Residential Foreclosure Process
This chapter addresses the nonjudicial foreclosure process involving residences of the borrower. Other types of foreclosures are addressed as follows in this manual: chapter 20, judicial foreclosures; chapter 22, commercial foreclosures; chapter 24, ad valorem tax lien foreclosures; chapter 25, property tax loan lien foreclosures; chapter 27, condominium foreclosures; chapter 28, home equity loan foreclosures; chapter 29, manufactured housing unit foreclosures; chapter 30, property owner’s association foreclosures; and chapter 31, reverse mortgage foreclosures.
The attorney should review the deed of trust or security instrument to obtain the information necessary to evaluate the options for collection of the debt (see chapters 2, 3, and 4 in this manual) and prepare proper demand and notice letters (see chapters 5, 6, 7, and 8).
§ 21.2:1Unique Requirements in Loan Documents
The attorney must always determine whether there are any unique or specific foreclosure requirements in the loan agreement documents. Failure to comply with a unique requirement may lead to a wrongful foreclosure if the failure to perform caused the property to be sold for grossly inadequate consideration. If the loan agreement is evidenced by standard forms commonly used in the residential mortgage industry, this is not a problem.
Many residential mortgage lenders use the Fannie Mae deed of trust form. The Fannie Mae deed of trust provides that the lender must give the borrower thirty days to cure a default. This is a longer cure period than the twenty-day cure period required under Texas Property Code section 51.002(d). Additionally, the Fannie Mae deed of trust gives the borrower the right to reinstate after loan acceleration, provided certain conditions are met. The Fannie Mae deed of trust requires that the notice of default inform the borrower of the borrower’s right to reinstate after acceleration and of the borrower’s right to bring a court action to assert the nonexistence of a default or any other defense of borrower to acceleration and sale.
See chapter 6 in this manual for discussion of the deed of trust documents and chapters 8 and 12 for a discussion of notices to a borrower.
§ 21.2:2Verification of Addresses
The attorney should ascertain if the borrowers have sent to the lender or servicer a change of address. If so, then the demand and notice communications should go to the new address. Failure to send the notices to the new address may make the foreclosure voidable. See Tex. Prop. Code §§ 51.0001(1), 51.0021. See also chapter 8 in this manual.
The attorney needs to know if the foreclosure notices and correspondence are being sent to a mailing address instead of the physical address.
It is recommended that the attorney have the client verify that the street address/property address listed in the referral for legal services is actually the correct physical location of the property. If the notices are sent to the wrong address, the foreclosure may be fatally defective. This can also become important in the event that the client commences eviction proceedings after the foreclosure is completed.
§ 21.2:3Verification of Default
In several instances, mortgaged property has been sold at foreclosure after the lender orally reinstated the loan or promised not to foreclose. See Diversified, Inc. v. Gibraltar Savings Ass’n, 762 S.W.2d 620, 623 (Tex. App.—Houston [14th Dist.] 1988, writ denied); Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.). The Diversified cases that were brought under the Texas Deceptive Trade Practices–Consumer Protection Act are no longer applicable because of Texas Property Code section 51.009, which provides that a foreclosure sale purchaser is not a consumer and the purchaser acquires the property “as is” at the purchaser’s own risk and without any express or implied warranties. See Tex. Prop. Code § 51.009.
§ 21.2:4Applicability of Consumer Statutes to Notices
Most loan situations will dictate that a notice of default, a notice of intent to accelerate, and a subsequent notice of acceleration be sent to the debtor before the statutorily required notice of foreclosure sale is sent. See chapters 8 and 12 in this manual. In the case of consumer debt, the initial communication with the debtor must contain the Miranda-style warning and the statutorily dictated notices provided by the federal Fair Debt Collection Practices Act. The attorney should review the loan payment history to verify that the demand being made to cure the loan default is correct. See chapter 7 for a discussion of both the Texas and federal Fair Debt Collection Practices Act.
