Foreclosure and the Confirmation Process
Tuesday in RealTalk, Jim Jordan discussed the idea of a marketable title for a property post-foreclosure. I found the post fascinating and think all of Jordan’s posts are interesting, thorough, and great. It struck me that some readers may not be familiar enough with the foreclosure process to get the ins-and-outs.
Some readers may not understand what a confirmation hearing is or why it affects title marketability.
So I’ll take a few minutes to walk you through the basics.
First, a note on audience. This post is meant to be a guide for those just beginning in the commercial mortgage process or those uninvolved with CRE finance. If you are a CRE attorney or an experienced creditor with years of experience in foreclosure litigation, this probably isn’t the post for you. Check out some of our other cool posts and check back tomorrow. If you are just getting to know the process or are a curious outsider, read on.
Let’s start after the creditor has foreclosed on the property.
It’s the first Tuesday of the month and the creditor just bought the property at the county courthouse in an open foreclosure auction. We will get into the foreclosure process later, but for now let’s just start after the creditor foreclosed.
Let’s assume that we’re foreclosing on an office building that currently has a market value of $500,000 which you determined through a recent appraisal and several BOVs (Broker Opinion of Value). The commercial mortgage on the property is $1,000,000.
Using those values, you foreclosed on the property and paid $500,000 at the county courthouse. Hopefully you can see that the borrower still owes you $500,000 since you exercised your right as the creditor to take the collateral at “market” value and still maintain a claim on the remaining loan balance. $1,000,000 loan, $500,000 property value, and a $500,000 shortfall to the mortgage balance.
This is the borrower’s “deficiency” as the property value was deficient in satisfying the entire mortgage amount.
Still with me? Fantastic.
So now you own the property and have a claim against the borrower of $500,000.
Now begins the confirmation process. Confirmation is simply the judicial process of “confirming” that you purchased the property at market value. This matters because creditors are often the only bidders on foreclosed properties at the county courthouse. In theory, a creditor could bid $1 for the $500,000 building, be the winning (and only) bidder, and then claim a $999,999 deficiency against the borrower. The creditor could basically rig the game to get the maximum claim against the borrower.
In cases where the borrower is disputing the creditor’s claim of deficiency, there is a confirmation hearing to determine whether the creditor paid market value for the property. These hearings are simply legal court battles where the creditor claims it paid market value and the borrower claims otherwise. Often, an appraiser will testify that the appraisal she completed 30 days ago was an accurate portrayal of market value and the creditor’s purchase price reflected that.
Back to the numbers.
Let’s say the CBRE gave an appraisal of the office building at $450,000. The creditor paid $500,000. In that scenario, the creditor and appraiser would claim that the creditor paid more than 110% of the fair market value for the property. If the borrower claimed that this was an unfair market value, the burden of proof would be on her to prove both the appraiser and creditor wrong.
Not an easy task, by the way. Borrowers don’t have much luck in that scenario (depending on the judge).
If the appraiser had appraised the property at $800,000 and the creditor paid $500,000, the borrower would have a much stronger claim that the creditor was paying below market value. The creditor may have to reforeclose and pay “true” market value.
You can see why this confirmation process is so important! It shows the creditor actually paid market value and that its subsequent claim against the borrower is legitimate. Any future legal proceedings between the creditor and borrower will then favor the creditor as it has gained a court ruling saying it has a true and valid claim against this borrower.
The creditor will file for this confirmation hearing within 30 days of the foreclose sale and this confirmation time period is what Jordan is discussing in his post. His basic question is: Can you sell the property while you’re confirming your purchase of it?
I will leave that opinion to his capable hands for now and weigh in later.
For now, let me bullet point the confirmation process to review:
- Creditor purchases property at public foreclosure auction
- Credit files for confirmation
- Borrower claims creditor paid something other than “market” value
- Creditor and borrower engage in legal hearing to determine whose claim has legal merit
- Creditor, Borrower, Appraiser, and sometimes Broker will testify in the hearing to establish the market value for the judge
- Judge weighs evidence and rules in favor of one party
- If in favor of the borrower, creditor must reforeclose the following month at market value. If in favor of the creditor, creditor has court-backed financial claim against the borrower.
Any questions on the confirmation process? Does it make sense? Can you see why it is vitally important in litigious battles between creditors and borrowers?
Leave any questions or comments in the Comment section below and I will be happy to respond.