Foreclosure - What does it mean?

Thursday, March 8, 2007
Contributed by: Thomas Clayton Feighny

Novices often throw around the term "foreclosing on a house" when nothing could be further from the truth. Foreclosure is a term that dates back to old England and was derived from the courts of equity. Upon even missing one payment, the lords of the land could come in and kick a mortgagor out immediately. These evictions happened often because the mortgagors made their payments out of their funds from being tenant farmers and the like, and any setback in income could mean losing their land.

As this seemed exceedingly unfair, the English courts of equity intervened. What they created was a concept called the "equity of redemption." The equity of redemption means that a person has an equitable right to redeem their house even if they are late on payments or have failed to pay their mortgage on time. "Foreclosure" means is that if you do not redeem your house in the period given to you under the statute, then your equity of redemption is foreclosed, and your right to retain your house is forever cut off.

The same holds true today.

Homes are pushed into foreclosure for a number of reasons, including late payments on mortgages, inability to pay mortgages, inability to pay state property tax, or inability to pay federal income tax. The vast majority of homes are not pushed into foreclosure through judgment creditors because an individual's home is his homestead, which is exempt from execution by a judgment creditor.

All of these factors give rise to an opportunity for real estate investors to move in and purchase real estate for pennies on the dollar. The problem is that establishing clear title on these homes is very difficult because (1) the debtors often have numerous judgment liens against them which could interfere with the process; (2) the debtors have many outstanding tax liens as well; and (3) a bank is often unwilling to let go of a house unless it is paid in full.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.