The attorney should review the promissory note to obtain the information necessary to prepare proper demand and notice letters and verify the amount of time that the borrower is given before the loan can be accelerated. Texas statutes require that a residential borrower be given at least twenty days’ notice of default and opportunity to cure. See Tex. Prop. Code § 51.002. See also section 21.3 below. Many residential notes and deeds of trust afford the borrower a longer period of thirty days to cure a default as a prerequisite to accelerating the loan. In this event, the attorney should make sure that the demand and notice of default letters afford the borrower thirty days rather than twenty days to cure the loan default as required by Texas Property Code section 51.002.
All foreclosure notices required by Property Code section 51.002 must include a military rights disclosure that is the same as or similar to the promulgated language found in subsection (i). See Tex. Prop. Code § 51.002(i). See chapter 33 and form 8-2.
§ 21.2:5Mortgagee Counseling Programs
It should also be noted that many investors, including Fannie Mae and Freddie Mac, now require that additional investor-specific notices be provided to defaulting debtors. These notices generally relate to loan modification, forbearance, loan counseling, or other default mitigation alternatives. Since these additional requirements are constantly changing, it would be prudent to search the investor’s website for such changes. See chapter 36 in this manual for a discussion of homeowner assistance programs.
If the mortgaged property is the debtor’s homestead or the debtor’s residence, consideration should be given to cure rights, consumer debt-collection laws, and limitations on enforcement of the secured debt. Section 51.002(d) of the Texas Property Code requires that the debtor be given twenty days to cure the default before notice of foreclosure sale is given:
Notwithstanding any agreement to the contrary, the mortgage servicer of the debt shall serve a debtor in default under a deed of trust or other contract lien on real property used as the debtor’s residence with written notice by certified mail stating that the debtor is in default under the deed of trust or other contract lien and giving the debtor at least 20 days to cure the default before notice of sale can be given under Subsection (b).
Tex. Prop. Code § 51.002(d). The notice of default given by the mortgage servicer to a residential debtor as required by section 51.002(d) of the Property Code does not literally have to use the word default as long as the notice puts the debtor on notice of the delinquency and gives the debtor twenty days to cure. Herrington v. Sandcastle Condominium Ass’n, 222 S.W.3d 99, 101 (Tex. App.—Houston [14th Dist.] 2006, no pet.). The debtor is entitled to this notice even if the loan originated before the passage of the statute. Rey v. Acosta, 860 S.W.2d 654, 657–58 (Tex. App.—El Paso 1993, no writ). Section 51.002(d) of the Property Code is a procedural requirement for accelerating a debt and therefore can be applied retroactively. The notice requirement raises numerous questions that unfortunately may have to be answered through litigation or legislative amendment. The following is a discussion of some of the questions that have already been raised by commentators.
See also chapter 8 in this manual.
§ 21.3:1What Is “Real Property Used as Debtor’s Residence”?
Texas Property Code section 51.002(d) does not specify when the mortgaged property is to be classified as the debtor’s residence. The mortgaged property could be so classified as of the execution of the deed of trust, as of the default, as of the foreclosure sale, or anytime in between. Nor does the statute define what types of properties can constitute the debtor’s residence. Second homes and rent properties, such as houses, apartment projects, small self-operated motels, high-rise hotels, office buildings with or without a penthouse, or time-shares, could all possibly be defined as residences. Other questions are raised by this statutory phrase as well. Suppose the owner of a rent house is the sixth owner after the loan was closed. If the term debtor includes all persons who have personal liability on the note, is the notice requirement triggered if any one of the five previous owners used the property as his residence at any time during the term of the loan?
§ 21.3:2Who Is the Debtor in Section 51.002(d)?
Usually the maker or obligor of a note secured by the mortgaged property is also the property owner and the owner at the time of foreclosure. See National Commerce Bank v. Stiehl, 866 S.W.2d 706, 707–08 (Tex. App.—Houston [1st Dist.] 1993, no writ), involving multiple notes with different makers. Section 51.002(b)(3) provides that the notice of the date, time, and place of the foreclosure sale must be given to each debtor “who, according to the records of the mortgage servicer of the debt, is obligated to pay the debt.” Tex. Prop. Code § 51.002(b)(3).
