Strict Foreclosure: The Second Bite of The Apple

When a mortgage is foreclosed, not only are the rights of the owners of the property extinguished, but all rights of third parties who have subordinate liens or other interests are extinguished, as well as the property, which will be sold at the foreclosure sale “free and clear” of any such interests.

In order for the Plaintiff's attorney to comply with the constitutional requirements of Due Process, these parties must be given “notice and an opportunity to be heard,” which is accomplished by naming them as defendants and serving them with a summons and complaint.

Sometimes the title company fails to discover a subordinate lien or interest and the foreclosure search does not include it. As a result, the party holding the subordinate lien or interest is not named as a defendant, and their lien or interest is not extinguished. Consequently, upon completion of the foreclosure the bidder’s title company (or third party purchaser’s title company if the Lender was the successful bidder and then sold the REO) will raise the lien or other interest as an exception.

In order to omit this exception, a “Strict Foreclosure” will be required, not against “the world”, but strictly against the one or more defendants who weren’t named in the original proceeding. To afford these parties “Due Process”, they must be:

  1. Named as Defendants in the Strict Foreclosure;
  2. Served with a summons and complaint;
  3. Given the opportunity to defend against and raise any defenses they would have been able to raise in the initial foreclosure; and
  4. Given the opportunity to exercise their right of redemption, which is the right to pay the mortgage debt in full, thus satisfying the mortgage and avoiding the loss of their lien or interest.

Rarely, if ever, is there any response from any of the parties served with a summons and complaint for a Strict Foreclosure, as these parties are not usually willing to to pay the entire mortgage balance in order to preserve their rights. Accordingly, upon the expiration of their time to answer or redeem, an Order may be submitted to the Court that extinguishes their rights, just as if they had been named and served the initial foreclosure.

The delay (six months to a year) caused by the need for this procedure, however, will be quite upsetting to the client, who is already frustrated at the length of time required to liquidate their non-performing mortgage. If the foreclosure attorney has a good relationship with the title company that is insuring the purchaser, and if the amount of the judgment of foreclosure is greater than the amount of the purchase price for the new property, the title company will often accept an “Undertaking” from Plaintiff’s lawyer to complete the strict foreclosure and extinguish the lien. Based upon the Undertaking, they will omit the lien as an exception to title, allow the closing to proceed and enable the client to receive their sales proceeds without further delay.

Sometimes it’s BOTH what you know and who you know!