17.16 Redemptions From Mortgage Foreclosures

17.16.1

In General

There are two types of redemption: Equitable redemption and Statutory redemption.

Equitable Redemption

Historically, equitable redemption evolved in England as a means of enabling the mortgagors to obtain the return of mortgaged lands they had forfeited to the mortgagees because of their failure to pay the mortgage debts on the "law day".

Nowadays, and in every jurisdiction, "equitable redemption" means the right of the mortgagors, within a certain period of time (imposed by state law) ranging between the time of default and the foreclosure sale, to perform their obligations under the mortgages and have the title to their property restored free and clear of the mortgages.

The mortgagor's right of equitable redemption is terminated by the foreclosure action.

Statutory Redemption

When a valid foreclosure had taken place, the equitable right of redemption or the "right to redeem from the mortgagee" ends. However, more than half the states authorize a statutory right of redemption which provides an additional time period for mortgagors, their successors in interest and in many instances, for junior lienors, in which to pay a certain sum of money, usually the foreclosure sale price, and to redeem the title to the property.

The statutory time periods vary greatly from state to state, being as short as six months in a few states and as long as two years in others. Most statutes specify a twelve month period. In the vast majority of states, the mortgagor will have the right to possession during the statutory period, although in one or two states both the statutory redemption and the right to possession are conditioned on the posting of a bond by the mortgagor. In most states statutory redemption is available in both judicial and power of sale type foreclosures.

It needs to be noted that, to a certain extent, the state statutory redemption may be inapplicable when federally held or federally insured mortgages are involved. It becomes of paramount importance to precisely determine, in each jurisdiction, the legal effect of redemptions by debtors-mortgagors upon subsequent and inferior liens created by them. Persons who can redeem, amount required, time of redemption, restrictions, general proceedings, as well as persons or entities capable of waiving their rights of redemption, are all matters of state law.

17.16.2

Redemption Rights Of The United States

Under federal law, the United States has certain redemption rights when its liens are eliminated in a foreclosure sale.

First, it should be understood that if the United States has a lien senior to the lien being foreclosed, the sale must be made subject to the lien of the United States. In this situation, the lien of the United States may not be disturbed unless the United States consents to a sale free of its lien.

Where the United States has a lien junior to the lien being foreclosed, the United States has a right to redeem as follows:

  • In a judicial sale

    One year from the date of the sale, unless the junior lien is one arising under the internal revenue laws in which case the United States has 120 days or the period allowable for redemption under State law, whichever is longer, (28 U.S.C.A. sec 2410[c]).

  • In a non-judicial sale

    Only the period allowable for redemption under state law, if any, unless the junior lien is one arising under the internal revenue laws in which case the United States has 120 days or the period allowable for redemption under State law, whichever is longer, (26 U.S.C.A. sec 7425[d]).

Examples of liens not arising under the internal revenue laws would include among others, mortgages held by the Small Business Administration or the Farmers Home Administration. An example of a lien arising under the internal revenue laws is a Federal Tax Lien.

The right of the United States to redeem property from a sale must be shown as an appropriate exception in the title commitment and/or policy being issued. Such exception must remain in the title commitment and/or policy until the applicable redemption period has expired and no tender of redemption has been made by the United States within the time permitted for redemption.

17.16.3

Federal Preemption Of State Mortgage Law

Under the Supremacy Clause of the United States Constitution, federal law, which is validly adopted and within the constitutional power of the federal government, is the supreme law of the land and supersedes state law.

Consequently, where the mortgage is one in which the United States is the holder or has an interest, or as the Federal Housing Administration, the Veterans Administration, the Small Business Administration or some other agency of the U.S. Government, the question arises as to what extent state redemption provisions are binding against the government.

In this respect, though the law of preemption is still far from being settled, the vast number of court decisions hold that the state redemption law is inapplicable.