The Foreclosure Process in Alabama
Sasser, Sefton & Brown, P.C.
Although always a remedy of last resort, foreclosure of a mortgage interest in real property can be an important tool for lenders in debt collection. This article will address the process of foreclosure in the State of Alabama, and how the process can aid lenders in debt collection.
I. Steps a Lender Should Take Before Initiation of Foreclosure Proceedings
A lender should always take certain steps before initiation of foreclosure proceedings, including review of the note, mortgage and other loan documents, as well as review of the account history.
A. Review of the Loan Documents and Account Histories
Upon default in payment of monthly mortgage payments, a lender should begin the process of debt collection by first reviewing the note and mortgage with regard to their provisions governing the debt collection process. The provisions of the note and mortgage, in conjunction with Alabama law, will generally govern the conduct of the process and must be followed as specified. The lender should also review the account history and conversation logs, as well as correspondence with the borrower, to determine what steps to collect the debt have already been taken.
B. Acceleration of the Mortgage Loan
In analyzing the note and mortgage, the lender should be careful to analyze whether the mortgage requires acceleration of the loan balance prior to institution of foreclosure proceedings. This is a common requirement which generally requires the lender to notify the borrower of the default, of the right to cure the default, of the action required to cure the default, and of a date (usually not less than thirty (30) days from the date of the notice to the borrower) by which the borrower must cure the default or the entire amount due shall become immediately due and payable without further demand. If such acceleration is required, the letter of acceleration generally should be sent by both certified and regular mail.
II. Institution of Foreclosure Proceedings
After acceleration and expiration of the time period for cure of the default, if the borrower has failed to cure such default, then under most mortgages, the lender need not take any additional action, but may immediately institute foreclosure proceedings, either judicially or by power of sale. Alabama law permits foreclosure by power of sale with respect to those mortgages executed after December 31, 1988, only if the mortgage provides for this remedy. If the mortgage does not provide for the power of sale and was executed after 1988, to foreclose the lender must proceed judicially by the filing of a complaint for judicial foreclosure in the circuit court of the county in which the real property is situated. Alternatively, if the mortgage contains a power of sale clause, the lender may proceed with foreclosure under the statutory power of sale provisions.
A. Process of Power of Sale Foreclosure
Foreclosure under a power of sale is accomplished by publication of a foreclosure notice in a newspaper of general circulation in the county or counties in which the land is located. Publication giving notice of the time, place and terms of the sale and providing a description of the real property to be sold must be made once a week for three (3) consecutive weeks. Although not statutorily prescribed, the foreclosure sale notice should also include the recording information of the instrument pursuant to which the foreclosure is being exercised in order to preserve marketability of the real property. Alabama law requires no other notice to the borrower. However, many mortgages contractually require that the lender notify the borrower of the institution of any foreclosure proceedings and of the date of the sale. Therefore, it is a preferred practice for the lender to notify the borrower in writing of the foreclosure proceedings. It is suggested that the notice be given both by regular and certified mail. The notice should be sent to the address requested to be used for notices by the borrower, which is not necessarily the property address.
B. Notices to the Borrower and The Fair Debt Collection Practices Act
All notices sent to the borrower, if sent by a person other than the lender, such as a third party debt collector or attorney, must comply with the Fair Debt Collection Practices Act (“FDCPA”). However, the lender is not required to comply with provisions of the FDCPA so long as the lender is collecting its own debt.
C. Review of the Title Report
A title report or title opinion letter should always be obtained on the real property at issue. If the lender already has a policy of title insurance, then it is permissible to limit the scope of the search from the date of such policy to the present. However, if the lender does not have such a policy, it is strongly recommended that a more extensive search be conducted to insure that there are no prior liens on the real property which would be superior to the lien being foreclosed. The title report will indicate whether there are other liens on the property, including other mortgage liens, judgments, state tax liens, federal tax liens, mechanic’s liens and the like. Each of these liens must be analyzed under applicable state law to determine its relationship to the mortgage lien and whether such other lien is superior or junior to the mortgage lien. Federal tax liens require special notice to be given to the Internal Revenue Service (“IRS”) prior to foreclosure in order for the purchaser at foreclosure sale to take the property free of the federal tax lien. If there is any lien that is superior to the mortgage lien, the lender must analyze whether it is willing to take the property subject to that lien in the event the lender is the purchaser at foreclosure sale. The lender also should take the prior lien into account in preparing its bid. (See discussion infra ).
