How is property seized by a loan holder?

Factual Questions
1

The current story of Graceland almost being actioned as well as the recent Planet Money episode on “zombie mortgages” make me confused and curious as to how a lender gains control of a property. It seems that company can claim to hold a load with a lien on your home, claim that you have defaulted, and that is enough for it to gain title to your home.

So questions: Is a lien registered with the same county or state entity that records property ownership? Is there a process of recording change of ownership of a lien when a loan is sold? What process does a lien holder go through to gain ownership of a property? How can property ownership be transferred without the participation or knowledge of the current owner?

2
3

“A judgment creditor is entitled, as a right, without the leave of the court and without notice to the judgment debtor, to issue execution.”

OK, so a company just has to convince a judge to issue a writ and your property is gone without you even being notified. And I suppose the writ binds the county or state to record the auction winner as the new owner.

4

I’m not in your jurisdiction but I think you are perhaps not appreciating the significance of the words “judgment creditor”.

A “judgment creditor” is a creditor who has already been to court and obtained a judgment confirming they are entitled to be paid the debt. That process will have involved notifying the debtor about the proceedings, and the debtor having the opportunity to defend.

In other words, obtaining the Writ of Seizure and Sale is a mechanical step that flows as a consequence of an earlier process on notice.

5

Yes. Take note of this from the link:

Writs of seizure and sale are used to take possession of a property when a borrower has failed to make payments on the debt or loan for an extended period of time.

A writ of seizure and sale is a drastic step taken by a lender or creditor to recoup some of the money that was lent to the borrower for the property.

So basically, the creditor has gone to court and gotten a judgement. The debtor has been told, given time, but for some reason, has not shelled out what he owes. This is the next logical step…

6

The Planet Money episode “Zombie Mortgages” opens with a story of a woman in Massachusetts who comes home to find her house being auctioned off. When she bought the house she had taken a secondary mortgage to cover the down payment. During a refinancing episode she believed this second mortgage had been absorbed or forgiven because she stopped receiving payment notices on it. But the loan had actually been sold and resold, and years later the holder foreclosed. They had started demanding payment from her by letters and phone calls, but because the company name was unfamiliar and the amounts were inconsistent, she assumed it was a scam and ignored it.

Unfortunately the episode wasn’t clear about the legal steps taken by the company or what communications the woman received. Would the woman have received a summons to appear at court to contest the seizure? Or could the property transfer have happened without her knowledge?

The Graceland case is similarly puzzling. News reports state that the foreclosure sale was “blocked”, which suggests that title to the mansion had already been transferred to the supposed loan holder, allowing them to initiate a sale. How did the process get so far before the Presley family had a chance to dispute the company’s fraudulent claim to the property?

7

In the case of real estate, the lender does not take possession directly. The lender must hold a public auction where anyone (including the lender) may bid for ownership. Usually, the opening bid is by the lender for the amount owed. To avoid any back-room sneaky deals, the lender must make a good-faith effort to see that the property sells for as much as practical by proper advertising in the local paper. If the property sells for more than what is owed, the excess must be tendered to the owner. If the property sells for less than the debt, the balance is still owed, but it is an unsecured debt.

8

She received multiple collection calls and notices from the entity that had bought out the account, who were not helpful in making clear to her why or how, but did correctly tell her she risked foreclosure if he did not pay up. Then her not responding is itself the evidence that she had her chance to dispute or correct the situation and didn’t, when the account holder asks for the order to execute the lien, and that is not an adversarial hearing.

9

In the UK, if you default on a mortgage, the mortgagee can apply to the court for possession and ultimately use bailiffs to evict you. They then sell the house by public auction, often for less than the outstanding debt.

The kicker is that you still owe the money you borrowed and they will go after you for their pound of flesh.

10

The issue is (at least in Canada) seized property is auctioned off, but a creditor risks losing out if there is evidence of an effort to avoid getting fair market value for the property. (i.e not advertising the deal properly, self-dealing, etc.) I assume a bidder could sue too, if they felt the auctioneer had allowed an insider to open sealed bids to just slightly outbid the competition.

I worked with a fellow who got well into debt, the bank took his car that he’d used as collateral. The bank said it sold for half what was the expected value, but there was some question how the auction was made. When he threatened to take them to court, they quickly paid up the difference to market value.

Note the difference. AIUI, I think the dealership retains title of a car until the loan is paid, so they can simply come and take it (“repo man”) if you fall behind on payments; whereas if it is collateral in a loan and you have title, they have to go through the court procedure. A mortgage is a lien, title still rests with the homeowner, so the same court procedure applies.

