Proof that a demand/breach letter with unequivocal notice of intent to accelerate the maturity of the debt
was sent certified mail — not by regular mail or certificate of mailing — to all persons obligated for the
debt. In addition, the referral package should include copies of the note, deed of trust, mortgagee title
policy, transfer or assignments of lien to the foreclosing mortgagee, loan history, collection notes, and
loan payoff with per diem good for 30 days from the date of referral.
Non-judicial foreclosure synopsis.
If the mortgagor defaults and the security instrument (deed of trust) grants the power of sale, the real
property and improvements securing the debt can be non-judicially foreclosed by a properly appointed
trustee. All non-judicial foreclosures must strictly comply with Texas Property Code §§51.0001-51.009,
as well as the terms and conditions of the note and deed of trust. However, if the loan was originated as
a Texas home equity loan pursuant to Tex. Const. art. XVI § 50a(6), a court order must be obtained
before the property can be sold at a public auction. If there is a conflict between statutory law and the
terms of the loan agreement, to include but not limited to the note and security instrument, statutory law
controls.
Beginning Jan. 1, 2004, a mortgage servicer can administer a non-judicial foreclosure sale so long as the
borrower is given a very specific disclosure in the breach or demand to cure letter. The disclosure must
state that the mortgage servicer is authorized to administer the foreclosure under a written agreement
with the mortgagee. [Texas Property Code §51.0025]
All persons obligated for the debt must be given four specific foreclosure notices which are generally
mailed in two separate letters. The first letter, commonly known as the demand or breach letter, advises
the debtor what must be done to cure the default. In addition, this letter must contain an “unequivocal
notice” that the mortgagee intends to accelerate the maturity of the debt if the default is not cured.Though the Texas Property Code mandates a non-waivable 20-day cure period for a loan secured by the
borrower’s residence, most security instruments provide a 30-day cure period. Therefore, because of the
Fair Debt Collection Practices Act, the mortgagee must give the mortgagor 30 days to cure the default
before the debt can be accelerated.
The second foreclosure letter, commonly known as the “posting notice,” gives the borrower notice that
the maturity of the debt has been accelerated and also gives notice of the date, time, and place of the
foreclosure sale. The Texas Property Code requires that all persons obligated for a debt be given at least
21 days advanced notice of the foreclosure sale date.
Each notice of the foreclosure sale date must be posted at the courthouse or other place designated by
the County Commissioner’s Court. The notice must also be filed in the office of the County Clerk where all
or any portion of the property is located.
Beginning Jan. 1, 2004, if the property to be foreclosed is the borrower’s residence, all foreclosure
notices must be sent by certified mail to the property address unless the borrower has provided the
mortgage servicer with another address in a reasonable manner. Non-residential foreclosure notices must
be sent by certified mail to the borrower’s last known address contained in the mortgage servicer’s
account file. The borrower has a duty to give the mortgage servicer notice of any change of address in a
“reasonable manner.”
In addition to the current borrower reflected in the servicing records, any other borrower obligated for the
debt must receive the foreclosure notices by certified mail. Foreclosure notices are not required to be sent
to either superior or inferior lienholders.
Texas law does not require that the defaulting mortgagor actually receive the foreclosure notices. The
mortgagee’s duty as to giving notice is complete when a prepaid, certified mail envelope is placed in a
U.S. mail depository and properly addressed to the debtor. However, if a debtor claims that a foreclosure
notice was not sent, the lender must be prepared to present credible evidence that all the foreclosure
notices were properly addressed and mailed by certified mail.
All Texas foreclosure sales are held between 10:00 a.m. and 4:00 p.m. on the first Tuesday of the month
even if it is a holiday, e.g., New Year’s Day, Independence Day. All foreclosure sales must be conducted
within three hours of a specific starting time stated in the foreclosure notice. If the notice says 10:00
a.m., then the sale must be conducted between 10:00 a.m. and 1:00 p.m.
The physical location for foreclosure sales is designated by the Commissioner’s Court for each of the 254
Texas counties. The public sale is usually conducted on the steps of a specific side of the county
courthouse. If the sale is not held in the place designated by the Commissioner’s Court, the sale is void. If
the property is located in two or more counties, the notice of foreclosure sale must identify the location
where the sale will be held.