III. Conduct of the Foreclosure Sale
A. Requirements of the Foreclosure Sale
A foreclosure sale must be conducted on the day advertised in front or at the main door of the courthouse for the county in which the real property or the majority of such property is situated and in which the foreclosure sale was advertised. The sale must be conducted during the legal hours of sale, which are between 11 a.m. and 4 p.m. The sale may be conducted by any agent of the lender and is conducted by reading the foreclosure sale notice and offering the property for sale. The lender should first enter its own bid and then take any other bids. Entry by the lender of its own bid establishes a minimum bid and also prevents a voidable foreclosure sale in the event a third party enters a bid before the lender, but is then unable to complete the sale by payment of the bid amount.
B. The Bid Process
Formulation of the foreclosure bid is often one of the most difficult tasks for a lender. A lender should take certain principles of foreclosure law and the effect of foreclosure, as well as the statutory rights of redemption, into account in formulating its foreclosure bid.
1. Lender’s Duty in Conducting a Foreclosure Sale
As a general matter, lenders owe a duty of fairness and good faith to borrowers in determining bid price. Therefore, in preparing the bid for each foreclosure sale, a lender must prepare its bid in good faith, complying with its duty of fairness and good faith to the mortgagor.
2. Surpluses and Deficiencies
Second, in preparing a bid for any foreclosure sale, the lender must also be aware of the law governing surpluses and deficiencies created by foreclosure of a mortgage interest. Foreclosure of a mortgage interest extinguishes the mortgage entirely and extinguishes the debt owed to the lender to the extent of the bid price. Therefore, the bid to be entered must be analyzed under this principle and as illustrated below:
(a) Bid of Total Debt
If a lender bids its total debt (i.e., the amount of the loan secured by its mortgage interest, plus the costs and other expenses of foreclosure), the lender’s mortgage will be extinguished and the debt owed to the lender will be deemed satisfied entirely. Because the debt to the lender is deemed satisfied from such a bid of total debt, the lender may not seek to collect a deficiency judgment against the mortgagor. This means that the lender will have only either the value of the real property or the amount paid by a third party for the purchase of said real property as satisfaction of the debt obligation.
(b) Bid in Excess of Total Debt
Alternatively, if a mortgagee bids an amount in excess of its total debt, a surplus is created. Alabama law requires any surplus to be paid to junior lienholders in the order their interests appear, or if there are no junior lienholders, to the mortgagor. Thus, if the lender bids an amount in excess of its total debt, the lender would be required to pay that amount in excess of its mortgage and expenses to either (i) any junior lienholder(s) or (ii) the mortgagor. To avoid paying funds to third parties, the lender should not bid more than its total debt.
(c) Bid Less Than Total Debt
Conversely, a lender may bid less than its total debt. If the lender bids less than its total debt, the lender is not deemed fully satisfied. Rather, the lender will be deemed satisfied only to the extent of its bid and may seek to recover a deficiency judgment from its mortgagor in the amount of difference between its bid and the debt.
Because a lender can “credit bid” up to the amount of its debt and expenses (i.e., its total debt) and, in so doing, is not required to expend actual funds, we recommend that a lender never bid in excess of its total debt. With regard to whether to bid less than the total debt to allow for recovery of a deficiency judgment against the mortgagor, a lender must (i) operate in good faith, (ii) evaluate whether it desires to expend the resources to recover a deficiency judgment, and (iii) evaluate its ability to recoup its loss from the value of the real property or from the funds paid to the lender by a third party purchaser. Taking these factors into consideration, a lender should prepare a bid that is less than total debt, but not so much less that the bid is prepared in bad faith.
3. Effect of Foreclosure
Lenders should also consider the effect that foreclosure has on title to the real property in preparing the bid to be entered at foreclosure sale. See discussion infra.
4. Effect of Redemption Statutes
Lenders should also consider the effect of the redemption statutes and the right to redeem in preparing the bid to be entered at foreclosure sale. See discussion infra.
