Understanding The Foreclosure Process

Foreclosure is the legal process by which a mortgage company can obtain legal ownership of a property.  It relinquishes a homeowner from any and all rights to the property and evicts the homeowner from the premises.

In most cases, foreclosure can begin a soon as a homeowner is late with the mortgage payment.  If the payment is due on or before the first of the month, for example, the lender has every legal right to initiate foreclosure proceedings against the homeowner. 

It has been our experience over the past few years that most banks do not initiate the foreclosure process until the homeowner is at least 90 days in arrears. However, most institutional lenders will try to work out alternatives with a homeowner in default before trying to repossess a home.  If a homeowner works with his or her lender, the lender may grant additional time before foreclosure is initiated. 

Alternatives provided by the lender may include loan modification, deed in lieu of foreclosure, short sale, or, though very rare, principal balance reduction.  Of course the homeowner must qualify for these alternatives.

If an alternative cannot be worked out between the lender and the homeowner, the lender may begin foreclosure proceedings.  Because most homeowners have a trust deed, the foreclosure time line is simple and quick because it does not have to go to court to foreclose upon a home.

In Arizona, a lender must appoint its trustee, the person or entity that has the legal right to sell the home in a trustee sale, to handle the appropriate paperwork.  By law, the trustee must record in the county recorder's office a "Notice of Trustee's Sale".  This is the legal notice that the home is to be sold no sooner than 90 days from the recording date of the notice.  This notice must also be published a minimum of once a week for four consecutive weeks in a "newspaper of general circulation" in that county.  The trustee will mail a notice within five days of the recorded notice of trustee sale to the homeowner and other parties affected by the foreclosure.

Assuming that the homeowner has not reinstated the loan, the trustee will conduct the sale at a previously disclosed location.  Every bidder is required to provide a $10,000 deposit to bid on the home.  At such time, the home is sold to the highest bidder, which may include the mortgage company.  If the bidder successfully wins, he or she has until 5:00 p.m. of the following day (assuming that it is not Saturday or a legal holiday) to pay the remaining balance in cash or other acceptable forms of payment as determined by the trustee.  In addition to the forfeit of deposit, a highest bidder who fails to pay the amount bid by that bidder is liable to any person who suffers loss or expenses as a result, including attorney fees.

Should the bidder fail to pay by 5:00 p.m. of the following day, his or her $10,000 deposit is forfeited and the second highest bidder is given until 5:00 p.m. of the next day.

Proceeds from the sale are used to pay off the primary lien (trust deed) against the home (as noted on the trust deed).  If any proceeds remain, payment is made to junior lien holders in order of priority.  In the event that any remaining balance is left over from the sale, the trustee will remit the balance to the ex-homeowner.

Title is conveyed to the winning bidder by a trustee's deed.  This transfer of title relinquishes any right the previous owner has from reinstating the mortgage or redeeming the property after foreclosure.  In addition, the trustee's deed clears the title of any liens and encumbrances that are junior to the trust deed.

In certain situations, junior lien holders may pursue a deficiency judgment against the previous owner to recover the balances owed.  However, an Arizona homeowner may be protected by such lawsuits under the law.