At the foreclosure sale, a trustee or a substitute trustee, properly appointed in accordance with the terms
of the deed of trust, auctions the property to the highest bidder for cash or cash equivalent. The
mortgagee, however, does not have to pay cash for its bid because the mortgagee has a credit bid equal
to the payoff amount. To the extent that any excess proceeds remain in the trustee’s custody after
payment of all loan and foreclosure fees, to include trustee fees, attorneys’ fees, and the loan balance due
the mortgagee, all remaining sums must be distributed in order of priority to inferior lienholders and then
to the borrower. Lienholders whose lien was superior to the lien foreclosed are not entitled to excess
proceeds.
If a third party foreclosure sale buyer fails to tender cash immediately after the bid is accepted, the
trustee must allow the bidder a “reasonable time” to obtain the cash price. If the bidder fails to return
with cash in the time agreed to by the trustee, the trustee must reschedule the sale for another first
Tuesday, unless all of the original bidders are given another opportunity to bid before 4:00 p.m.
Beginning Jan. 1, 2004, the trustee can advise bidders of all the conditions of sale, and so long as the
conditions are reasonable and are announced prior to the first sale of any property the trustee sells, the
conditions of sale are inviolable. All properties sold at a foreclosure sale are sold “as is” without any
express or implied warranties.
After sale, the trustee conveys the property to the successful bidder by a trustee’s deed, which passes
title free of all inferior liens but subject to all superior liens, ad valorem taxes and other government liens,
e.g. weed and demolition liens. All warranties of title found in a trustee’s deed come from the borrower,
not the trustee or mortgagee.
At least 25 days before foreclosure of a property encumbered by an IRS lien, the Internal Revenue Service
must be given written notice of the sale. Otherwise, the IRS lien continues to encumber the property. If
the lien to be foreclosed was recorded prior to the IRS lien, the IRS has 120 days to redeem the property
for the foreclosure sale price. If the IRS does not redeem, the federal tax lien no longer encumbers the
property.
A non-judicial foreclosure sale may be enjoined by any interested party who can show that a right,
whether legal or equitable, will be affected by the foreclosure sale. Most trial judges grant a Temporary
Restraining Order as a matter of right. The TRO bond that must be posted by the borrower is usually for
less than $500.
If, at the time of the foreclosure sale, a receivership, bankruptcy, guardianship or certain types of probate
proceedings are pending, any sale conducted without the appropriate court’s prior consent may be void.
If an independent probate proceeding is pending, a mortgagee may not enforce its claim against the estate
until six months after the personal representative has received Letters Testamentary. If a dependent
probate administration is pending, the property cannot be foreclosed without a court order. In many
respects, a dependent administration is analogous to a bankruptcy proceeding where an application must
be filed and court approval obtained before the debt can be enforced.
Generally, title companies will not issue a title policy unless the deceased mortgagor’s estate was
probated because title was vested in the deceased mortgagor’s heirs-at-law immediately upon the
mortgagor’s death. A spouse is a relative by marriage and not an heir-at-law. In order of priority, heirs are
children, then parents, then brothers and sisters and then the children of brothers and sisters. If no
probate is pending, the lender must open a creditor’s probate administration or file a vendor’s lien lawsuit
in order to divest the heirs from title.
Home equity foreclosure synopsis.
On November 4, 1997, Texas voters changed 150 years of history and voted to amend the Texas
Constitution to allow “home equity” loans to be secured by a person’s homestead. TEX. CONST. art. XVI
§ 50a(6). Subsequently, on Oct. 29, 2003, the voters amended the Texas Constitution to allow home
equity lines of credit or HELOC loans. However, because 34 consumer protection safeguards are written
into the constitutional amendment, Texas home equity loans are very different from home equity loans in
other states. Failure to comply with any of the consumer safeguards invalidates the lien against the Texas
homestead. Because all home equity loans are non-recourse, if the home equity lien is invalid, the
mortgagee can neither foreclose nor sue the borrower on the note. Beginning Oct. 29, 2003, a new
constitutional amendment allows the mortgagee to cure loan origination defects within 60 days after the
borrower complains.
