Equitable and Statutory Redemption
Statutory Redemption
• Until a foreclosure sale occurs, the mortgagor can exercise
his/her right of equitable redemption, by paying off the entire
balance of the mortgage debt (applies in ALL states)
• Equitable redemption price = full balance of mortgage
debt
• Statutory redemption price (in most states that recognize
statutory redemption) =
– Redemption by mortgagor extinguishes the mortgage lien
– Right of equitable redemption is extinguished by foreclosure sale
• In some states, even AFTER foreclosure sale occurs, the
mortgagor can exercise a right of statutory redemption
Example of Statutory Redemption (MN, p. 801)
Foreclosure sale price = $70,000; Balance of debt = $100,000; 6-mo.
redemption period; $1,000 in unpaid taxes, ultimately paid by Buyer
Equitable Redemption
Statutory Redemption
Debt
Taxes
$100,000
1,000
Sale Price
$70,000
Taxes
1,000
Interest (10%)
3,500
Price
$101,000
Price
$74,500
– Foreclosure sale price paid by buyer +
– Interest accruing on that amount from the date of sale +
– Any sums paid by the buyer after sale for real estate taxes
(and for repairs, if buyer took possession and made repairs)
Statutory Redemption
• Why should a state
allow the mortgagor to
redeem the land, after
the foreclosure sale, at
the foreclosure sale
price?
Statutory Redemption: Rationale
• Concern: if there are no competing bidders, the mortgagee
has an incentive to make “low-ball” bid, in order to maximize
the amount of the mortgagee’s deficiency judgment (which
could be enforced out of the mortgagor’s other assets)
– With statutory redemption, this takes away the mortgagee’s
incentive to make a “low-ball” bid; to minimize risk of
redemption, mortgagee can bid FMV of the property
– This “keeps the foreclosing lender honest”
Statutory Redemption: Concerns
• This “discount” is worse in states that allow the mortgagor to
keep possession during the redemption period
• Other states allow the buyer to take possession immediately,
but the lack of marketable title creates problems for buyer
– Buyer may be unable to sell or lease the property pending
expiration of redemption period (since Buyer lacks marketable title)
– If the property needs improvements, the foreclosure sale buyer
can’t safely make them (courts may say that buyer can’t get credit
for those improvements b/c buyer is attempting to “drive up” the
mortgagor’s redemption price)
Statutory Redemption: Concerns
• In states the recognize a statutory redemption right,
foreclosure sale buyer doesn’t have a marketable title to the
land until the statutory redemption period has expired
• This may discourage 3d parties from bidding at foreclosures
(or 3d parties may “discount” their bids to account for the
additional risk/delay posed by threat of statutory redemption
• For this reason, some argue that statutory redemption is
counterproductive (likely to produce lower sale prices), and
many states do not allow it
• Because of these concerns:
– A few states allow statutory redemption only if the mortgagee was
the foreclosure sale buyer (not where the buyer was a 3d party)
– A few states allow statutory redemption only after a nonjudicial
foreclosure sale
– Some states (e.g., MO) require the mortgagor to post a bond, prior
to the foreclosure sale, if the mortgagor wants to preserve its postsale redemption right
– In Missouri, statutory redemption price = full unpaid amount of the
debt (not just the foreclosure sale price)
– ≈ 1/2 of states = no statutory redemption at all!
