Default Clauses
There is no legal description of a default other than saying a default is the inability to meet the demands of the promissory note a borrower has with a lender. The reason why there is no legal definition is because default is defined by the parties within their agreement. Together the parties decide what events will trigger default and the rights associated once default occurs.
Acceleration
In the event of a default acceleration clauses require the payment of the debt in full at one time. There are two kinds of acceleration clauses, automatic and optional. Automatic acceleration occurs automatically once the borrower is in default. Optional gives the lender the freedom to choose whether the accelerate the debt, depending on the willingness of the borrower to remedy their default. If the borrower is unable to satisfy the loan in full at the time of acceleration, this clause gives the lender freedom to foreclose on the property to recover their losses.
Types of Foreclosure
After foreclosure occurs, the lender sells the property following specified procedures. If the sale of the property is less than the amount required to satisfy the debt, the borrower is in deficiency and the lender can seek a deficiency judgment against the borrower. If the sale produces more than the value of the remaining debt, this is surplus that goes first to any junior interests, then the remainder to the borrower.
Strict
Not commonly used but this just means that there is a court date set where the payment of the property is required by the borrower or else the property is foreclosed and possessed by the lender. There is no right to a surplus in a strict foreclosure and the lender can retain the property
Judicial
Essentially the same as a strict foreclosure except the lender is required to sell the property at a public sale conducted by the sheriff. If there are any junior interests, these are necessary parties who could assert a right to some payment on the proceeds of the sale.
Power of Sale
Also known as nonjudicial foreclosure. This is the most common method of foreclosure, but can only be done if stated within the parties agreement. Again, the purpose is to sell the property and recover the profits to satisfy the debt. The advantage here is that power of sale is typically cheaper and faster than judicial foreclosure.
Foreclosure Abuses and Reforms
Due to the large increase of foreclosures during the 2007–2009 housing crisis a large number of abuses were discovered. Promissory notes had been lost, there was difficulty in knowing who the mortgagee of record was, short sales (sales of homes where the value is less than the remaining balance on the home) were conducted, homeowners would engage in strategic default (walk away if the value was less than the remaining balance) because they had the means of purchasing cheaper housing elsewhere, and robo-signing (signing affidavits with no review of the content). Many of these issues led to judicial reform.
Zervas v. Wells Fargo Bank, N.A.
93 So. 3d 453 (Fla. Ct. App. 2012).
Wells Fargo sought to foreclose on Zervas’s property and was successful at trial despite Zervas’s request for time to make up the issue. On appeal, Zervas argues that Wells Fargo did not give notice of acceleration or a reasonable opportunity to cure. The note had also been lost by Wells Fargo who could not produce where the assignment was located. For these reasons, there was a genuine issue as to a material fact and the district court’s ruling granting summary judgment in favor of Wells Fargo is reversed.
Pasillas v. HSBC Bank USA
255 P.3d 1281 (Nev. 2011).
HSBC sought foreclosure on a home and Pasillas sought to utilize a mediation program to forego foreclosure. The parties met but were unable to come to a resolution. At the mediation, it was unclear whether HSBC was represented by counsel and they failed to bring proper documentation (the mortgage was missing two pages, the assignment of rights was incomplete, etc.). Additionally, HSBC failed to bring somebody who had the power to adjust the terms of the loan (why have mediation if nothing is going to change?). For these reasons, HSBC did not properly follow the statutory requirements of the mediation program. As remedy for this abuse, the case is remanded to consider the total amount of sanctions that ought to be imposed on HSBC by evaluating whether there was bad faith, the prejudice caused, and whether there is a willingness to continue negotiations.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