A Texas home equity loan cannot be foreclosed without a court order. If a mortgagee treats a home
equity loan like a regular foreclosure, the mortgagee may be liable for wrongful foreclosure and damages
under the Texas Deceptive Trade Practices Act.
The Texas Rules of Civil Procedure provides three methods for obtaining the “court order” required to
foreclose a home equity loan. The first method found in Rule 735(1) is judicial foreclosure, which has been
an accepted foreclosure procedure in Texas since 1845. A judicial foreclosure requires the lender to file a
lawsuit in district court and obtain a judgment against the borrower. A court-designated official then sells
the property at public sale. A judicial foreclosure is not only subject to normal litigation delays but
additional delays and difficulties caused by a sheriff or constable who has little experience conducting
such sales.
The second method for acquiring the “court order” necessary to foreclose a home equity loan is Rule
735(2), which provides for a declaratory judgment or counterclaim for foreclosure if the borrower files a
pre-foreclosure lawsuit against the mortgagee.
The third expedited foreclosure method is set out in Rule 736. This rule requires that all the elements of a
regular non-judicial foreclosure sale be performed. Once the maturity of the debt is accelerated, the lender
files a Rule 736 application in the district court in the county where the property is located seeking a
court order to allow the mortgagee to proceed with non-judicial foreclosure.
The Rule 736 application requires that the lender verify in writing that (1) the debt exists; (2) the debt is
secured by a valid home equity loan that encumbers the homestead; (3) a default exists under the security
instruments; and (4) all requisite legal foreclosure notices have been given to the borrower.
Once the application is filed, the applicant must send the promulgated notice contained in Rule 736(2)(C)
to the debtor by both certified and regular mail. The debtor must file a response with the clerk of the
court before the Monday following 38 days after the notice was mailed. If a response is not timely filed,
the court is authorized to sign a default order without the necessity of a hearing. At this time, however,
many judges refuse to sign a Rule 736 default order without a hearing.
Once the Rule 736 order is obtained, notice of the foreclosure sale date, time, and location is sent to the
borrower and the borrower’s attorney, if any, in accordance with Texas Property Code §51.002, along
with a copy of the Rule 736 court order. The property can then be sold by the trustee at public auction
just like any other non-judicial foreclosure sale.
Assuming no unusual delays, a realistic elapsed time for completion of an uncontested home equity
foreclosure is approximately 210 days from the date of referral (assuming the breach letter has been sent
by the mortgagee) to the date of sale. If the trial judge requires a Rule 736 hearing, an extra 60-90 days
can be added to the foreclosure timeline.
If the debtor files a response to the lender’s Rule 736 application, either party can set the matter for
hearing. Unless there is an agreement for an extension of time, Rule 736 requires that a hearing be held
within 10 days after the response date. In most courts, however, a home equity case is scheduled like
other litigation matters, with the usual scheduling orders and delays. At a Rule 736 hearing, the court
either grants or denies the Rule 736 application. If the application is granted, the lender continues with
the foreclosure process; otherwise, the foreclosure process is terminated.
At the Rule 736 hearing, the lender has the burden of proving that: (1) the debtor is in default; (2) the
security instruments created a valid home equity lien; (3) a default has occurred under the security
instruments; and (4) the lender has complied with all of the notice requirements of the security
instruments, Texas Property Code § 51.002, and applicable law. Unless the judge agrees to allow the
presentation of evidence by affidavit, the mortgagee must provide a corporate representative to prove-up
the four elements of the application at the hearing.
If the borrower files a lawsuit at any time during the Rule 736 process, the home equity proceeding is
immediately abated and the lender’s Rule 736 application dismissed. The lender will then be forced to
defend against the borrower’s lawsuit as in any other mortgage related litigation.
The legal cost associated with foreclosing a home equity loan is difficult to ascertain because it is a
litigation matter. However, the range of legal fees to handle default home equity proceeding is generally
between $1,300 to $2,500, plus costs, because the proceeding includes all the aspects of a non-judicial
foreclosure as well as compliance with the unique home equity provisions related to the Texas
Constitution.
