Statues that Protect the Mortgagee
Here are the statues that protect the mortgagee in a foreclosure, and other details about redemption of the property per the various laws that apply.
One-action statutes prohibit a lender from bringing separate actions for foreclosure and for breach of the contract to repay the debt. Rather, the mortgagee must seek a deficiency judgment in a foreclosure action or forfeit the right to recover a deficiency.
The effect of these statutes is to require the mortgagee to recover as much value as possible from the mortgaged property first. Otherwise, the mortgagee might first get a judgment and try to get as much value as possible from the mortgagor’s other assets before foreclosing.
The one-action rule protects the mortgagor’s basic expectation that the primary source of repayment in the event of default will be the sale of the mortgaged property. It also protects the mortgagor from having to deal with two separate actions.
Statutory rights of redemption
The value of the property in excess of the debt encumbering it is often referred to as the mortgagor’s equity. If the mortgaged property is sold at foreclosure for less than it’s worth, the mortgagor loses equity that otherwise would’ve paid off junior debts or been returned to the mortgagor.
Anti-deficiency statutes don’t protect the mortgagor against the loss of equity. They protect the mortgagor only against excessive out-of-pocket payments on the debt when the value of the property should’ve resulted in paying off more of the debt.
Even with an anti-deficiency statute, the property may be sold in foreclosure for less than it’s worth so that the mortgagor loses her equity; instead, the foreclosure buyer enjoys the excess value that it bought for cheap.
Of course, the mortgagee and foreclosure buyer might reply that the mortgagor lost her equity only because she breached her contract. As long as she pays her debt as she agreed, she won’t lose the property at all.
Even if she defaults, she may have the opportunity to cure her default for a time. And even after the debt is accelerated, she can avoid losing the property, and avoid losing her equity, by paying the outstanding debt.
Even so, a majority of states provide one more opportunity for the mortgagor to avoid losing her equity even after the foreclosure sale. In most states, statutes provide that the mortgagor can redeem the property after the sale, meaning the mortgagor can essentially buy it back from the foreclosure purchaser. The following sections detail the essential elements of these statutory redemption schemes.
A few statutes require the redeeming party, or redemptioner, to pay the whole debt secured by the foreclosed mortgage. All the other statutes require the redemptioner to pay the foreclosure buyer the amount she bid for the property, plus costs and interest.
That encourages bidders at the foreclosure sale to bid higher and closer to market value, because the lower the winning bid, the more likely a redemptioner will be to have the money and incentive to redeem the property.
Who can redeem
The primary reason for statutory redemption is to allow the mortgagor to recapture her equity and keep the property. By paying the foreclosure purchase price, she can fully compensate the winning bidder but get the property back. If the property is worth more than the winning bid, the redeeming mortgagor can thereby recapture that extra value.
Some of the statutes also allow junior interest holders to redeem. A junior interest holder doesn’t have the primary claim to the equity in the property, of course; the mortgagor does. The mortgagor therefore has the primary right to redeem, and if she does so, no junior interest holder can.
But if the mortgagor doesn’t redeem, in some states a junior interest holder can redeem because doing so enables the junior interest holder to apply excess value to the debt the mortgagor owes her.
Time to redeem
State redemption statutes vary in the time allowed for redemption, ranging from a few months to a couple of years after the foreclosure sale. Some statutes provide longer redemption periods for larger parcels of land or agricultural land, and some provide shorter periods for redemption when a purchase-money mortgage was foreclosed or the property is abandoned.
Some provide a time period during which only the mortgagor may redeem, and afterward, junior interest holders may redeem within a specified time if the mortgagor doesn’t.
Possessing the property
Many of the redemption statutes allow the mortgagor to retain possession of the property during the statutory redemption period that follows the foreclosure sale. Legislatures included such provisions so that mortgagors could keep making use of their property and thereby have a better chance of redeeming their property.
Sales from which property can be redeemed
Some states allow statutory redemption only when the property is sold in a judicial foreclosure or only when the property is sold in a nonjudicial foreclosure. Such statutes affect which type of foreclosure mortgagees will choose, because one method of foreclosure removes the possibility of statutory redemption after the sale and thereby makes the property more marketable.
The possibility of statutory redemption may discourage bidders at the foreclosure sale, who may have to wait until after the redemption period to take possession and in any event face some uncertainty about their continued ownership until the period passes.
So, mortgagees have a reason to want mortgagors to waive the right to statutory redemption. However, in some states, by statute or judicial decision, waiver isn’t allowed. In other states, sometimes expressly by statute, waiver is allowed.