Lien Revival: Example
Reacquisition by Mortgagor — Lien Revival
• After a foreclosure sale occurs, the mortgagor can only
reacquire the property in one of two ways
– First, by exercising the right of statutory redemption, or
– Second, by acquiring the property from the foreclosure sale buyer in
a voluntary transaction
• Majority rule: if the mortgagor reacquires the property in the
future, the extinguished mortgage liens are revived to the
extent that the mortgage debt(s) remain unpaid
Lien Revival and the BFP
• Now assume 3d party (Trump) bought home at foreclosure
sale, and later resold it to Smith (the original mortgagor)
• In this circumstance, the liens of Bank1 and Bank2 would
NOT be revived
– Trump got title “free and clear” of extinguished liens; Smith
gets benefit of “shelter” principle [Note 3, page 800]
– Otherwise, Trump loses the ability to confer “clear title” to his
chosen buyer
• Smith owns home, subject to two mortgages:
– Senior mortgage held by Bank1 (debt balance = $200K)
– Junior mortgage held by Bank2 (debt balance = $50K)
• First Bank forecloses after default; sale price = $170K
– Both mortgage liens extinguished
• After sale, Smith exercises statutory redemption right;
liens are revived; Smith now owns home subject to:
– Senior mortgage held by Bank1 (balance = $30K)
– Junior mortgage held by Bank2 (balance = $50K)
• In recent housing crisis, Boston Community
Capital adopted a program to buy homes at
foreclosure sales and sell them back to
mortgagors at the current FMV
– BCC and cooperating community banks would
make “new” mortgage loans to the mortgagors
to finance their repurchase of the home
• Federal Housing Finance Agency: when
mortgagors reacquired the property, that
revived any liens that had been
extinguished by the foreclosure
• What’s the correct policy?
Reasons for Lien Revival
• 1) If Mortgagor warranted title in granting the mortgage, the
covenant of further assurances obligates the mortgagor to “remortgage” the land upon reacquisition of it
• 2) If junior lienholder can get a judgment on the debt, that
judgment would constitute a lien on the land as soon as the
Mortgagor reacquired it
• 3) Law shouldn’t reward “strategic” default by Mortgagor (i.e.,
default, let senior foreclosure “wipe out” junior liens, then buy
back a “clean” title)
Creditor Remedies
• Traditional rule: a creditor’s remedies are cumulative; a
secured creditor can foreclose, sue on the debt, or do both
at the same time (UCC Article 9 reflects this approach)
• For real estate, a few states have a “one-action” rule, under
which creditor must “foreclose first”
– In a state with a “one-action” rule (such as CA), lender can’t
obtain a judgment on the debt until after lender conducts a
foreclosure sale
• Note that not all states follow the “lien revival” rule
• In particular, California has enacted statutes that liens
extinguished by foreclosure are not revived when
mortgagor reacquires the property (either by statutory
redemption or voluntary reacquisition) [Cal. Code Civ.
Proc. § 729.080(e)]
• Likewise, a later New Jersey court decision rejected lien
revival as recognized in Currie [Note 1, p. 799]
• A one-action rule ostensibly protects the mortgagor from a
“multiplicity of actions” and potential abuse by mortgagee
• As the one-action rule has been interpreted in California and
six other western states, it forces the mortgagee to exhaust
its security (land) first, before it could pursue the borrower
personally or the borrower’s other assets
– If mortgagee files a suit for judgment on the debt, the borrower
can compel mortgagee to foreclose first (“shield”)
– If mortgagee gets judgment on debt w/out foreclosing first,
mortgagee deemed to have waived its mortgage lien! (“sword”)
Deficiency Judgment: Problem
Missouri: No One-Action Rule
• Like most states, MO has NO one-action rule
– Most “full recourse” mortgage loan documents don’t require
lender to foreclose first
– In Missouri, lender typically forecloses by power of sale first
anyway, and then may sue for a deficiency judgment (if
there’s a deficiency)
– But, lender could sue for a judgment on the debt and
foreclose simultaneously (the proceeds of a later foreclosure
sale would be applied to reduce the judgment)
• Bank holds mortgage on Uphoff’s home, loan is in default
(loan balance = $300K)
– Bank conducts a nonjudicial foreclosure sale at which it buys the
home for a credit bid of $200,000
– At time, Bank has appraisal showing FMV = $250K
• Bank sues Uphoff for $100K deficiency judgment
• Should the Bank be entitled to:
– A $100,000 deficiency judgment? (Debt minus sale price)
– A $50,000 deficiency judgment? (Debt minus FMV)
– Or, no deficiency judgment at all?