Judicial foreclosure synopsis.
Judicial foreclosure should be considered by the mortgagee if: (1) the mortgagee anticipates litigation
from a disgruntled borrower; (2) there are problems with origination of the loan or the loan documents; or
(3) title issues cloud title to the property. A judicial foreclosure can also eliminate a potential wrongful
foreclosure suit.
Once a judgment for judicial foreclosure is final, an officer appointed by the court, generally the sheriff or
constable, conducts a public sale after notice is published in the newspaper in the manner specified by the
court. In the large metropolitan counties, one person in the Sheriff or Constable’s office usually conducts
these sales on a regular basis and is familiar with the process. Otherwise, the lender’s attorney will spend
an inordinate amount of time helping the county official advertise and conduct the sale.
Deficiency actions.
The statute of limitations for initiating a deficiency lawsuit is two years from the date of the foreclosure
sale. By statute, the mortgagor can have a court determine the fair market value of the property as of the
date of the foreclosure sale. If the court determines the fair market value was greater than the
foreclosure sales price, the fair market value is used in the deficiency calculation, not the bid price, as is
the usual case.
Texas law does not permit the garnishment of wages or seizure of a borrower’s exempt property to pay a
deficiency judgment. In addition, because of the liberal debtor exemptions available in Texas, most
deficiency judgments obtained after a regular lawsuit is filed in district court are uncollectible because the
borrower is “judgment proof.”
A deficiency judgment is enforceable for 10 years against any of the borrower’s non-exempt property
located in a county where an abstract of judgment has been filed of record. An abstract of judgment can
be renewed for successive 10-year terms by following certain statutory requirements.
Eviction synopsis.
After title has been conveyed as a result of a foreclosure sale, any occupant may be sued for eviction in
the justice of the peace court in the precinct where the property is located. The only issue to be decided in
the justice court is the right of possession. Any matter that affects title, whether specious or not, is
outside the jurisdiction of the justice court to decide.
Before an eviction suit can be filed, the occupant must be given an opportunity to vacate the property. If
the occupant is the foreclosed borrower, the borrower is given a three-day notice to vacate. If the
occupant is a tenant, the tenant must be given a 30-day notice to vacate.
If the occupant refuses to vacate, the justice of the peace issues a summons to the occupant to appear
before the court. Since Texas has more than 450 justice of the peace courts, each with different rules
and procedures, it is advisable to contact the court to determine the court’s eviction suit requirements. If
an eviction judgment is granted, the new owner of the property by virtue of a trustee’s deed is entitled to
a writ of possession for the property.
All justice of the peace court evictions may be appealed to the county court. Eviction appeals must be
perfected within five days of the justice of the peace court’s judgment. To perfect an appeal, a bond that
is set by the justice of the peace must be paid into the registry of the court. Within five days after filing
the bond, the appellant must give notice of appeal to the other party. All further eviction proceedings are
stayed pending appeal.
On appeal, no reference can be made to any of the proceedings or findings in the justice of the peace
court and the case is litigated as if no eviction case had been filed. Obtaining a trial date depends on the
court’s docket, which may mean a wait of one to four months.
A “writ of possession” issued by a court authorizes the sheriff or constable to physically evict the
occupant from the premises. Many times, these officials require the mortgagee/owner to post a surety
bond to protect the county and its officials from any liability if the occupant is physically evicted from the
property.
Deed–in-lieu synopsis.
A deed-in-lieu of foreclosure is the voluntary conveyance of the secured property from the mortgagor to
the mortgagee. The Texas Supreme Court in Flag-Redfern Oil Company v. Humbell Exploration, Inc., 744
S.W.2d 6 (Tex. 1987) held that “... there is no such deed as a deed-in-lieu of foreclosure.” The court also
held that a deed-in-lieu does not cut off any inferior lien that encumbers the property.