IV. Effect of Foreclosure on Title to the Real Property
A lender should also be aware of the effect of foreclosure where the property is purchased by either the lender or by a third party. Foreclosure of a mortgage interest operates to convey legal title to the real property to the purchaser at foreclosure sale. Following foreclosure sale, a foreclosure deed is to be executed by the party conducting the sale in favor of the purchaser. The foreclosure deed conveys to the purchaser legal title and equity of redemption, subject to any prior interests or liens, encumbrances or other title infirmities having priority over the foreclosed mortgage, and subject also to the statutory right of redemption.
The effect of foreclosure and specifically the transfer of title subject to certain liens, can complicate a foreclosure sale, especially where there is more than one mortgage or lien on the property. The following is an analysis of the effect of foreclosure where there is more than one mortgage on the real property.
A. Foreclosure of Only the First Lien Mortgage Where There is a Second Lien Mortgage
Foreclosure of a first lien mortgage extinguishes all junior liens, including any second lien mortgage, and vests title to the property in the purchaser. Therefore, if there are two mortgage liens on the same parcel of real property and the lender forecloses only on the first lien mortgage loan, bidding only the amount of the debt secured by the first mortgage, the lender would extinguish the second lien mortgage.
B. Foreclosure of a Second Lien Mortgage
Foreclosure of a second or other junior lien extinguishes all liens subordinate to the junior lien, but not those liens having priority. Foreclosure of a junior lien operates, however, to convey title to the purchaser, again subject to the prior liens or mortgages. Therefore, if a lender forecloses on its mortgage, which is junior to another mortgage, the lender will take title to the property subject to the superior mortgage.
C. Foreclosure of Both the First and Second Lien Mortgages in Successive Sales Where Both Mortgages are Held by the Same Lender
Where a lender holds two mortgages on the same piece of property, the lender is advised to foreclose on its second lien mortgage prior to foreclosing on its first lien mortgage. Foreclosure of the second lien mortgage extinguishes all subordinate liens inferior to the lien of such second mortgage without extinguishing the first mortgage lien. Thereafter, assuming default in the first mortgage or cross default provisions, the lender may also foreclose on the first lien mortgage. Foreclosure of the first lien mortgage may take place either immediately following the foreclosure of the second lien mortgage, generally on that same date, or any time thereafter in a separate sale during the legal hours of sale. By foreclosing in this order, the borrower or any other redemptioner would be required to remit payment of both purchase prices paid at each of the respective foreclosure sales, plus other costs of redemption, in order to redeem the property. See discussion of redemption infra.
D. Foreclosure of All Liens Held by the Lender in a Single Sale
Alabama law also provides that where a lender holds several mortgages on the same property, all the powers may be exercised in a single sale, provided that no prejudice or harm is done to the interest of the borrower. Therefore, if both mortgages are in default, or contain cross-default clauses, the lender could foreclose on both mortgages at the same time, provided that no prejudice or harm is done to the interest of the borrower in holding the sales together. Holding the sales of both mortgages at the same time requires publication of notices of foreclosure for both mortgages in the same manner as required for foreclosure of a single mortgage. In addition, all other requirements of foreclosure would have to be complied with for both mortgages. The lender could then bid up to the amount of the debt secured by both mortgages, plus costs and expenses of foreclosure, without creating a surplus.
V. Redemption of Real Property
The redemption statutes and the process of redemption have an effect on the foreclosure process and, in particular, on formulating a bid.
A. Availability of the Right of Redemption
Redemption is a statutory right that may be exercised before the expiration of the one-year period following the foreclosure sale in order to regain title to property sold at foreclosure sale.  This right is available to the borrower and others having an interest in the real property and is statutorily defined.
B. The Price of Redemption
Regardless of the identity of the redeeming party, the basic elements of the redemption process are the same. To redeem, the redeeming party must pay or tender to the purchaser of the property at the foreclosure sale, or to the transferee of said purchaser, an amount equal to the “purchase price,” plus interest calculated at the rate set for judgments, “and all other lawful charges” with interest. The “purchase price” is normally the amount actually paid at the foreclosure sale, even when redemption is from a later transferee who paid a different amount than that paid at the foreclosure sale. A lender should be aware, though, that an exception to this general rule applies. The purchase price for redemption is not determined by the price paid at the foreclosure sale when the purchaser is also the mortgagee. When the mortgagee buys the property at the foreclosure sale, the purchase price for purposes of redemption is limited to the amount of debt secured by the mortgage. Therefore, the rights of redemption and the amount required to redeem, which is determined in part by the purchase price paid at foreclosure sale, have an effect on the foreclosure bid process.
