29 Nov Why Are Connecticut Foreclosures So Weird? – (Pt 1)
Foreclosures in Connecticut are unlike foreclosures in 48 other states. (Connecticut and Vermont share this weirdness.) In most cases, aforeclosure does not result in an auction. Usually, the lender will just come to own your property without an auction. How does that happen? Read on.
Connecticut is a Title Theory state. That means that every time you grant a mortgage on your home, you are actually transferring ownership of the home to the lender. All you retain is the Equity of Redemption. That is the right to regain ownership of the property when you pay off the mortgage.
All foreclosures in Connecticut are judicial. That means a lawsuit has to be filed to foreclose real estate. So to foreclose a property in Connecticut, you need to cut off the Equity of Redemption in Court. The only thing a lender has to prove is that it owns the loan in question by receiving a proper assignment of the mortgage deed and note (if the lender was not the originator of the loan) and that there was a default in the terms of the mortgage. Defenses are extremely limited. Anything that happens thereafter is merely a question of value.
Foreclosure auctions will occur in only two circumstances. One is that the IRS has a lien on the property. Federal law requires that any foreclosure of real estate with an IRS lien on it must be by auction. Federal law pre-empts state law on this issue. The other instance is when there is equity in the property for the owner. That is, the Equity of Redemption has real value.
To calculate equity for the owner, you have to know the current value of the real estate and then subtract out the balances due on all of the mortgages and liens on the property. Mortgages and lien are paid in the order of their priority.
Priority is the order in which the mortgages and liens attach to the property; generally the date the lien or mortgage was recorded in the land records for the Town where the property is located. Each lien is entitled to get paid in full, one at a time from the first in line to the last until all the liens and mortgages are paid. There is no pro-rata payment. If there is not enough money to pay every mortgageor lien, then there is no equity in the property.
The theory of foreclosure auctions is that the value of the property is large enough that there will be enough money realized from the successful bidder to pay all the costs of the auction, all of the mortgages and liens and still have money left over for the owner. This means is that the property is determined to be worth quite a lot.
With the declining real estate market, 25 % of all homes nationwide are worth less than the balances on their mortgages. They are ‘underwater’. Since most properties in foreclosure are worth less than the balances on the mortgage, no auction will happen in Connecticut. This means no sign and no strangers on your lawn looking ot buy your house out from underneath you.
Read on to Part Two for the weirdness that happens next….