A mortgagor cannot unilaterally extinguish a debt by delivering a deed to the mortgagee or by filing a deed
to the mortgagee in the deed records. Without the mortgagee’s acceptance of the deed, there is no
conveyance of the property. Puckett v. Hoover, 146 Tex.1, 202 S.W.2d 209 (Tex. 1947).
A recent addition to the Texas Property Code has removed some risk if a mortgagee accepts a deed-inlieu.
Pursuant to Texas Property Code §51.006, a mortgagee can void a deed in lieu at any time within
four years of acceptance, if the debtor failed to disclose material facts affecting title to the property. If
the mortgagee elects to void the deed-in-lieu, the priority of the original deed of
Manufactured housing/mobile home synopsis.
Prior to or after foreclosure, the servicer discovers:
(a) The debtor’s residence is a manufactured housing unit (MHU) and not a “stick or brick” home;
(b) Title to the MHU was never cancelled or surrendered and the MHU was never converted to real estate,
therefore, the legal character of the manufactured house remains personal property – not real property;
(c) The deed of trust did not perfect a security interest in the MHU because a MHU is personal property that requires lien perfection under the Texas Business & Commerce Code;
(d) According to the official MHU records kept by the Texas Department of Housing and Community
Affairs (TDHCA), another lender has a superior lien against the MHU; or
(e) Non-judicial foreclosure of the real property did not foreclose or transfer title of the MHU because the
MHU is personal property.
If title to a MHU is not properly cancelled and a Certificate of Attachment or Statement of Ownership and
Location has not been filed in the real property records of the county where the MHU is located:
(a) Non-judicial foreclosure only transfers the land. As personal property, a MHU must be foreclosed
pursuant to Texas Business and Commerce Code § 9.601 et. seq.
(b) If the mortgagee that obtains custody, control, or possession of the MHU based on non-judicial
foreclosure, the mortgagee may be liable for conversion because the mortgagee failed to obtain title by a
personal property repossession.
(c) A title company will not issue a title policy insuring the manufactured home as real property if the
MHU title was not cancelled and a Certificate of Attachment or Statement of Ownership and Location
was not filed in the deed records.
If the MHU loan was not converted to real property, VA, HUD and the GSEs require the investor to
repurchase the loan because the lien was not properly perfected. A manufactured home cannot be
classified real property until:
(a) the MHU is permanently attached to real property; and
(b) the Manufacturer’s Certificate of Origin (MCO) or the original document of title is surrendered to the
TDHCA for cancellation; and
(c) a Certificate of Attachment or Statement of Ownership and Location is filed in the real property
records of the county in which the manufactured home is located.
All three elements listed above must be accomplished before a manufactured home changes its character
from personal property to real property. [See, Texas Property Code § 2.001]. If any element is missing,
the lien is not properly perfected and a real property foreclosure will not vest title of the manufactured
home in the grantee of the trustee’s deed.
The administrative rules of the Texas Department of Housing and Community Affairs (TDHCA) govern all
aspects of manufactured housing in Texas [Tex. Rev. Civ. Stat. Ann. (R.C.S.), art. 5221f §19 and 10 Tex.
Admin. Code §§80.202, et seq.]
The TDHCA may refuse to issue a document of title if the applicant has failed to furnish all the
information required by the Director, or the Director has reasonable basis to believe that the MHU has
been unlawfully converted or, the issuance of a document of title would constitute a fraud against the
rightful owner or a lienholder.
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In Texas, due-on-sale clauses are enforceable even though many courts consider a due-on-sale clause as a
restraint on trade. When applicable, the Garn-St. Germain Depository Institution Act, 12 U.S.C. §1701j-3
et. seq., preempts any limitation on the exercise of a due-on-sale clause found in the loan documents.
Escrow Accounts.
The lender may collect one-twelfth of the annual estimated escrow disbursement with a one-sixth cushion
of the annual estimate. If the mandatory escrow analysis of the borrower’s account, performed on at
least an annual basis, shows a deficiency, the lender can require the borrower to pay the difference.
[RESPA 12 U.S.C. §2609.10(b)(c) and (d) and its implementing regulation, Regulation X §3500.17.] A
servicer must use aggregate accounting for escrow accounts.
Proof of Insurance.
