Foreclosures, Short Sales, and Other Things You Need to Know – Part 2 of 3

How does the foreclosure process work?  In Minnesota, the legal process is quite different than in many other states.  When doing your research, make sure you focus on Minnesota law.  The lender may begin the foreclosure process immediately after the borrower defaults on the loan.  The following is a basic timeline of events.

Most mortgages in Minnesota contain a power of sale clause.  This gives the lender the right to conduct a foreclosure and sell the property without actually going to court.  This is also known as a foreclosure by advertisement.  The other method which involves the court system is called a judicial foreclosure and is used when the mortgage does not contain the power of sale clause.  However, the lender may choose the judicial foreclosure process even when a power of sale clause is included in the mortgage contract. 

I will focus on the most common method, which is the foreclosure by advertisement.  The lender must  advertise the foreclosure in a newspaper in the country where the property is located for at least 6 weeks before selling it to the highest bidder at a public auction.  The auction is conducted by the county sheriff and is also known as a sheriff’s sale. 

A copy of the notice of foreclosure must be sent to the borrower at least 4 weeks before the sheriff’s sale.  This notice contains the legal description, names of the lender and the borrower(s), the original principal amount, the redemption period, the time and place of the sheriff’s sale, and other pertinent information.

There are two redemption or reinstatement periods.  The first one is known as the borrower’s equity of redemption – this is the period of time before the sheriff’s sale.  In the case of a foreclosure by advertisement, this period is at least the 6 weeks between the initiation of the process and the sheriff’s sale.  To cure the default during this time, the borrower must pay all past-due installments and penalties.

The other reinstatement period is the statutory redemption period, which gives the borrower a chance to redeem the property after the sheriff’s sale.  In the case of most residential mortgages in Minnesota, it is 6 months.

However, if the property is abandoned, it can be as little as 5 weeks.  Evidence of abandonment, such as: termination of utilities, two or more police reports of trespassing or vandalism, safety problems, broken windows, sanitation problems, broken doors, or other signs must be present.  This rule 5 week rule only applies to residential properties with no more than four units and under 10 acres.

In some special circumstances, the statutory redemption period is 12 months:

·        the mortgage is more than 1/3 paid off,

·        the property is more than 40 acres,

·        the property is more than 10 acres AND in agricultural use,

·        the property is more than 10 acres AND the mortgage was originated prior to July 1^st, 1987.

To redeem the property during this period, the borrower must pay the amount of the high bid at the sheriff’s sale plus interest.  The high bidder at the foreclosure sale cannot take possession of the property until the end of the statutory redemption period and the borrower is generally entitled to remain in possession until then.

At the sheriff’s sale, the high bidder receives a sheriff’s certificate of sale which is recorded by the county.  At the end of the statutory redemption period the recorded document becomes a sheriff’s deed.  It is at this point that the high bidder obtains the right to posses the property.

There are generally not very many bidders at the sheriff’s sale because of the long redemption period.  Most investors do not want to wait that long or they do not wish to purchase the rights to the mortgage without being able to inspect the property.  Most of the time, the lender is the high bidder.

If the proceeds of the sheriff’s sale are insufficient to pay the loan in full and the 12 month statutory redemption applies and the foreclosure by advertisement process was used, the lender may seek a personal deficiency judgment against the borrower to cover the difference.  However, if the statutory redemption period was either 5 weeks or 6 months, the lender is limited to the proceeds of the sheriff’s sale and may not take further action against the borrower.  The lender has the option of a judicial foreclosure if they wish to seek a deficiency judgment.

In the rare event that the sheriff’s sale generates more than the amount owed plus any liens or other costs, the remainder is returned to the borrower who defaulted on the loan.

If more than one lender is involved the junior lien holders may pay off the primary lender in order to protect their interests in the property.  This is the case when there is a 2^nd mortgage or when mortgages are “piggy backed” (such as a 80/15/5 mortgage).

You may have heard the term strict foreclosure – this may occur as part of a judicial foreclosure.  It is when the court terminates the borrower’s rights to the property and gives the property back to the lender.  There is no sheriff’s sale in a strict foreclosure.

For more detailed information see parts 1 or 3.  You may also contact me for further assistance.

Part 1 – General overview

Part 3 – Short sale process in detail