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No redemption under new law actually is good news

Denver Business JournalOn the Money
From the January 4, 2008 print edition

Colorado has new foreclosure laws, as of Jan. 1.

Colorado House Bill 1157 went into effect then, enacting dramatic changes in an attempt to improve and simplify the foreclosure process, while also providing property owners with more realistic prospects of retaining ownership.

The essence of the changes revolves around two words: “cure” and “redemption.”

The cure period is the time between the commencement of foreclosure and the initial sale date. This time span has been increased from 45-60 days to 110-125, (215-230 for agricultural land). Owners now have about four months to work with their lender and cure the default, stop the foreclosure and retain their property.

However, the concept of “redemption” — which is the ability to redeem after the sale for up to 75 days — is extinguished.

The good news is that it’s far easier to cure than to redeem. In other words, it’s far easier to conquer the disease than to attempt resurrection after demise.

“Cure” means to arrange with the current lender (almost always the foreclosing party), to remove the default before the sale. Often, that means a loan modification. Unless there’s a significant amount of equity in the property, lenders prefer modification to foreclosure.

Some examples of loan modifications include:

  • Extension — Missed payments are added to the loan amount, and the term of the loan is extended by the number of missed payments.
  • Forbearance — The lender simply delays filing a foreclosure even though they have the right to do so.
  • Refinance arrears — The delinquent amount is refinanced and added to regular payments for a period of three to six months.
  • Pricing — The interest rate or term is modified to reduce the monthly obligation.

The new law facilitates these methods, and even more creative approaches, such as adding additional non-real estate collateral.

Before HB 1157, “redemption” meant the former owner, in order to get back his property, had to pay the successful bidder at the foreclosure sale within 75 days. That payment would include fees, accrued interest and other charges associated with the foreclosure action.

But now, that possibility is gone.

Redemption was nearly impossible anyway, since it required an owner to qualify for a new loan while having a pending foreclosure on their credit report.

Colorado’s foreclosure structure always has been debtor/owner friendly, and remains so even with the legal changes. Colorado is the only state to require foreclosures to be conducted by a public trustee in each county. The governor appoints them.

Some states follow the “title theory” of mortgages. That is, the borrower doesn’t actually keep title to the property during the loan term.

But Colorado follows the “lien theory” of mortgages. The mortgage only creates a lien on the property. The property owner retains all rights of title, possession, rights to collect rents, etc.

As a final safeguard for the property owner, the procedures governing a public trustee foreclosure are set by statute, and must be followed precisely. If foreclosure procedures aren’t followed exactly, the foreclosure sale can be invalidated.

With the recent turmoil in the credit markets, the law also is intended to shield homeowners from foreclosure vultures who appear during the redemption period, not the cure period, to loan money at “resurrection rates.”

It’s nearly always to the property owner’s advantage to work with the current lender, which can happen only during the cure period.

The new statute also gives the foreclosing lender the right to rescind the transaction up to eight business days following the foreclosure sale to allow a “short sale” to close. This is another example of the Legislature’s attempt to infuse flexibility into the foreclosure process.

While the new law eliminates the owner’s right to redeem, “junior” lien holders still have redemption rights. These lien holders include:

  1. A lien recorded prior to the commencement of the foreclosure.
  2. A lien recognized by statute, such as a mechanic’s lien or an association’s lien.
  3. A lien created by a court judgment.

However, post-foreclosure sale redemption periods for junior lien holders are shortened under the new law. The oldest junior lien holder, who has filed proper notices, is allowed between 15 and 19 days to redeem. Each subsequent junior lien holder is allowed five days each.

Contact information for all of Colorado’s Public Trustees may be found on the web atwww.e-ccta.org/CPTA/CPTA_home_page.htm.

Additional information, including a detailed checklist for the new foreclosure procedures, is maintained by the Colorado Public Trustees’ Association, and may be viewed at www.e-ccta.org/index.htm.

As with any legal matter, be sure to engage a qualified attorney to receive definitive assistance.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.