§ 21.3:3When Does Twenty-Day Curative Period Begin?
Does the twenty-day curative period begin when the certified-mail notice is deposited in the mail or when it is received by the debtor? Texas Property Code section 51.002(d) provides the following:
The entire calendar day on which the notice required by this subsection is given, regardless of the time of day at which the notice is given, is included in computing the 20-day notice period required by this subsection, and the entire calendar day on which notice of sale is given under Subsection (b) is excluded in computing the 20-day notice period.
Tex. Prop. Code § 51.002(d). In a situation in which there are multiple debtors because the mortgaged property has changed hands and the loan has been assumed several times, there may be more than one twenty-day cure period. See Newman v. Woodhaven National Bank, 762 S.W.2d 374, 375–76 (Tex. App.—Fort Worth 1988, no writ) (involving twenty-day notice sent to debtor after loan ballooned).
§ 21.3:4How Is Address of Debtor Determined?
The address of the debtor for purposes of Texas Property Code section 51.002(d) is the debtor’s last known address as provided in section 51.0001(2). The debtor has a statutory duty to provide a new change of address if the debtor expects to receive foreclosure notices at a new address. Tex. Prop. Code § 51.0021.
§ 21.4Homeownership Counseling
A number of state and federal statutes provide for counseling and refinance programs for delinquent homeowners, and some of these programs mandate that many large mortgage servicers offer homeowners the opportunity to participate in these programs. For example, all mortgagees that service conventional mortgage loans and home loans insured by the U.S. Department of Housing and Urban Development (HUD) are subject to the requirement that an “eligible” mortgagor who is past due on his payments shall be notified of the availability of homeownership counseling. See chapter 36 in this manual for a further discussion of these programs.
HUD has taken the position that the notification of the availability of homeownership counseling should be made before the forty-fifth day after any eligible homeowner fails to pay any amount by the date the amount is due under a home loan. HUD requires that the notification be made within forty-five days from the date that payment was due. See 12 U.S.C. § 1701x(c)(5)(B)(ii). A list of HUD-approved housing counseling agencies can be found at HUD’s website at www.hudgov-answers.force.com/housingcounseling/s/?language=en_US. HUD may be contacted by telephone at 202-708-1112 or by writing to U.S. Department of Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 20410-0001.
If the loan is guaranteed by the U.S. Department of Veterans Affairs (VA), the VA is required to follow the procedures outlined at 38 U.S.C. § 3732(a)(4). The VA is similarly required to provide homeownership counseling, including information on alternatives to foreclosure, possible methods of curing the default, and deeds in lieu of foreclosure. Additional information regarding VA-guaranteed loans in Texas is available from the VA Regional Loan Center, 6900 Alameda Road, Houston, TX 77030-4200, telephone 1-888-232-2571, or at its website at www.benefits.va.gov/ROHOUSTON/rlc-services.asp.
§ 21.5Residential Foreclosure Consultants
Texas Business and Commerce Code chapter 21 regulates the business operations of residential foreclosure consulting services. Foreclosure consultants are defined as persons who make a representation, a solicitation, or an offer to a homeowner to perform services for a fee that involve seeking to prevent or postpone foreclosure, obtaining a forbearance agreement, curing or reinstating a delinquent mortgage, advancing or lending funds to prevent foreclosure, or ameliorating the impairment of a borrower’s credit rating. See Tex. Bus. & Com. Code § 21.001(a). See sections 36.6 and 37.3 in this manual for a discussion of residential foreclosure consulting.
§ 21.6120 Days Delinquent Before Foreclosure Referral
The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) added significant new requirements for servicing a mortgage in default, if that residential mortgage loan is a federally-related mortgage loan secured by the borrower’s principal residence. These mortgage servicing regulations require early intervention, continuity of contact, and loss mitigation procedures. Most of these Dodd-Frank default servicing requirements fall under the purview of the mortgage servicer and are handled before the file is referred to the foreclosing attorney. However, foreclosure practitioners should be aware of the 120-day delinquency rule.
