The Illinois Mortgage Foreclosure Law (IMFL) governs the judicial foreclosure process in Illinois.1 The process is a lengthy one, with built in safe guards and lengthy time periods during which the borrower or homeowner can act to save the home through reinstatement or redemption.2 The statute also provides alternatives to the standard judicial foreclosure process such as a Deed in Lieu of Foreclosure or a Consent Foreclosure.3 The purpose of this article is to discuss not only some of these statutory foreclosure alternatives, but also to review other foreclosure alternatives common in the mortgage industry and voluntarily considered by mortgage lenders’ loss mitigation/work out departments.
Most mortgage foreclosures in Illinois are accomplished through a statutorily prescribed process. Once a loan falls in default and is demanded, a complaint is filed in the statutory form4, summons are served, and judgment is obtained, usually through default or summary judgment motions with amounts due being proved up by affidavit.5 After the expiration of the redemption period which will be described in more detail below, a foreclosure sale is conducted either by the judge, sheriff, or court appointed selling officer.6 In DuPage County, foreclosure plaintiffs are currently required to use the sheriff’s office to conduct sales. After the sale, an additional hearing is conducted by the court to review the selling officer’s report and confirm the sale. The court can also award any deficiency judgment or order distribution of any sales surplus at this time.7
Reinstatement and Redemption. Reinstatement occurs when the mortgage arrearage (the amount the mortgage is delinquent plus any allowable fees, costs, and corporate advances) is paid, and the borrower resumes payment under the contract as is no default had ever occurred.8 The IMFL provides the mortgagor with a statutory right to reinstate the loan by "curing all defaults then existing, other than payment of such portion of the principal which would not have been due had no acceleration occurred, and by paying all costs and expenses required to be paid by the mortgage" if such reinstatement is made within ninety (90) days of completion of service on all mortgagors.9
It should be noted that although the statutory right to reinstate the loan expires ninety (90) days after the mortgagors are served with the foreclosure summons, many underlying notes and mortgage will provide a contractual right to reinstate the loan – usually up to judgment or sale. Even absent such a provision, most lenders will accept a full reinstatement of the mortgage at any time prior to judicial sale.
The statutory right of redemption can be exercised by either a mortgagor or owner of the property within a statutory period of time called the redemption period.10 The statute provides a specific method for exercising the right of redemption, but this procedure is not generally followed. Usually, a borrower or his attorney simply requests pay-off figures from the plaintiff’s attorney, and these are provided. Most lenders will accept a full pay off at any time prior to sale, but the statutory right to redeem is actually limited to the redemption period which can be calculated in four different ways.11
Standard Redemption Periods. In foreclosure cases involving residential real estate12, the redemption period expires the later of seven (7) months from completion of service on the mortgagors or three months from entry of the foreclosure judgment. In foreclosure cases involving non residential or commercial property, the redemption period expires the later of six (6) months from completion of service on the mortgagors or three months from entry of the foreclosure judgment.
Shortened Redemption Periods: Under certain circumstances, the court may find a shorter redemption period applies. If the property has been abandoned by the owners, redemption can be shortened to thirty (30) days from judgment, regardless of the date of service. Generally, a request to find the property has been abandoned must be supported by an affidavit from a process server or other party who has personally inspected the property. The court may also shorten redemption to sixty (60) days after entry of the judgment if it finds that the property is worth less than ninety percent (90%) of the amount owed on the mortgage AND the plaintiff is willing to waive any deficiency.
The Special Right to Redeem.13 In addition the pre-sale redemption period described above, the IMFL allows for a special right to redeem after the foreclosure sale in certain limited circumstances. If a foreclosure sale is conducted in which the successful bidder at the sale was the plaintiff/mortgagee AND the successful bid was less than the total amount owed on the mortgage (i.e., there is a remaining deficiency), then the owners or mortgagors have a special right to redeem the property with thirty (days) of sale confirmation, by paying the amount bid at sale. The balance due on the mortgage would remain a lien on the property at the same priority level as the original mortgage and could, presumably, still be foreclosed upon. In other words, if the plaintiff is owed $100,000.00 and is the successful bidder at the foreclosure sale for $90,000.00, the mortgagor could redeem the property by paying plaintiff $90,000.00 within 30 days of sale confirmation. The plaintiff would still retain its mortgage lien, at its pre-foreclosure priority, in the reduced amount of $10,000.00. Because it is difficult to find a lender, especially on short notice, that will provide financing in return for a junior mortgage position in these circumstances, the special right to redeem is seldom exercised.
