Minneapolis Real Estate

 

Minnesota Foreclosure Basics

 

Part 2: Default, Auction & REO

Default Stage

How does the process of foreclosure work?

In Minnesota, mortgages often contain a “power of sale” clause. This lets lenders conduct foreclosures without taking the borrower into court. This process, known as “foreclosure by advertisement” or "nonjudicial foreclosure" is favored by lenders, because it is faster and less costly than taking court action.

Lenders do have the option to take the borrower into court, however. This option, known as "judicial foreclosure" occurs when court action is needed to repossess the borrower’s property. This usually happens when the mortgage does not contain a power of sale clause.

The most common method here is foreclosure by advertisement. After the borrower receives notice of default from the lender, the lender’s attorney files a default notice in the county’s public record for all to see. This occurs weekly for six weeks before further action can occur.

The notice contains detailed information about the owner, property, loan and default status. It also states that a sheriff’s auction has been scheduled for the property.

Before the sheriff’s auction occurs, the borrower has a brief reinstatement period known as the borrower’s "equity of redemption". In foreclosure by advertisement, the borrower may cure the default during this period by paying all past-due mortgage installments, escrows and lender penalties.

Sheriff's Auction

If this does not occur, a sheriff’s sale, or sheriff’s auction, occurs in a public venue, often on the courthouse steps or in the lobby. The auction is conducted by the county sheriff. It is a reserve auction, with a minimum acceptable price established by the lender. If the price is not met, no sale occurs. If the minimum price is met, the property is sold provisionally to the highest bidder.   

Frequently, property does not sell at auction. The auction terms are strict for buyers. You may not be able to inspect the home prior to making the purchase. And you must have funding available immediately in the form of cashier's check or the equivalent if your bid is accepted. (Call your local county sheriff to determine the county's specific requirements before attending a sheriff's auction.) 

If the property is not sold at auction, the title transfers back to the lender.  

After the sheriff’s sale, the borrower receives a second reinstatement period. This period of "statutory redemption" for residential properties is usually six months in Minnesota. (It can be 12 months in special circumstances, e.g., for large parcels and certain older mortgages.) During this time, the borrower gets another chance to cure the default and redeem the property. The borrower can do this by paying the amount of the highest bid at auction plus interest if the property sold at auction, or by working with the lender to meet their established criteria.

If the property sells at auction, the high bidder receives occupancy and possession at the end of the statutory redemption period. The borrower can maintain possession until the end of this period.

If the property is abandoned in an “open and notorious” manner, the statutory redemption period can be accelerated. Evidence of abandonment includes utility termination, police reports of trespassing or vandalism, sanitation problems, broken doors or windows, and more.

If the sheriff’s sale proceeds are insufficient to pay the mortgage balance, in some circumstances the lender may seek a personal deficiency judgment against the borrower. Contact an attorney to discuss your situation. If the sheriff’s auction nets more than the loan amount and costs, the remainder may be returned to the borrower.

REO Stage

When the statutory redemption period lapses, a property that didn’t sell at auction goes into the lenders portfolio. It becomes a real estate owned (REO) property. After a period of information processing, the lender contacts a local Realtor, or listing agent, to put the home on the market for sale. At this time the buyer can often get the best deals. Currently there are high levels of REO properties available, creating a strong buyer’s market.

As a foreclosure buyer, you will need to work with a Realtor to tour REO homes. You should be aware of two things here:

• First, some Realtors specialize in foreclosures. Others may be knowledgeable about different areas.
• Second, the listing agent has already signed a contract with the lender, and has agreed to represent the lender’s interests. If you call the phone number on a foreclosure sign or internet listing, you could complete the sale with a Realtor who is currently working for the seller (the lender). That’s why most serious buyers look for homes with an Accredited Buyer’s Agent. Most buyers want an agent who works on their behalf and has no fiduciary relationship with the seller.

As a foreclosure buyer, you must understand the various types of liens that may apply during foreclosure. You should know how the liens came about, and what you need to do to correct them before closing escrow.

Liens may give a third party an interest in, or otherwise encumber, the property. Some liens can be evidenced by a thorough title search. Others may require additional investigation. 

Lien types may include:

• Statutory liens, which give creditors a security interest in the asset to satisfy debts based on law (often mechanic’s liens)

• Equitable liens created by the homeowners express or implied actions for personal debts

• Property tax liens for unpaid real property taxes

• Federal tax liens for unpaid IRS taxes, which may supersede other lien types

• Judgment liens which may grant creditors an interest for various debts including damage awards

• Consensual mortgage liens for senior and junior mortgages and credit lines

• Welfare liens, marital support liens and child support liens

• Other liens may also apply.

If more than one lender is involved, the sales negotiations may become lengthy and complex. The interests of senior mortgage lenders (first or primary lenders) often supercede the interests of junior lenders (second mortgage lenders or equity credit line lenders). All of the mortgage lien holders may need to agree to or approve the formal terms of purchase. Depending on the circumstances, junior lien holders may sometimes refuse to sell, or pay off the senior lender, to protect their interests in the property. 

If the borrower paid private mortgage insurance (PMI) due to a low down payment on the original mortgage loan, the insurance company may also become involved in the negotiations. 

Read Parts 1 and 3 for more detailed information. Call the Real Estate Foreclosure Specialist, Fritz Von Yeast, at 612-965-2212 for assistance.

Part 1 – Preforeclosures

Part 3 – Short sale process in detail

This information is provided for general educational purposes only. It is not legal advice. If you have legal or financial questions concerning foreclosure, contact your attorney or tax advisor. The author does not warrant the information's accuracy or completeness, and strongly advises the reader to gain competent professional guidance before making any real property buying or selling decisions.