How are mortgage liens treated in Texas?
Texas is known as a title theory state where the property title remains in trust until payment in full occurs for the underlying loan. The document that secures the title is usually called a deed of trust but may also be referred to as amortgage. If payment of the loan is not made in accordance with the terms of the loan documents, the Lender may exercise its rights via foreclosure.
The non-judicial process of foreclosure is used when a power of sale clause exists in a deed of trust. A "power of sale" clause is the clause in a deed of trust, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. In deeds of trust where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".
Power of Sale Foreclosure Guidelines
If the deed of trust contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
1. Prior to proceeding with a foreclosure, Texas laws state that the lender must mail the borrower a letter of demand, informing the buyer he has twenty (20) days to pay the delinquent payments or foreclosure proceedings will begin.
2. At some point after the borrowers twenty (20) days have expired, but at least twenty one (21) days before the foreclosure sale, a foreclosure notice must be: 1) filed with the county clerk; 2) mailed to the borrower at their last known address; and 3) posted on the county courthouse door.
3. The foreclosure sale must take place on the first Tuesday of any month, even if said Tuesday falls on a legal holiday, but only after the proper reliminary notices have been given. The sale is on the courthouse steps by auction to the highest bidder for cash. Anyone may bid, including the lender, who bids by canceling out the balance due on the note, or some part of it.
Lenders may obtain deficiency judgments, but they are limited to the difference between the fair market value of the property at the time of sale and the balance of the loan in default.
Home Equity Foreclosure.
A Home Equity foreclosure follows substantially similar procedures as a Non-Judicial foreclosure except for the requirement that the Lender's Trustee must obtain judicial approval to proceed with the Non-Judicial Process. The Supreme Court of Texas has established rules for a home equity foreclosure. This guideline must be carefully followed or the Court will not approve the foreclosure sale.
Section 735 & 736 of the Texas Rules of Civil Procedure describes the procedures:
1. Lienholder sends notices, accelerates debt.
2. Lienholder applies to court for an order allowing foreclosure
3. Court only has jurisdiction to determine whether has correctly alleged and proven the debt, the default, and the notices.
4. Court issues an order allowing a nonjudicial foreclosure under Texas Property Code 51.002
5. Order has no preclusive effect on subsequent proceedings
6. Trustee posts property for sale.
7. Trustee conducts foreclosure sale in the same way as a non-judicial foreclosure.
Judicial foreclosure is an option where a lien holder chooses despite the fact they may be entitled to a non-judicial foreclosure, notwithstanding the fact that the latter is a faster and less expensive method of foreclosing real property liens. For example, a holder of a first lien deed of trust that provides for non-judicial foreclosure also has the option to file a lawsuit and request a judicial foreclosure. While filing suit for a judgment on the debt and foreclosure of real property does constitute an election of remedies, the election does not bar a non-judicial foreclosure proceeding until a judgment has been rendered for judicial foreclosure.
Consequently, a lien holder can dismiss its judicial foreclosure proceeding before obtaining a judgment if the lien holder desires to seek non-judicial foreclosure of real property, but a lien holder cannot concurrently pursue non-judicial foreclosure and a judicial foreclosure of the same property. Why would you choose the more expensive option of judicial foreclosure over a less expensive and faster non-judicial foreclosure? Generally there are three categories of reasons to choose a judicial foreclosure over a non-judicial foreclosure, these reasons are:
1. Defective loan documents;
2. Defective title; and
3. Litigious borrowers.