Statutory Alternatives to Foreclosure. The statutory alternatives include Deeds in Lieu of Foreclosure and Consent Foreclosures:
Deeds in Lieu of Foreclosure. The first statutory alternative to foreclosure contemplated in the IMFL, is the deed in lieu of foreclosure.14 Basically, the owner of the property voluntarily deeds the property to the lender, usually in exchange for the lender’s agreement not to pursue any deficiency against the borrower. Such an agreement may be very beneficial to the borrower where there is minimal or no equity in the property (making a sale or refinance difficult), and he is unable for whatever reason to reason to reinstate the loan and comply with the terms of the original mortgage. The benefit to the lender is the incredible savings in time over a standard foreclosure action, and for mortgage lenders as for other businesses, time is money.
The biggest impediment to entering into a deed in lieu agreement is usually the existence of junior liens. If a junior lien holder is named and properly served in a judicial foreclosure, its interest in the real estate will be extinguished. However, the rights of other lien holders are not affected by the deed in lieu and so the mere existence of any other lien will usual prevent a lender from entering into an agreement for deed in lieu of foreclosure.15
Many lenders will have additional requirements before agreeing to accept a deed in lieu and waive deficiencies. Usually, investor policy will require that the property be worth at least a certain percentage of the debt and that the borrower’s financial circumstances would not permit him to pay any deficiency balance. For these reasons, approval of a deed in lieu will generally require a clean title report, an appraisal (and perhaps a marketing history), and completion of some financial hardship documentation.
It should also be noted that wherever there is any kind of waiver of deficiencies or debt forgiveness, there may be tax consequences to the borrower that need to be considered as well.
Consent Foreclosures. A consent foreclosure is not so much an alternative to judicial foreclosure as an alternative method of judicial foreclosure. In a consent foreclosure, the mortgagors/owners of the proper consent to transfer ownership of the property to the mortgagee, and in return the mortgagee waives any deficiency rights it might have against the mortgagors. A foreclosure action must still be brought in court to extinguish any other lien holders’ rights, but the foreclosure is usually a much quicker and less expensive process as no redemption period is require and there is no sale or sale confirmation. The entry of the judgment itself vests title in the plaintiff.16 The benefits to the lender and borrower are similar as in the deed in lieu situation, but lender is able through the consent foreclosure process to extinguish the rights of junior lien holders. Again, lenders will usually require that the property be worth at least a certain percentage of the debt and that the borrower’s financial circumstances would not permit him to pay any deficiency balance. For these reasons, approval of a consent foreclosure will generally require an appraisal (and perhaps a marketing history), and completion of some financial hardship documentation.
It should be noted that a consent foreclosure may not be a viable option if any liens are held by the United States of America. Under federal law, a foreclosure action that does not include a judicial sale will not affect a lien in favor of the federal government.17
Non-Statutory Foreclosure Alternatives. Mortgage lenders are not in the business of managing real estate, they are in the business of making and servicing loans. The longer a loan is in default, the more money the lender is likely to lose, and completed foreclosures are a huge source of loss to lenders. Because of this most major mortgage servicers have established loss mitigation or "work out" departments that attempt to help to reduce losses by making arrangements with the borrower to bring the loan back into performance or to transfer the property as quickly and painlessly as possible for all parties. As a result, there are a large number of non-statutory foreclosure alternatives available to borrowers including, but not limited too: Short Sales; Loan Modifications; Repayment Agreements; Loan Assumptions; Payment Deferments; and Loan Restructuring.
Short Sales aka "Pre-Foreclosure Sales." In simplest terms, a short sale takes place when a lender agrees to accept less than the amount owed on the mortgage, and still release its lien. Most frequently, this occurs when a borrower has been attempting to sell the property but is unable to get a sales price sufficient to pay the mortgage loan in full and cover the costs of sale.
For example, I.M. Borrower has been attempting to sell his house for about six months and has been asking for $115,000.00 in order to cover the costs of sale and pay the lender’s $100,000.00 mortgage. Despite his best efforts, the current offer of $90,000.00 is the best offer he has received to date. The draft closing statement shows that after costs of sale and with I.M. Borrower taking no proceeds from the sale, the amount available to be paid to the lender would be $83,000.00. I.M. contacts his lender, explains the situation, and asks the lender to accept the $83,000.00 and release its lien on the property so that the sale can be consummated.
