The Wall Street Journal recently sounded the alarm of the rise in foreclosures of religious entity’s buildings it a story captioned “Church Foreclosures seen as the ‘Next Wave’ in Crisis.” Additional press reports and financial reports of lending institutions affirm that church foreclosure is rising. It is very important to take the issue of defaulting loans seriously and address them as soon as possible once a religious entity becomes aware that defaulting on a loan is a possibility. The foreclosure process is the legal remedy for lenders to reclaim the collateral when a borrower defaults on a mortgage or real estate loan. Each state has specific laws regarding this mortgage foreclosure process. The “Foreclosure Process” is similar but different from state to state in two main categories: judicial foreclosures and foreclosure by advertisement / non-judicial foreclosures. At the forefront, it is very important to know that foreclosure laws vary significantly from state to state. The location of the property will determine what state’s laws will govern any foreclosure action. Become familiar with those laws since they will influence strategy and other decision-making throughout the process. If the mortgage relates to property outside your state and you are not familiar with that state's laws, consider retaining competent counsel early in the process to assist you.
If you are a religious institution and find that you are close to foreclosure . . . There are a few pro-active items for you to consider in a commercial foreclosure process, the first being review all loan documents. Review the lender’s entire loan file for relevant documents and talk with the loan officer in charge of the file. Common documents to reviewed include the basic loan documents of the Note(s), Mortgage(s), all applicable amendments or modifications, Co-lender or participation agreements if the loan is participated. Other common loan documents include assignment of rents, Cross-Collateralization agreements, Security agreement, and Guarantees. These documents will give you an idea of what is involved in the loan; who may be responsible for payments in the event of default, and how foreclosure may occur upon default. Having a clear understanding of the documents at the outset of a defaulting scenario will guide your attorney and bank in addressing default possibilities. A review will also assist the Church in determining how the financial institution considers if a “default” has occurred. The most common default, of course, is the non-payment of principal and interest. There may be other defaults. For example, a borrower who is not paying principal and interest also likely has not paid taxes or insurance, which are often requirements of the loan documents. The loan file will also show if there are any communication may constitute a modification, settlement or waiver by the mortgagee. This may prove valuable in defending a default claim.
Now that I am in default, what happens next? The commercial foreclosures process differs from residential foreclosures and it is very important to know that every state has a separate and unique manner in which the process occurs. The timeline for the mortgage foreclosure process is based on your state foreclosure laws, and may also depend on if the property is owner occupied, and in some cases also the property type (residential, commercial, vacant land). Typically it takes one to twelve months to complete a foreclosure. See the table above for your state foreclosure laws. Therefore, it is important to consult with a professional who has the basic knowledge of the process for the state where the loan is located. Although the particular foreclosure procedures vary from state to state, the following is a general overview of the commercial foreclosure process. Notice must be provided by the lender. All foreclosures begin with the lender notifying the borrower that it is in default of the loan agreement. Typically, there are four levels of notice. Notice of Default. Once a Church defaults on a commercial mortgage, the lender will send a notice of default. The notice of default is usually sent via certified mail and will include the total amount which must be paid by the borrower in order to reinstate the loan. The notice of default will also set forth the date by which the loan must be reinstated in order to avoid foreclosure. Notice of Acceleration. If the borrower fails to reinstate the loan, the lender will send him a notice of acceleration. The notice of acceleration demands that payment in full of the total amount due on the loan be made within a specified period of time to avoid foreclosure. The notice of acceleration is usually mailed via certified mail. Notice of Foreclosure. The commercial lender must notify the borrower of its intention to foreclose. The notice must contain the total amount due on the loan, the date, time, and location of the foreclosure sale, and must identify the instrument by which it claims the right to foreclose. In most states, the notice of foreclosure must also be published in the legal organ of the county in which the property is located. IRS Notice. If the IRS has a tax lien against the property, the lender must send the service a notice at least twenty five days before the foreclosure. The IRS then has One Hundred and Twenty days from the foreclosure to buy the property for the foreclosure purchase price, plus 6% interest and operating expenses (less any operating income). If the lender does not send this IRS notice, the tax lien continues even after the foreclosure. Another option is to have the IRS consent to the sale and release its lien. However, this process can often take so long that it’s faster to just foreclose and wait out the One Hundred and Twenty day redemption period. The Foreclosure Sale. Once the notice requirements are satisfied, the lender will proceed with the foreclosure sale. A commercial loan agreement will have a “Power of Sale” clause in a Note or Security instrument which allows the lender to foreclose and sell the property if the borrower defaults