11

Thanks for clarifying. I assumed that a foreclosure meant that the creditor gained title to the property. Nevertheless, it seems that often the creditor often ends up gaining the property anyway by advertising the auction so ineffectively that no one shows up to bid against them.

12

Outside, say, a peculiar family or property developer situation, the creditor’s almost invariable priority is to get their money back, not get the property.

It makes no sense at all for a creditor to deliberately rig the auction so that no one shows up to bid. They want lots of bidders so that a good price is achieved to cover their debt. It is a disaster for a creditor if no bidders turn up.

13

As I understand, failing to make a reasonable effort to get fair market value would open the creditor up to a serious lawsuit. I assume (IANAL) there are some fairly standard procedures to go through to ensure the “reasonable” part is met. Even something as simple as letting an insider bidder see sealed bids during an auction could be construed as collusion to low-ball the sale.

14

Agree.

IME there are two problematic issues concerning sales by secured creditors.

The first, which you mention in your last sentence, is where there is corruption. I have no doubt this happens on occasion but there are safeguards in place and I don’t think it is an endemic problem.

The second is that - particularly where the value of the property is substantially higher than the amount owing - there is little motivation for the creditor to try hard to achieve maximum sale price because they will be confident that the sale will achieve enough to cover their debt and after that they don’t care. So there is no motivation to do more than the minimum to obtain fair market value i.e. just enough to avoid the type of lawsuit that you mention, and not much more.

In other words a (slight) variation on Hanlon’s Razor applies - never attribute to corruption what is explicable by apathy.

15

Reminds me of that study (Freakonomics?) that realtors’ own houses sold for more relatively than the houses of their clients. An agent could work their behind off and maybe sell a house for say, $30,000 more - they get 3% if that, split 50-50 with the agency they work for, so 1.5% - an extra $450. Or they can sit back, do the minimum, and get 1.5% of the house sale anyway.

Whereas when they sell thie own house, all the extra proceeds are theirs.

So yes, same applies to forced sales, urgent sales, sales expedited by someone other than the party that profits. But the key part is they must make the minimum effort.

This is why those “Location, location, location” guys talked about finding real estate deals to flip. If the seller is not determined to sell at maximum price (usually to sell ASAP instead), there’s additional profit to be had.

The worst scenario is when the person foreclosed on knows they won’t see a cent from the sale - then the risk is that they specifically damage the property further to stick it to the creditor. And, of course, if they had any additional money to go after them for the damages, they wouldn’t be in that position.

I read about a lawsuit years ago - a fellow had gone bankrupt. He had basically no equity at that point in his house, and rather than force a sale, the court let him stay and pay the mortgage and gave each of the creditors a lien on it. One enterprising creditor (or one desiring to really stick it to the debtor) bought everyone else’s liens for pennies on the dollar. Over 10 years later, house value has gone up and house was paid down substantially, the debtor goes to sell and realizes most of his profit goes to this one creditor. He tried to get out of it claiming the lien sales were invalid, but the courts said “no”.

So that’s an alternative, a lien on the property instead of foreclosure, if the prospect is the debtor is solvent enough to keep paying the existing mortgage9s).

16

would have been a hijack.

17

To be clear, there are two types of debts- secured and unsecured. IANAL, but the secured kind, the creditor gets a court order to take back the property that is security, evict the debtor, and sell to settle the debt.

As I understand - The other is like what Rudi Giuliani faces - the court orders him to pay two poll workers $180M. (Or OJ Simpson with the Goldmans) He declares he’s bankrupt, can’t pay. The next step, the creditors go to court and ask the court to allow them to seize what property (real estate or other valuables) they can find. IIRC they have to present a list and the court okays items on that list.

There’s also the confusion that in bankruptcy court (as opposed to creditors asking to seize something) the debtor has to enumerate his assets and let the judge decide who gets what or how to liquidate assets. Often bankruptcy is a tactic to prevent one creditor from grabbing asset(s) when several others also are owed money.

OJ Simpson took advantage of a peculiarity of Florida law, that in bankruptcy the creditors cannot seize the debtor’s homestead (even if it’s a mansion worth $25M+). But for example, he ended up in jail because he went to repossess by force items stolen from him years ago - because he knew if he went to court to claim items that were stolen from him, the Goldmans would ask the court for the right to that property to continue paying down OJ’s debt.