It should be noted that a short sale can be accepted by the lender either with a waiver of any deficiency or without a waiver of deficiency. The short sale agreement is a voluntary agreement, not governed by the IMFL the waiver of deficiencies should definitely be part of the agreement negotiation.
The benefit to the borrower of such an agreement is that he can avoid having a foreclosure on his credit record, avoid the time, frustration, and uncertainty of a judicial foreclosure action, and (if deficiencies are waived) start fresh without any continuing obligation under the note and mortgage. The advantage to the lender is the savings in time and avoiding the expense of carrying and marketing the property after a foreclosure sale if no third party purchaser materializes.
To consider agreeing to a short pay off, the lender will likely require evidence of the property actual value (an appraisal), information on prior marketing history (some lenders may require that the house have been on the market for a specific period of time), a copy of the real estate contract, a proposed closing settlement statement, and completion of some financial hardship documentation (especially if waiver of deficiency is requested).
Once again, it should also be noted that wherever there is any kind of waiver of deficiencies or debt forgiveness, there may be tax consequences to the borrower that need to be considered as well.
Loan Modifications. A loan modification is basically a rewriting of the loan terms – usually to increase the principal balance to cover defaulted amounts or a portion of defaulted amounts, and reamortizing this balance over the remaining term of the loan. Since a loan modification is basically a new agreement altering the terms of the original note and mortgage it must be in writing and depending on the lender may be recorded with the county recorders office.
Because a loan modification is essentially a new loan agreement, approval requires a similar underwriting process to loan origination. This can be time consuming and require a review of substantial financial documentation (income, assets, liabilities, etc.). It is probably not a good option for borrowers who are chronically in default or who otherwise lack the income necessary for loan approval, but might be an excellent option for borrowers who fell into default because of an income interruption but have since gotten "back on their feet" and experiences a positive change in circumstances.
For example, I.M. Borrower becomes ill and is unable to work for a few months. As a consequence, he falls behind on his note and mortgage. I.M. eventually recovers his health and goes back to work. While he has sufficient income to make regular mortgage payments in the future, he does not have the means to catch up the existing default. I.M may be a good candidate for a loan modification18, and should investigate this option.
Repayment Agreements. Another option for the delinquent but gainfully employed borrower may be some type of a repayment agreement. In a repayment agreement, the borrower and lender agree to repay the delinquent amount of a loan over time while making future monthly payments as they come due.19 In the past, as a rule of thumb lenders have generally required something like half the default be paid upfront, with the remainder to be paid within six months. While lender requirements vary, lower initial payments and longer cure periods have become much more common.
Here is an example of how a repayment proposal might work. I.M. Borrower is behind on his mortgage by $6,000.00 through February due to a work interruption. In February, he receives a $3000.00 tax refund and returns to work. I.M. contacts his lender and proposes to pay the $3,000.00 up front, and to cure the remaining balance of the default ($3,000.00) by paying an additional $500.00 per month beginning in March. Eventually an agreement is reached. I.M. pays the $3,000.00 up front, and beginning March first, I.M. will pay his regular monthly mortgage payment each month, and will pay an additional $500.00 per month on the fifteen of each month from March through August. If he performs under the agreement, I.M.’s loan will be completely current by August fifteenth - a six month repayment plan.
A borrower entering such an agreement should be aware that if a foreclosure has already commenced when the repayment agreement is entered into, the lender will usually require that the agreement provide that upon breach of the agreement by the borrower, the lender may resume foreclosure and keep the moneys tendered up that point without prejudice the foreclosure proceeding. In other words, in the example above, if I.M. Borrower tenders the $3,000.00 down stroke, complies with the plan for three months, and then defaults, the lender may well resume the foreclosure action from whatever point they had reached pre-agreement, and complete the foreclosure for the remaining $1500.00 default.
Loan Assumptions. A loan assumption is basically a substitution of borrowers. In the context of avoiding a foreclosure sale, it generally occurs where the original borrower has experienced a change in circumstances and can no longer afford to make payments on his home loan. A lender may allow the loan to be assumed by new borrowers who are better able to maintain the loan payments. Generally, this takes place in conjunction with a transfer of real estate ownership to new borrowers and lender’s agreement to waive the "due on sale" provision of the mortgage contract for purposes of the transaction.
There are generally two principal requirements for a lender to consider a loan assumption. First, the loan must be brought current prior to or contemporaneously with the assumption, and second, the assumptors must qualify for the loan as if they were the original loan applicants.
The original borrowers should be aware that lenders may accept a loan assumption either with or without recourse to the original borrowers. To avoid potential future liability, borrowers should make sure they obtain agreement to a release of their personal liability.