The 120-day delinquency rule provides that the “first notice or filing” of a foreclosure action may not be filed on a borrower’s principal residence before the borrower is 120 days delinquent, with certain limited exceptions.
The “first notice or filing” is not the initial demand letter and notice of intent to accelerate. For a judicial foreclosure, the “first notice or filing” is the date the foreclosure application is filed. For a nonjudicial foreclosure, the “first notice or filing” is the date the notice of trustee’s sale is posted.
Delinquency is the period of time during which a borrower and the borrower’s mortgage loan are delinquent, beginning on the date a periodic payment becomes due and unpaid, until such time as no periodic payment is due and unpaid.
There may be a default other than the payment of periodic payments, such as failure to pay property taxes or maintain required insurance, committing waste, or failing to occupy the collateral. Since delinquency is defined as failure to make periodic payments, such defaults do not begin the 120-day clock. Instead, the loan must be accelerated (after notice of default and intent to accelerate), with day one of delinquency beginning after acceleration.
The 120-day delinquency rule does not apply if (1) the borrower violated the due-on-sale clause or (2) the servicer is joining the foreclosure action of a superior or subordinate lienholder. The 120-day delinquency rule also only applies if the collateral is the primary residence of the borrower or if the loan is not a “federally related mortgage loan,” as that term is defined under 12 C.F.R. § 1024.2(b).
For more details on the 120-day delinquency rule, see 12 C.F.R. § 1024.41(f) and the “Factsheet on Delinquency and the 2016 Mortgage Servicing Rule” published by the Consumer Financial Protection Bureau on August 4, 2016, found at https://files.consumerfinance.gov/f/documents/08042016_cfpb_Mortgage_Servicing_Factsheet_on_Delinquency.pdf.
§ 21.7Sales Conducted under a Power of Sale in the Security Instrument
A trustee or substitute trustee conducting a residential real property foreclosure may contract with an attorney to advise the trustee or substitute trustee and to administer or perform any of the trustee’s or substitute trustee’s functions or responsibilities under the deed of trust and chapter 51 of the Texas Property Code. Tex. Bus. & Com. Code § 22.003. The trustee or substitute trustee may also contract with an auction company to arrange, manage, sponsor, or advertise a residential real property foreclosure sale. Tex. Bus. & Com. Code § 22.003.
On residential real property foreclosures, a trustee or substitute trustee must also satisfy any applicable requirements of sections 22.004, 22.005, and 22.006 of the Texas Business and Commerce Code. If the successful bidder is not the mortgagee or the mortgage servicer, the trustee or substitute trustee must obtain the name, address, and other required information on certain parties submitting the highest and best bid. Tex. Bus. & Com. Code § 22.004. The trustee or substitute trustee must also provide the winning bidder a receipt for the sale proceeds tendered, deliver or record the deed, and account for and distribute the sales proceeds, including maintaining the sales proceeds in a separate account, and maintaining a written record of all deposits and disbursements from the account. Tex. Bus. & Com. Code §§ 22.005, 22.006.
A trustee or substitute trustee conducting a residential real property foreclosure may recover (1) the trustee’s or substitute trustee’s reasonable actual costs, (2) reasonable attorney’s fees incurred by the trustee or substitute trustee, (3) a reasonable trustee’s or substitute trustee’s fee, and (4) the trustee’s or substitute trustee’s reasonable attorney’s fees in a suit based on a claim related to the sale if the suit is found to be groundless, in each instance payable from the sales proceeds in excess of the amount owed on the indebtedness secured by the residential real property. Tex. Bus. & Com. Code § 22.006. Certain trustee’s or substitute trustee’s fees and expenses in a residential real property foreclosure are presumed to be reasonable if they do not exceed the amounts provided by law. Tex. Bus. & Com. Code § 22.006.