on the terms of a loan. This is typically a clause which is necessary to allow a non-judicial foreclosure process for a particular loan. A loan is secured by real estate with one of two types of security instrument, called a mortgage or deed of trust. Mortgages and Deeds of Trust are similar and are the instrument which gets recorded at the county recorder’s office, to announce to the world that the property owner has a debt secured by a particular property. Judicial or Non-judicial foreclosure may be influenced by which type of security instrument is used to secure the loan. The two most common forms of foreclosure are judicial foreclosure and foreclosure by advertisement. In states that only allow judicial foreclosure of commercial properties, like New York, the lender initiates a judicial foreclosure by filing a lawsuit. In states that permit foreclosure by advertisement, like Michigan, or non-judicial foreclosures, like Texas, a lender is not required to obtain a court order before it can foreclose. After satisfying all statutory notice provisions, the lender may proceed with a non-judicial foreclose. A non-judicial foreclosure is an auction type sale which usually takes place on the courthouse steps in the county where the property is located. The property is sold to the highest bidder; if there are no bids, the lender is automatically deemed to be the highest bidder and takes possession of the property. Post – Foreclosure Sale. After the foreclosure sale is completed, the Church is left with eviction, and possibly, a deficiency judgment and redemption. Eviction. After the sale is completed, the new buyer may evict the Church from the premises. State law governs the eviction process. Deficiency Judgment. In some instances, a lender may seek a deficiency judgment to recoup its losses if the property is sold at foreclosure for less than what was owed on the commercial mortgage. A deficiency judgment may occur after a foreclosure has been completed, if the lender suffers a loss on the loan, and is not able to recoup their original principal. The lender can go to court and get a judgment against the borrower for the amount of their loss. This is not allowed in all states, and may also depend on whether a judicial or non-judicial foreclosure process was used. Junior lien holders who were wiped off title by a foreclosed senior lien may be allowed deficiency judgments if the junior lien was NOT created at the time of purchasing the property (non-purchase money junior liens). Redemption period. In some states, like Tennessee, the borrower may reclaim its property within two years after the foreclosure. This is called the redemption period. A right of redemption after a trustee sale / foreclosure sale, allows the borrower who just lost their home at the foreclosure auction, the opportunity to buy it back from the bank (or winning bidder), usually at the same price as the highest bid at the trustee sale. This is allowed in some states and for a specific amount of time after the trustee sale (weeks to many months). This is a disadvantage for bidders and lenders, as any property improvement costs will not be recouped if the borrower exercises this right. In order to reclaim, the borrower must pay all the expenses of the foreclosure transaction in addition to the full amount of the loan.
Is there anything that I can do when I am in default of a loan so that we do not lose the building? There are options to consider as a borrower. Each remedy is dependent on state law. For example, under Illinois law, a mortgagee can recover the property without waiving its right to recover the deficiency from the borrower. That is not true in all states. Some states, such as California, limit the mortgagee to a single recovery — the property or the amount in default. In addition to foreclosing on the property, other actions that may be available include, for example, claims for deficiency, claims on the note, and claims on the guarantee, if any. Lending institutions may consider these options other than foreclosure. Some common consensual resolutions include: Work out/Restructuring of Loan. Come up with mutually agreeable terms based on your cash flow. Create a realistic payback of the loan with the understanding the principal will likely not be reduced. Lenders may be flexible with interest rates, late fees and penalties. Deed-in-lieu of foreclosure. Under Michigan and Illinois law, for example, the mortgagee, with the consent of the mortgagor, takes title to the property subject to any other claims or liens affecting the property. Acceptance of a deed-in-lieu relieves from personal liability all persons who may owe payment or the performance of other obligations secured by the mortgage except to the extent that person agrees not to be relieved in an instrument executed contemporaneously. Consent foreclosure. Unlike the deed-in-lieu option, a consent foreclosure forecloses the interests of the mortgagor and any other lien claimant, other than the United States (which can be foreclosed only through a judicial sale). In Illinois, requires that a judicial proceeding be initiated and mortgagee must waive any rights to a personal judgment for deficiency against the mortgagor or any other person liable for the indebtedness or other obligations secured by the mortgage. The important thing to remember is that as a borrower in default, you absolutely must retain consultants knowledgeable in the lending arena to protect your interest and negotiate a resolution. Do not walk alone in this process. Next, maintain constant, honest and direct communication with a lender. Do not lie. Do not run away from calls, meetings or other communications with your lender. Third, provide all requested information and supplement financials, even when not asked, to give the lender a clear picture of what is happening at the Church. Most lenders want to work with religious borrowers in modifying loan agreements. However, if the Church fails to communicate or is not honest in its dealing with the bank, expect swift, expensive and difficult foreclosures to occur.