Payment Deferments / Loan Restructuring. Another foreclosure alternative available from some lenders is a program under which the lender will forbear to collect on a small number of delinquent payments and allow the borrower to simply resume making payments under the contract. The delinquent payments are carried as an amount still due, but the loan is treated as being current and the principal portion of the deferred payments cease to accrue interest. Some lenders refer to these deferred payments as "restructured payments".
For example, I.M. Borrower falls two months behind on his mortgage. He is unable to cure the two month default, but has sufficient income to resume making regular payments. The lender agrees to treat the loan as if it were current, and carry the two payment delinquency as a recoverable but not delinquent amount.
Because the accounting systems typically used by lenders are not designed to reflect this type of loss mitigation agreement, account statements may identify the deferred amount as a "forbearance advance" or "restructured amount".
Conclusion. A wide variety of options are available to borrowers trying to avoid foreclosure sales, the best option for any one borrower varies depending on the borrowers circumstances and the lenders guidelines. The best advice for borrowers is to act quickly, but be patient. A borrower is more likely to be able to work out a loss mitigation agreement prior to foreclosure or early on in the foreclosure, before the default gets too large and unmanageable. Patience is important because although most lenders now place a high priority on loss mitigation, the work out departments are processing an extremely large number of requests and often must follow strict investor guidelines in considering work out proposals. Fortunately, in most cases, the Illinois Mortgage Foreclosure Law provides ample time for such arrangements to be proposed and considered.
1 735 ILCS 5/15-1101 et seq.
2 735 ILCS 5/15-1601 through 1604
3 735 ILCS 5/15-1401 and 1402
4 See, 735 ILCS 5/15-1504(a) "Form of Complaint"
5 "The vast majority of mortgage foreclosure cases in Illinois do not go to trial. In these cases, the elements of the foreclosure are proven up by affidavits at default and/or summary judgment hearings." See, "Trial of the Foreclosure Case", Illinois Mortgage Foreclosure Practice 2003, p. 7-3. (Illinois Institute for Continuing Legal Education, 2003). See also, 735 ILCS 5/15-1506.
6 735 ILCS 5/15-1507
7 735 ILCS 5/15-1508
8 See, Rizzo v. Pierce & Assocs., 351 F.3d 791 (7th Circuit, 2003), for a discussion of what must be paid to reinstate a loan and the concurring opinion there in for a discussion of the statutory right to reinstate a loan.
9 735 ILCS 5/15-1602
10 See, 735 ILCS 5/15-1603 and 5/15-1212.
11 The four methods for calculating redemption are found in 735 ILCS 5/15-1602
12 Under the IMFL, 735 ILCS 5/15-1219, real estate is only considered residential if it is occupied by the mortgagor, the mortgagor
’s spouse, or the mortgagor
13 735 ILCS 5/15-1604
14 735 ILCS 5/15-1401
15 In some circumstances, a consent foreclosure may be a viable option to the deed in lieu in situations involving junior lien holders.
16 735 ILCS 5-/15-1402
17 28 USC 2410
18 In this situation, I.M. may also be a good candidate for a payment deferment or restructuring.
19 Chapter 13 bankruptcy practitioners may note the similarity to Chapter 13 plans which cure mortgage arrears over time under 1322(b)(5) or to stipulations to resolve motions for relief from stay under 11 USC 362(d).
Berton J. (B.J.) Maley started with Codilis & Associates, P.C. in March of 1993 and is a Supervising Attorney at the firm, concentrating in secured creditors’ rights in bankruptcy, mortgage foreclosure, and related matters. He manages the firm’s bankruptcy department and serves on the firm’s management committee. He is a member of the Bankruptcy Association of Southern Illinois, the DuPage County Bar Association, the Illinois State Bar Association, the American Bankruptcy Institute, the National Association of Chapter 13 Trustees (associate member), and Phi Alpha Delta Law Fraternity, International. Mr. Maley co-authored Trial of the Foreclosure Case, in Illinois Foreclosure Practice, (Illinois Institute of Continuing Legal Education, 2003). His other professional published works include “Chapters & Verse: Real Estate Professionals and the Bankruptcy Process” and “No Vacancies” appearing in REO Magazine and “Saving Your House Through Bankruptcy” in the Loyola Consumer Law Journal. Mr. Maley also is a regular lecturer on bankruptcy, mortgage foreclosure, and related topics. He received his JD from Loyola University Chicago School of Law.