GETTING THROUGH THE FORECLOSURE SALE

Real estate workout officers have had much experience with foreclosure sales in New Jersey, including the costs and delays involved in the process. (In fact, many lenders require that their loan officers attend foreclosure sales without attorneys in order to save costs.) We thought it would be useful to offer some practical suggestions in getting through the foreclosure sale without incurring unnecessary costs.

I. AVOIDING SHERIFF’S COMMISSIONS

A. At the Sheriff Sale

The amount of the sheriff’s commission at a foreclosure sale is set by statute (N.J.S.A. 22A:4-8) and court rule (R.4:65-1). The sheriff is permitted a fee of 4% on bids not exceeding $5,000. The minimum fee is $20. For bids exceeding $5,000, the sheriff’s commission is $200, plus 2-1/2% on all sums in excess of $5,000.

The foreclosing lender typically bids $100 at a foreclosure sale and is the successful bidder, with a minimum sheriff’s fee of $20. When many bidders attend a foreclosure sale, the lender would like to avoid unacceptable bids, which simply drive up the sheriff’s commission. For example, if a lender will only accept a bid of $200,000, but is required to bid $100,000 because of competing bids, the lender must pay a sheriff’s commission of $2,575.

Some counties allow the lender to announce its “upset” price, i.e., the maximum price the lender will bid, prior to bidding. An “upset” price usually discourages “low ball” bidders. Therefore, in addition to your bid strategy, you need to find out the county’s policy before attending a sale and announce the “upset” price before bidding. Not all counties allow this bidding practice since sheriffs want their commissions!

B. Withdrawal from Sheriff’s Sale

It is not unusual for a lender to make a settlement with a borrower after the property is listed for sheriff’s sale. In New Jersey, the sheriff is entitled to receive one-half of his normal commission if the property is listed for sale, but is later withdrawn. (N.J.S.A. 22A:4-8). The commission is based on the amount paid to the lender on its mortgage to withdraw the property from the sale, even if that amount is paid by the borrower. In effect, this is a fee for the payoff of the loan. The lender should factor this cost into any deal when evaluating a lump sum settlement with the borrower.

If the loan is purchased by a third party, the sheriff’s commission can be avoided entirely by an assignment of the loan documents, including the writ of execution. The assignee then is responsible for paying any commission.

We have had success in settlements with borrowers by using a consent order which (1) allows the property to be withdrawn from sale, (2) dismisses the foreclosure judgment and (3) directs the sheriff to return the writ marked “unsatisfied”. Some sheriffs now object to this type of order because it avoids the statutory commission.

Another alternative to decrease the sheriff’s commission is for the lender to reinstate the mortgage for a short period of time for a small payment, but require the borrower to deposit, in escrow, the balance of the payoff amount to be disbursed after the property is removed from the sale. The payoff is not pursuant to the removal from the sale, but is made pursuant to a loan payoff agreement. The sheriff’s commission would then be based on the amount necessary to reinstate the mortgage.

II. PROTECTING YOUR EQUITY

The lender holding a junior mortgage should file a noncontesting answer joining in the foreclosure action brought by a first or prior mortgagee. This will entitle you to receive notice of the prior mortgagee’s progress in pursuing its foreclosure. You will also receive notice when the mortgagee applies for final judgment so that you can timely submit proof of the balance due on your mortgage as part of the first mortgagee’s final judgment of foreclosure.

If you hold a junior mortgage on a property with equity, you should be sure to have your mortgage position recognized as part of the final judgment in the prior mortgagee’s foreclosure action. This allows you to bid at the sheriff’s sale with your judgment, rather than having to bid with cash.

Generally, it does not make sense to purchase the first mortgagee’s interest until the sale, unless you can negotiate a discount or unless the first mortgagee is not diligently pursuing its foreclosure. A foreclosing mortgagee is limited to legal fees allowed under New Jersey Court Rule 4:42-9, which are often substantially less than the actual legal fees incurred. For example, the allowed legal fee on a $100,000 mortgage balance is $1,150. Most mortgagees do not apply for an increased legal fee (which is allowed by court order in certain circumstances). Nevertheless, the first mortgagee will generally demand its full legal fees and costs on a payoff request. Also, once the judgment is entered, the interest rate is reduced to the judgment rate. Even applying the judgment rate to the principal and accrued interest, the rate is usually less than the loan interest rate. For this reason, you need to monitor a first mortgagee’s foreclosure because the mortgagee may not be aggressively pursuing foreclosure, instead relying on you, as a junior mortgagee, to eventually pay off its loan in full.