More and more homeowners are finding it impossible to make their monthly mortgage payments. As a result, foreclosures are on the rise. This is often bad news for both the bank and the homeowner.
When a property is foreclosed, a homeowner has a window of opportunity, called the redemption period, in which to come into court and pay off the mortgage. Once that period elapses, the home is sold at a “sheriff's sale” to the highest bidder. From the proceeds of that sale, expenses are deducted, the mortgage is paid and any remaining balance is remitted to the homeowner. All too often, however, the recovery amount is not enough even to pay off the mortgage. Thus, not only do homeowners lose their homes but the lenders often do not even recover the amounts they are owed—a classic lose-lose situation.
The Lure of Finding a Buyer—Even during Foreclosure
Since a property sold in a foreclosure seldom brings in market value, everyone benefits if the homeowner is lucky enough to find a buyer who will pay something close to true market value. Therefore, it behooves the homeowner to aggressively search for such a buyer, even during the foreclosure process. But what if a buyer doesn’t emerge until after the sheriff's sale has already taken place? Is the homeowner out of luck? Maybe not, at least not if the sheriff's sale has not yet been approved by the court.
When a homeowner finds a buyer willing to pay market value, both the homeowner and the bank will want the court to disallow the sheriff's sale so that they can sell the home to the new buyer. On the other hand, the bidders at the sheriff's sale will want the transaction upheld. After all, they made their bids in good faith and with the understanding that they would own the property if they were the highest bidder. Don't they also have rights?
That was the situation addressed by the Illinois Supreme Court in Household Bank, FSB v. Jewel Lewis, 2008 WL 2132467 (May 28). In that case, the court had to decide whether the Illinois Mortgage Foreclosure Act allows a court to vacate a judicial (sheriff's) sale at the mortgagee's (homeowner's) and the mortgagor's (lender’s) request when the mortgagee finds a buyer after the statutory redemption period has expired but before the judicial sale has been confirmed—even though the high bidder at the sheriff's sale objects. The Illinois Supreme Court held that a court does have such authority and can vacate the sale, despite language in the act indicating that the sale must be approved.
The Role of the Current Economy
In years past, this decision might not have had much impact. But in an economic climate where mortgage foreclosures are increasing at an alarming rate, the opposite is likely to be true. By allowing a homeowner more time to find a buyer who will pay market value—or at least something close to market value—the Illinois Supreme Court helped both the homeowner and the lender, turning a lose-lose situation into a potential win-win.
It is difficult to guess how much the Illinois Supreme Court was influenced by the current state of the economy in the Household Bank case. But it would not be surprising to see similar decisions in the future—decisions that, consciously or not, take into consideration the harsh economic realities we currently face.
Courts are not immune to what is happening in the economy. Though constrained by the law, they have a great deal of power and discretion regarding how they rule. Sometimes, all a judge needs is a particularly persuasive or creative argument—a peg on which to hang his hat—in order to reach a decision that might not reflect the letter of the law or the contract in question but is nonetheless the “right” one under the circumstances. That is equally true in a business context as in any other. As good attorneys who are committed to the success and well-being of our clients, it is our job to give the court those legal pegs.© 2010 Much Shelist Denenberg Ament & Rubenstein, P.C.