Forclosures, Short Sales and Bank Owned

Foreclosure

is the legal process by which a mortgagee, or other lien holder, usually a lender, obtains a termination of a mortgagor’s equitable right of redemption, either by court order or by operation of law (after following a specific statutory procedure).[clarification needed] Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, it is a cloud on title and the lender cannot be sure that (s)he can successfully repossess the property. Therefore, through the process of foreclosure, the lender seeks to foreclose the equitable right of redemption and take both legal and equitable title to the property in fee simple. Other lien holders can also foreclose the owner’s right of redemption for other debts, such as for overdue taxes, unpaid contractors’ bills or overdue homeowners’ association dues or assessments.

A Short Sale

is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.

Short Sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. A short sale will often result in a negative credit report against the property owner, however it is less damaging than a foreclosure report.

Real estate owned or REO

is a class of property owned by a lender typically a bank, government agency, or government loan insurer, after an unsuccessful sale at a foreclosure auction. A foreclosing beneficiary will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the beneficiary will legally repossess the property. This is commonly the case when the amount owed on the home is higher than the current market value of this foreclosure property, such as with a high loan-to-value mortgage following a real estate bubble. As soon as the beneficiary repossesses the property it is listed on their books as REO and categorized as an asset (non-performing asset).

Illinois Foreclosure Laws

How are mortgage liens treated in Illinois?

Illinois is known as alien theory state where the property acts as security for the underlying loan. The document that places the lien on the property is called amortgage. Power of sale foreclosures are not permitted in Illinois.

How are Illinois mortgages foreclosed?

In Illinois, the lenders go to court in what is known as ajudicial foreclosure proceeding where the court must issue a final judgment of foreclosure. The property is then sold as part of a publicly noticed sale. The court with jurisdiction over a foreclosure is known as theCircuit Court. In Illinois, theCircuit Courts are broken down by county, and the Chancery Division handles foreclosures. A complaint is filed inCircuit Court along with what is known alis pendens. Alis pendens is a recorded document that provides public notice that the property is being foreclosed upon.

In Illinois, a party can offer aDeed in lieu of foreclosure, which effectively deeds the property back to the lender. There can be no deficiency judgment if the lender accepts aDeed in lieu of foreclosure.

If legal action has already ensued, the property owner can request aConsent Foreclosure, which shortens the foreclosure process, and based on judicial discretion, will further prevent a deficiency judgment, although the property owner may be liable for court costs and attorney fees.

What are the legal instruments that establish a Illinois mortgage?

The documents are known as themortgage,note, and in a commercial transaction, asecurity agreement. Sometimes the mortgage document is combined with thesecurity agreement. Amortgage is filed to evidence the underlying debt and terms of repayment, which is set forth in thenote.

How long does it take to foreclose a property in Illinois?

Depending on the court schedule, it usually takes approximately 215 days to effectuate an uncontested foreclosure. This process may be delayed if the borrower contests the action, seeks delays and adjournments of hearings, or files forbankruptcy. Property owners have a right to reinstate a defaulted mortgage within ninety (90) days of the personal service of the foreclosure complaint. Property owners have thirty (30) days after the foreclosure sale is confirmed to retain possession and occupancy of the property at the expiration of which they must vacate.

Is there a right of redemption in Illinois?

Illinois does not have apost-foreclosure sale statutory right of redemption, which would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. On residential properties, there is a seven (7) month right of redemption from either the time the foreclosure complaint is filed or three (3) months form the time a final judgment of foreclosure is entered. A foreclosure sale cannot occur until these time periods expire. Reinstatement and redemption rights can only be exercised once every five (5) years.

Are deficiency judgments permitted in Illinois?

Yes, adeficiency judgment may be obtained when a property in foreclosure is sold at a public sale for less than the loan amount that the underlying mortgage secures. This means that the borrower still owes the lender for the difference between what the property sold for at auction and the amount of the original loan. Deficiency judgments are not permitted in cases ofConsent Foreclosure or aDeed in lieu of foreclosure.

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