The public trustee foreclosure system in Colorado is unique compared to other state systems, and for decades has provided an efficient method for lenders to foreclose on loans while protecting borrowers in the process. On July 1, 2007, however, Colorado’s foreclosure system will fundamentally change as a result of House Bill 06-1387 (the Act), the first major revision of the foreclosure statutes since 1990. The Act makes numerous procedural and substantive changes to the foreclosure system. One of the most significant changes, however, is the termination of the once-entrenched rights of borrowers to redeem their property after a foreclosure sale.
Understanding traditional deeds of trust and redemption
Under the current system, which has been fundamentally intact since 1984, a lender starts a foreclosure by filing a notice of election and demand with the public trustee. By statute, the public trustee must set a date for the foreclosure sale between 45 and 60 days after the recording of the notice of election and demand. Borrowers have an absolute statutory right to cure a monetary default by noon on the day before the sale by delivering to the public trustee the amount necessary to cover all back payments, late fees, etc., under the loan, as well as the lender’s costs incurred in the foreclosure. If a borrower cures in this manner, the loan is reinstated and the foreclosure is withdrawn.
Under the current system, if borrowers do not cure before the foreclosure sale, they still have another 75 days after the sale to redeem the property by paying the public trustee the full amount for which the property sold. This redemption process allows the borrower to see the price for which the property sells and gives the borrower options to get the property back. For instance, during the redemption period, the borrower might secure new financing to redeem the property or the buyer might sell the property to a third party for more than the cost to redeem, thereby preserving the borrower’s equity. Historically, this right of redemption was considered so fundamental in Colorado that lenders were statutorily precluded from requiring borrowers to prospectively waive their redemption rights in a deed of trust.
The effects of the Act
The Act, however, entirely revamps the cure and redemption process. Starting July 1, 2007, borrowers in foreclosure will no longer have a right to redeem their property once it is sold at foreclosure. Rather, the Act rolls the pre-sale cure and post-sale redemption periods into one pre-sale cure period of between 110 and 125 days.
The deletion of the borrower’s redemption rights strongly favors lenders. For example, if the lender is the highest bidder at the foreclosure sale, but its bid is lower than the amount owed by the borrower on the loan, the lender can then sue the borrower for this “deficiency.” Under the current system, if a borrower believes the lender’s bid was too low, the borrower can redeem the property and prevent the lender from getting a windfall (and/or a deficiency claim).
Response to underbidding
Under the Act, however, the borrower will not have any ability to respond to an underbidding lender. For instance, under the current statute, if the fair market value of the property is $250,000, the borrower owes $200,000 on the loan and the lender bids $150,000 at the sale, the borrower could
- sell the property to a third party during the redemption period for $200,000 or more and protect against a deficiency claim, or
- refinance the property and redeem by paying off the defaulted loan.
Under the Act, however, the lender would retain the property (and its $50,000 of equity) plus gain a $50,000 deficiency claim against the borrower, because the borrower would have no opportunity to redeem after the sale. And, although the borrower might still have a defense against the lender’s deficiency suit (based on the lender’s “unreasonably low bid”), the borrower has no ability to recover the $50,000 of lost equity, because the right to redeem has been extinguished. As a result, under this scenario, the lender would walk away with a potential $100,000 profit on a $200,000 loan (e.g., $50,000 in equity, plus a $50,000 deficiency claim).
The Act constitutes a major re-write of the foreclosure statutes, and affects numerous rights of borrowers, lenders and other lienholders. The above is just one example, however, of the ways in which the Act favors lenders.