, except as to warranties of title. For purposes of preventing DTPA claims, the Property Code explicitly states that the buyer of property at a foreclosure sale “is not a consumer.” After an unsuccessful sale at foreclosure auction, properties not sold are reverted to the lender. These properties are then referred to as real estate owned (REO) properties.
Military Servicemembers
A sale, foreclosure, or seizure of property under a mortgage or deed of trust securing payment on property owned by a military service member may not be conducted during the military servicemember’s period of active duty military service or during the nine months after the date on which that service period concludes. The only exception is where the sale, foreclosure or seizure is conducted under a court order or pursuant to a waiver by the military servicemember.
Deficiency Suits Following the Sale
When a lender forecloses on a lien, the total amount of debt owed by the borrower to the lender often exceeds the foreclosure sale price. The difference between the amount of debt owed and the sale price is known as a “deficiency.”
The lender may bring an action against the borrower personally within two (2) years to recover the post-sale deficiency. In such a suit, Texas law allows the borrower to receive credit for the fair market value of the property as an offset to the deficiency amount.
Limited Right of Redemption in Texas
Texas laws offer limited right of redemption to borrowers after a foreclosure sale. In general, there is no right of redemption, except for (1) sale for unpaid taxes and (2) HOA foreclosure by an assessment lien.
Foreclosure Sale for Unpaid Taxes. After a foreclosure sale for unpaid taxes, the former owner of a homestead or agricultural property has a two-year right of redemption. The new owner of the property is entitled to a redemption premium of 25% in the first year of the redemption period and 50% in the second year. For non-homestead and non-agricultural property, the redemption period is limited to 180 days and the redemption premium to 25%.
HOA Foreclosure of an Assessment Lien. A former homeowner may redeem the property until the 180th day after the date the association mails written notice of the sale to the owner and lienholder pursuant to Section 209.101 of the Property Code. A lienholder who wishes to redeem the property may do so before ninety (90) days after the date the association mails written notice and only if the homeowner has not previously redeemed.
Eviction Following the Sale
The successful bidder of foreclosed property receives title to the property after the sale, but not actual possession of the property. A tenant or occupant who refuses to surrender possession of the property after the foreclosure sale commits a forcible detainer and is a tenant at will or by sufferance, assuming the lien foreclosed upon is superior to the tenant’s lease.
To evict a tenant at will or by sufferance, the new owner must give the tenant at least three (3) days’ written notice to vacate before the new owner files a forcible detainer lawsuit. Often times, it is the borrower who was foreclosed upon that becomes a tenant at will or by sufferance if the borrower resides in the property that was sold at auction. However, if resident is a tenant under a residential lease, timely pays rent, and is not otherwise in default under the lease, the purchaser must give the residential tenant at least thirty (30) days’ written notice to vacate before filing a forcible detainer lawsuit.
Instead of going through the expensive and lengthy eviction process, a new owner can often work out a cash-for-keys deal with the holdover tenant. In this arrangement, the new owner offers the tenant money in exchange for an agreement to move out.
Wrongful Foreclosure
After the conclusion of the sale, the borrower may file suit for wrongful disclosure if he or she can demonstrate that the loan documents are defective, that notices were given incorrectly or untimely, or if there was defect with the sale itself (e.g., chilled bidding).
Challenging the effectiveness of notice by claiming that a lender mailed the notices to the wrong address is an uphill battle. The only requirement placed upon lenders in this regard is to send the notices to the last known borrower’s address in the lender’s files. A borrower making this claim will have the burden to show that the lender had the borrower’s most recent address in its records and failed to deliver notice by certified mail to that address.
While trustees must conduct the sale fairly, there is no requirement that the sales price be fair. A borrower seeking to rescind a sale or recover damages in a suit for wrongful foreclosure based upon inadequate sales price must prove (1) that the consideration was grossly inadequate, (2) that either notice or the sale itself was defective, and (3) a causal connection between the inadequate sales price and the defect.
Rescission of Non-Judicial Foreclosure Sales
A lender or its trustee or substitute trustee may rescind a foreclosure sale within 15 days of the sale by serving written notice by certified mail on the purchaser and each debtor and by filing each notice for recording in the real property records. A sale may be rescinded by agreement of the affected parties or if one of the following has occurred:
- the statutory requirements for the sale were not satisfied (i.e., defect)
- the default was cured prior to the sale;
- receivership or dependent probate administration involving the property was pending at the time of sale;
- the lender and borrower agreed to cancel the sale based on an enforceable written agreement by the borrower to cure the default; or
- a court-ordered or automatic stay of the sale in a bankruptcy case filed by a person with an interest in the property was in effect.
Our real estate attorneys have experience both conducting foreclosures from beginning to end and assisting homeowners who are being foreclosed upon. We understand the technical requirements of relevant state and federal laws and work to quickly achieve our clients’ goals.
If you are considering foreclosing upon a defaulting borrower or require the assistance of counsel in reviewing your loan documents and advising you on your rights as a lender or borrower, call us at 210-807-8932 or email us your concerns.