Remedies for defaults under loans secured by real property varies on a state-by-state basis. In the eastern part of the country, enforcement is mostly by mortgage foreclosure. In the western states, there are enforcement proceedings by way of a deed of trust. There is a spectrum of debtor protections afforded to borrowers depending on the state involved. States like Georgia permit a lender to effect remedies against a defaulting borrower within four to six weeks. In California, a lender can complete an enforcement proceeding in 120 days. But there are states like Florida, where a contested foreclosure can run more than a year; some may take several years.
In each state, the state legislature has made a determination on the amount of protection afforded to real estate borrowers. States like Florida have adhered to a procedure established by the English Chancery Courts originally designed to prevent unsavory lenders from making loans to acquire ownership of real estate in anticipation of a default by borrowers where the law courts provided little protection in this regard. (1) The English Chancery Courts developed the concept of "equity of redemption" to allow a borrower to protect its equity in its ownership of real estate. The equity of redemption permits a borrower to pay the amount due the lender prior to the conclusion of the foreclosure sale to prevent the loss of his or her property.
The concept of equity of redemption is a significant right of borrowers in those states, like Florida, where loss of an interest in real property requires a judicial action in an equitable proceeding. In fact, Florida has codified the concept of equity of redemption by statute.
Right of redemption. At any time before the later of the filing of a certificate of sale by the clerk of the court or the time specified in the judgment, order, or decree of foreclosure, the mortgagor or the holder of any subordinate interest may cure the mortgagor's indebtedness and prevent a foreclosure sale by paying the amount of moneys specified in the judgment, order, or decree of foreclosure, or if no judgement, order, or decree of foreclosure has been rendered, by tendering the performance due under the security agreement, including any amounts due because of the exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorneys' fees of the creditor. Otherwise, there is no right of redemption. (2)
Florida courts have characterized the right of redemption as a "mortgagor's valued and protected equitable right to claim [the borrower's] estate in foreclosed property." (3) Foreclosure is an equitable proceeding and, as such, a court may determine not to extinguish a defaulting borrower's interest in his or her property because of a minor, technical, or other default that may not adversely affect the lender's collateral, especially where the borrower's equity in the mortgaged property is substantial. (4)
Over the years, lenders have been frustrated by various acts of borrowers to delay foreclosure actions. The most common act was filing for bankruptcy on the eve of a foreclosure sale. This issue has been largely addressed by so-called "carveout" or
"bad-boy" guarantees triggering full personal liability for the debt by a guarantor upon a bankruptcy filing. In today's world, this...