What is a Foreclosure?

Foreclosure is the legal process in which a bank or other secured creditor sells or repossesses a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust". Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien".

Different Types of Foreclosures

The mortgage holder can usually initiate foreclosure at a time specified in the mortgage documents, typically some period of time after a default condition occurs. Within the United States and many other countries, several types of foreclosure exist. Two of them --- namely, by judicial sale and by power of sale --- are widely used, but other modes of foreclosure are also possible in a few states.

Foreclosure by judicial sale, more commonly known as Judicial Foreclosure is available in every state and required in many, involves the sale of the mortgaged property under the supervision of a court, with the proceeds going first to satisfy the mortgage; then other lien holders; and, finally, the mortgagor/borrower if any proceeds are left. As with all other legal actions, all parties must be notified of the foreclosure, but notification requirements vary significantly from state to state. A judicial decision is announced after pleadings at a (usually short) hearing in a state or local court. In some fairly rare instances, foreclosures are filed in Federal courts.

Foreclosure by power of sale, which is also allowed by many states if a power of sale clause is included in the mortgage. This process involves the sale of the property by the mortgage holder without court supervision. It is generally more expedient than foreclosure by judicial sale. As in judicial sale, the mortgage holder and other lien holders are respectively first and second claimants to the proceeds from the sale.

Other types of foreclosure are considered minor because of their limited availability. Under strict foreclosure, which is available in a few states including Connecticut, New Hampshire and Vermont, suit is brought by the mortgagee and if successful, a court orders the defaulted mortgagor to pay the mortgage within a specified period of time. Should the mortgagor fail to do so, the mortgage holder gains the title to the property with no obligation to sell it. Historically, strict foreclosure was the original method of foreclosure.

Loan Acceleration Clause - Due on sale

The concept of acceleration is used to determine the amount owed under foreclosure. Acceleration allows the mortgage holder to declare the entire debt of a defaulted morgagor due and payable. If a mortgage is taken, for instance, on a $300,000 property and monthly payments are required, the mortgage holder can demand the mortgagor make good on the entire $300,000 if the mortgagor fails to make one or more of those payments.

The vast majority (but not all) of mortgages today have acceleration clauses, most in the State of Arizona are. The holder of a mortgage without this clause has only two options: either to wait until all of the payments come due or convince a court to compel a sale of some parts of the property in lieu of the past due payments. Alternatively, the court may order the property sold subject to the mortgage, with the proceeds from the sale going to the payments owed the mortgage holder.

Click here to review the Arizona Revised Statutes, Title 33, Chapter 6.1 - Deeds of Trusts, which outlines the rules, regulations, and procedures for foreclosure in Arizona.