Restatement: “Fair Value”
Deficiency Judgment
• Traditional rule: if sale was properly conducted, deficiency
amount is conclusively established by sale price
– Rationale: if land really was worth more than $200K, bidding
should’ve driven price to that level (sale price = best evidence
of value at time of sale)
• If sale was defective, Uphoff can recover damages from
Bank (and offset those damages vs. his liability to Bank for
$50K deficiency)
• § 8.4(c): if sued for deficiency, mortgagor may request court
to determine FMV of land as of date of sale [note 5, p. 867]
• § 8.4(d): If court-determined FMV >>> foreclosure price,
mortgagor gets an offset vs. deficiency, to that extent
• Result: If Uphoff proves land’s FMV was = $250K, Bank can
get deficiency judgment of only $50K (not $100K)
• At least 21 states have adopted “fair value” protection by
statute; in these states, deficiency is calculated based on “fair
value” regardless of whether sale complied with statutory
requirements or was “reasonable”
• In First Bank v. Fischer & Frichtel, the
Missouri Supreme Court refused to
adopt Restatement § 8.4, and instead
retained traditional rule, suggesting
that any change was up to the
legislature to make
• Is that argument compelling?
• Should the Missouri legislature adopt a
“fair value” limit?
Restatement “Fair Value” Rationale
• Foreclosure sale process creates opportunity/incentive for lender
to “strategically” bid low if there are no competitive bidders, to
increase potential deficiency judgment
• “Fair value” procedure takes away that incentive (keeps lender
honest)
• Is there a “down-side” to adopting the “fair value” approach?
– There may be a risk that courts will “overvalue” the mortgaged land
in judicial appraisals (but this may be no greater than the risk that
foreclosure sales “undervalue” land)
• Proponents argue:
Anti-Deficiency Rules?
• Some states go further and adopt “anti-deficiency
statutes” or nonrecourse statutes (e.g., California)
– Cal. Code Civ. Proc. § 580b: no deficiency judgment after
foreclosure of a “purchase money” mortgage
– Cal. Code Civ. Proc. § 580d: no deficiency judgment after any
nonjudicial foreclosure
• Good idea, or bad idea?
– Nonrecourse rule allows borrowers to get a “fresh start”
after foreclosure (lender can’t get a deficiency judgment, go
after borrower’s other assets)
– Nonrecourse rule incentivizes lenders to consider and
accept reasonable modification terms (like principal
reduction, where property is “underwater”)
– Nonrecourse rule should put real “teeth” into the loan
underwriting process; if lenders can’t get a deficiency
judgment, they’ll be more careful and make better loans in
the first place (only making loans where value of the
collateral justifies the mortgage amount)
• Detractors argue:
– Nonrecourse rule creates a severe moral hazard problem (if
borrower can “walk away,” an underwater borrower that can still
afford to make its payments can “walk,” or use threat of
“walking” to force a modification of the debt)
– Nonrecourse rule potentially inflates the real estate bubble (it
may encourage buyers to overpay or buy more house than they
can afford, hoping to refinance as prices go up)
– Lenders will pass along cost of lost deficiencies through higher
borrowing rates generally (i.e., good borrowers end up
subsidizing bad ones)
Benefits to Mortgagor?
• Less expensive than foreclosure
– On a recourse loan, the loan documents typically make Borrower
personally liable for any deficiency, including collection costs and
attorney fees; foreclosure increases those costs
• May be less disruptive to Borrower’s future credit standing (no
foreclosure would appear on Borrower’s credit report)
• May be able to avoid/limit deficiency (mortgagee may agree
to waive some/all of debt if Borrower “gives up”)
Deeds in Lieu of Foreclosure
• In all states, after
mortgagor has
defaulted, the
mortgagor can execute
(and mortgagee can
accept) a “deed in lieu
of foreclosure”
Benefits to Mortgagee?
• Mortgagee can avoid costs of collection (e.g., attorney fees)
– Even if loan documents make Mortgagor liable for those costs,
Mortgagee may be unable to recover them if Borrower is judgment-proof
or is protected by anti-deficiency statute
– Even if the mortgage secures repayment of those costs, Mortgagee
cannot recover them from the property if property is “underwater” (worth
less than outstanding debt)
• Speed
• No statutory redemption right (statutory redemption right is
triggered only by a foreclosure sale!)
Problem
• Uphoff owes Bank $300K
• Bank holds mortgage on Uphoff’s
land to secure that unpaid debt
(FMV = $250K)
• Uphoff (in default) offers Bank
deed in lieu of foreclosure
• Should Bank accept?