One of our bank clients, which has a home equity line of credit portfolio, recently asked me to give a presentation on how best to deal with foreclosure suits filed by senior lenders (first mortgagees). Whether junior mortgages are residential or commercial, the basic plan of attack in Indiana is the same:
1. Email Summons and Complaint filed by senior mortgagee, together with scan of the bank’s loan documents, to foreclosure counsel. Advise foreclosure counsel of the manner of service of process (certified mail or hand delivery) and date of receipt.
2. Foreclosure counsel will file an appearance and a motion for extension of time with the court. Nothing else typically will be due with the court until 50 – 53 days after the date of service of process.
3. During the 50 – 53 day window, the bank should do the following:
a. Order an appraisal or broker price opinion, and determine the fair market value of the mortgaged property.
b. Create an estimate of the senior mortgagee’s entire indebtedness, including unpaid principal balance, accrued interest, late fees, delinquent real estate taxes, per diem interest and attorney fees/litigation costs. The complaint will list many of these figures.
c. Create an estimate of carrying costs associated with owning the real estate, including real estate taxes, hazard insurance premiums, maintenance/repair costs, utility expenses and attorney fees/litigation expenses for foreclosure.
d. Create an estimate of liquidation expenses, including broker fees and closing costs.
e. Determine the bank’s own estimated indebtedness, including unpaid principal balance, accrued interest, per diem interest and late fees.
4. Before the close of the 50 – 53 day window, the bank should determine whether it would ultimately net any money if it were to acquire the mortgaged property at the sheriff’s sale and then liquidate it. The question is whether the value of the mortgaged property exceeds the senior mortgagee’s indebtedness, the carrying costs and the liquidation expenses. Here is a basic formula: Fair Market Value - (Senior Debt + Carrying Costs + Liquidation Expenses) = Equity.
5. If the calculation in #4 shows insufficient equity, then the bank should consider instructing foreclosure counsel to file a disclaimer of interest and motion to dismiss. (The exception to this would be if the bank desires to collect the debt from other assets of the borrower or a guarantor.) The case might end here.
6. If the calculation in #4 shows sufficient equity, then the bank should advise foreclosure counsel of its debt figures in #3(e) above and instruct counsel to file an answer to the complaint and a cross claim against the borrower (and guarantor, if applicable).
8. Foreclosure counsel will monitor the lawsuit and obtain judgment/foreclosure decree for the bank.
9. After the entry of judgment but before the sheriff’s sale, the bank should revisit the equity analysis in #4. The bank – the junior lender - must decide if it is prepared to pay off the senior mortgagee’s judgment so that the bank can credit bid its own judgment at the sale.
10. The junior lender should communicate its decision regarding #9 to foreclosure counsel, with bidding instructions, if any.
11. As applicable, foreclosure counsel will attend the sheriff’s sale, tender a cash deposit sufficient to pay the senior mortgagee’s judgment in full and submit a credit/judgment bid on behalf of the bank, which will acquire title to the property if it’s the winning bidder. If the bank is outbid, then it will receive cash in the amount of its credit bid (and a refund of the deposit).
Perhaps the most important thing to bear in mind is that the process requires junior mortgagees to bring enough cash to the sheriff’s sale to pay off the credit (judgment) bid of the senior mortgagee. A junior lender cannot submit its own credit bid or obtain title to the real estate unless it first outbids the senior lender with cash. Hence the significance of the analysis in #4.