mortgage

How foreclosure works in your state

Foreclosure
Highlights
  • Foreclosures unfold in one of two formats: judicial and nonjudicial.
  • Lenders are generally suspending foreclosures in judicial states.
  • Bankrate map shows whether states use judicial or nonjudicial format.

At least four mortgage companies have suspended foreclosure actions while they straighten out irregularities in legal paperwork. But the halts in foreclosures aren't happening everywhere. The moratoriums primarily are in states that employ judicial foreclosure.

Each state governs foreclosures in its own way. Broadly speaking, there are two formats. In judicial foreclosure states, all foreclosures are overseen by courts. In nonjudicial foreclosure states, foreclosures usually are processed without court supervision.

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"In judicial foreclosures, all foreclosures must go through a more traditional court process," says David Townsend, CEO of Agents National Title Insurance Co., based in Columbia, Mo. "A judge or administrative law judge must sign off on a foreclosure before the property is taken back by the foreclosing lender."

In nonjudicial foreclosure states, "lenders can foreclose on a piece of property by doing certain steps that are usually laid out by statute," Townsend says.

"Once those steps have been followed, the sale is held and the property can be sold or transferred back to the lender," he says.

Loan parts

A home loan has two parts: the borrower's promise to repay and the lender's right to take the property back if the loan isn't repaid.

In a judicial foreclosure state, a mortgage allows the lender to file a lawsuit to get the property back. In a nonjudicial foreclosure state, a deed of trust puts the property title in escrow. If the loan goes delinquent, the trustee transfers title to the lender after the lender follows a series of steps.

The definition of a nonjudicial foreclosure state can be slippery, because in most of these states, the lender has the option of pursuing foreclosure through the courts. But in practice, most of these jurisdictions go the nonjudicial route because it's usually faster and less expensive.

Peter Macdonald, general counsel and senior vice president for LoanDepot.com, an online mortgage lender, says: "In some cases, lenders choose to judicially foreclose when they have the option to nonjudicially foreclose, and they choose that option because they want to secure an additional judgment against the borrower for money."

In other words, when the bank wants not only the house, but also to sue the borrower for some of the money that the bank lost, the bank can pursue foreclosure in court.

Where do you live?

Do you live in a judicial foreclosure state? Look at the accompanying map, which takes its data from a 2009 Federal Reserve paper on state foreclosure laws. In 16 states, the answer is always yes. In five states -- Maryland, Massachusetts, New York, South Dakota and Vermont -- the answer usually is yes because timelines or customs favor judicial foreclosure.

One place -- the District of Columbia -- always uses nonjudicial foreclosure. In the rest of the states, lenders tend to use nonjudicial foreclosure in most cases.

It's mostly in the judicial foreclosure states that Bank of America, GMAC Mortgage and its parent company Ally, JPMorgan Chase and PNC Financial Services Group suspended pending foreclosures. (Bank of America now has a moratorium in all 50 states.)

Robosigning fiasco

While foreclosures dwell in limbo, the companies will deal with fallout from a controversial practice dubbed "robosigning."

Robosigning is the practice of signing affidavits assembly line-style. In these affidavits, the signers swear that they have personal knowledge that the facts laid out in these legal documents are true.

In depositions, some robosigners have testified they signed the affidavits without investigating whether they were true and accurate. Industry observers believe robosigning has been rampant, and that other major mortgage servicers will suspend foreclosure cases, too -- at least in judicial foreclosure states.

Are borrowers better protected in judicial foreclosure states? Macdonald pauses and answers carefully: "In my opinion, judicial foreclosure states have greater opportunity for the borrowers to protect themselves," he says. "In a deed of trust state, the process goes unless stopped. In a judicial foreclosure, the process essentially has someone making sure things are going correctly."

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