A lender cannot require a borrower to provide evidence of insurance more than 15 days before the
termination of an existing policy and cannot charge an administrative fee of more than $10 if the
borrower provides a substitute insurance policy. [Tex. Ins. Code art. 21.48A §2]
Insurance claims.
If an insurance claim is paid and the mortgagee holds all or part of the claim proceeds, the lender has 10
days to advise the insured of the lender’s requirement for releasing the funds and then 10 days to actually
release the proceeds when the requirements have been met. [Tex. Ins. Code art. 21.48B §2]
Junior Liens.
A foreclosing mortgagee does not have to give notice of foreclosure to either superior or inferior lien
holders.
Late Charges.
Any late charge associated with a second lien must conform to the “late charge” provision found in Tex.
Fin. Code §342.302.
Manufactured housing/mobile homes.
A manufactured home (MH), more commonly known as a mobile home, cannot be converted from personal
property to real property unless: (a) the MH is permanently attached to real estate; (b) a Statement of
Ownership and Location (SOL) is obtained from the Texas Department of Housing and Community Affairs
(TDHCA); and (c) the SOL is filed in the official real property records of the county where the MH is
permanently affixed to real estate.
Mechanic’s and Materialman’s Liens.
Mechanic’s, contractor’s, or materialman’s lien requirements are found in Texas Property Code §§53.001-
53.260. Because of the unique aspects of Texas homestead law, the legal nuances related to these liens
are many and complex.
Mortgage Insurance Cancellation.
For all loans originated after January 1, 1998, the mortgagee or mortgage servicer must provide the
borrower, on an annual basis, with a form required by Texas Insurance Code, art. 21.50, advising the
borrower of the right to cancel private mortgage insurance coverage once the principal balance of the loan
is less than 80 percent of the current fair market value of the property. All unearned mortgage insurance
premiums must be refunded to the borrower within 10 days of receipt. [Tex. Ins. Code art. 21.50 §1B(a)
and 1B(b)]
Mortgagor Requests.
Within 20 days after receipt of a “qualified written request” from a borrower relating to servicing of a
loan, the servicer must provide a written response acknowledging receipt of the request and within 60
business days must provide a written explanation of why no errors occurred, or correct the problem. [12
U.S.C. §2605] Otherwise, the mortgagee is liable for the same penalties imposed for violations of the Fair
Debt Collection Practices Act. The Texas Debt Collection Practices statute requires the lender to provide
the borrower with assistance or a form for issues related to loan servicing. Notice of Default/Acceleration
Requirements. Texas requires a notice to cure the default, notice of intent to accelerate, notice of
acceleration, and notice of the date, time, and place of the foreclosure sale, all of which must be sent by
certified mail — NOT BY CERTIFICATE OF MAILING — to all persons obligated for the debt.
NSF Fee.
A NSF fee cannot exceed $30 per dishonored check. [Tex. Bus. & Com. Code §3.506]
Predatory Lending.
No express predatory lending laws or statutes. However, the Texas home equity and home equity line of
credit constitutional amendment contains 34 consumer safeguards that protect the borrower from certain
predatory lending practices, e.g. cannot refinance without a 12-month seasoning period, only one home
equity loan can encumber the property at a time, and a 3 percent cap on certain loan origination fees.
Prepayment Penalties
AIf the loan is a Texas home equity loan or line of credit, prepayment penalties are prohibited by TEX.
CONST. art. XVI §50a(6). In addition, no prepayment penalties may be charged on conventional residential
mortgage loans secured by homestead, if the interest rate is greater than 12 percent per annum. [Texas
Finance Code §302.102] Otherwise, the lender can collect prepayment penalties, but only if the
prepayment penalty clause is clear and unequivocal. [See Parker Plaza West Partners v. Unum Pension &
Insurance Co., 941 F. 2d 349 (5th Cir., 1991)]
Property & Preservation.
The security instrument must contain an express “preserve and protect” provision to allow the mortgagee
to change the locks or otherwise safeguard a vacant property. Because of recent changes to Texas
homeowner’s policies promulgated by the Texas Insurance Commission, there is no longer any mold
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