Foreclosure

Foreclosure is the legal process through which a lender takes possession of a property used as collateral for a loan, most commonly a home mortgage, after the borrower fails to keep up with the agreed payments. The lender then typically sells the property, usually at a public auction or through a conventional sale, and applies the proceeds to the outstanding loan balance, fees and costs of the foreclosure process itself.

The exact steps, timelines and borrower protections involved in foreclosure vary considerably by country and, within countries such as the United States, by state, since foreclosure is governed primarily by local property and contract law rather than a single uniform national process. In broad terms, foreclosure begins once a borrower has missed enough payments to be in material default under the loan agreement, usually after several consecutive missed monthly installments rather than a single late payment.

A mortgage is essentially a deal where the borrower is allowed to live in and build equity in a home while slowly paying off the bank, as long as the agreed payments keep coming in. Foreclosure is what happens when that deal breaks down: the bank exercises its right, written into the loan contract from the start, to take the property back and sell it to recover what it is owed, because the collateral backing the loan is the ultimate guarantee the bank relied on when it agreed to lend in the first place.

• Default: the borrower falls significantly behind on payments, commonly 90 days or more, triggering formal notices from the lender.
• Notice of default or demand letter: the lender formally notifies the borrower of the default and the amount needed to cure it.
• Foreclosure filing or notice of sale: if the default is not cured, the lender begins formal legal or administrative proceedings, which can be judicial, through the courts, or non-judicial, through a trustee or similar process, depending on the jurisdiction and loan documents.
• Sale and eviction: the property is sold, typically at auction, and the occupants are required to vacate if they have not already done so, sometimes through a separate court-ordered eviction.

In jurisdictions that require judicial foreclosure, the lender must file a lawsuit and obtain a court order before the property can be sold, which generally takes longer but gives the borrower more opportunities to contest the process. In jurisdictions that allow non-judicial foreclosure, typically where the mortgage document includes a power-of-sale clause, the lender can proceed to sale through a trustee without going to court first, which is usually faster but still generally requires specific notices and waiting periods designed to give the borrower a last chance to cure the default or sell the property voluntarily.

Before foreclosure is completed, borrowers and lenders have several possible alternatives, including a loan modification that changes the loan terms to make payments affordable again, a short sale where the lender agrees to accept less than the full balance owed from a sale, or a deed in lieu of foreclosure, where the borrower voluntarily transfers the property to the lender to avoid a formal foreclosure on their record. Lenders generally prefer these alternatives where realistic, since foreclosure is costly and time-consuming and typically recovers less value than a cooperative sale.

A foreclosure is one of the most damaging events that can appear on a credit report, typically remaining on record for several years and significantly affecting a borrower's ability to obtain new credit, including a future mortgage, during that period. In many jurisdictions, if the sale proceeds do not cover the full loan balance, the borrower may also remain liable for the shortfall, known as a deficiency, unless local law specifically protects against that outcome.

A wave of foreclosures across a city or region can depress nearby home values and strain the credit bureau records of affected borrowers for years, since foreclosed properties are often sold below typical market value and used by appraisers as comparable sales for other homes in the area, a dynamic that was widely documented during the 2008 financial crisis in the United States, when a sharp rise in foreclosures following the collapse of the subprime mortgage market contributed to a broader decline in home prices nationally. Because of this spillover effect, governments and lenders have periodically introduced foreclosure moratoriums or expanded loan modification programs during severe downturns, aimed at slowing the pace of foreclosures and giving distressed borrowers more time to recover, rather than letting the normal foreclosure process run its full course during a period of unusually high defaults.

Most jurisdictions require lenders to provide the borrower with specific written notices before and during the foreclosure process, stating the amount needed to cure the default, the borrower's right to contest the foreclosure, and, in many cases, information about housing counseling services. The right to cure a default by paying the overdue amount, sometimes up until shortly before the foreclosure sale itself, is one of the more significant borrower protections built into most foreclosure laws, since it gives a borrower who has recovered financially, even if only at the last moment, a path to keep the property rather than losing it to a sale.

• Consumer Financial Protection Bureau