C. Effect of the Foreclosure Bid on the Price of Redemption
If the bid price at foreclosure sale is lower than the value of the property or than the lender’s interest in the property, the property may be redeemed for less than its value or the lender’s interest or both because the bid price at foreclosure sale determines, in part, the amount required to redeem. Further, if a first lien mortgage loan is foreclosed and only the amount due thereunder is bid, the foreclosure of the first lien will extinguish the second lien mortgage so that the borrower would be able to redeem for the amount of the first lien mortgage only and in doing so, avoid the cost of the second lien and all other obligations related thereto. For these reasons, analysis of the effect of foreclosure on title to the real property and of the rights of redemption is necessary for lenders in formulating a foreclosure bid.
In conducting a foreclosure, a lender must be careful to evaluate its position and its interests in the real property prior to initiation of foreclosure proceedings. Such evaluation of the lender’s position should include review of the loan documents and account history. Only after review of these, should a lender initiate foreclosure proceedings. In proceeding with the foreclosure, the lender should also be careful to follow Alabama law and any contractual requirements of the loan documents. Generally, formulation of the bid to be entered at foreclosure sale is one of the most difficult tasks for the lender. As discussed above, formulation of the bid amount, in conjunction with an analysis of the effect of foreclosure on title to the real property, will directly effect both the lender’s ability to recoup any loss on the loan which is not compensable by the sale of the real property and any amounts due to redeem the property in the event redemption is requested. For these reasons, all aspects of the foreclosure process must be evaluated by a lender.
 Ala. Code § 35-10-12 (1991). Mortgages executed prior to 1989 may be foreclosed by power of sale regardless of whether the mortgage provides a power of sale. See Ala. Code § 35-10-3 (1991). This type of foreclosure requires publication once a week for four (4) consecutive weeks in a newspaper of general circulation in a county where the lands or a portion of the lands is situated.
 Ala. Code §§ 35-10-1, -12 (1991).
 Ala. Code §§ 35-10-8, -13 (1991).
 15 U.S.C. §§ 1692 et seq.
 26 U.S.C. § 7425.
 Ala. Code § 35-10-2, -14 (1991).
 Ala. Code § 35-10-14 (1991).
 Wood River Dev., Inc. v. Armbrester, 547 So. 2d 844 (Ala. 1989); First National Bank of Opp v. Wise, 235 Ala. 124, 177 So. 636 (1937).
 Simpson v. Coosa Valley Production Credit Ass’n., 495 So. 2d 1029 (Ala. 1986).
 In re Morris, 204 B.R. 783 (Bankr. N.D. Ala. 1996); Davis v. Huntsville Production Credit Ass’n., 481 So. 2d 1103 (Ala. 1985); Mobley v. Brundidge Banking Co., Inc., 347 So. 2d 1347(Ala.1977).
 In re: XYZ Options, Inc., 217 B.R. 912 (Bankr. N.D. Ala. 1998); Bailey Mortg. Co. v. Gobble-Fite Lumber Co., Inc., 565 So. 2d 138 (Ala. 1990); Mobley v. Brundidge Banking Co., Inc., 347 So. 2d 1347 (Ala. 1977); Brown v. Kingsberry Mortg. Co., 349 So. 2d 564 (Ala. 1977); Cochran v. Pate, 712 So. 2d 1099 (Ala. Civ. App. 1998), reh’g denied.
 Wood River Dev., Inc. v. Armbrester, 547 So. 2d 844 (Ala. 1984).
 Ala. Code §§ 35-10-1, -5, -12 (1991); Wragg v. Federal Land Bank of New Orleans, 317 U.S. 325 (1943); In re Sims, 185 B.R. 853 (Bankr. N.D. Ala. 1995); Palmer v. Resolution Trust Corp., 613 So. 2d 373 (Ala. 1993); In re Detter, 141 B.R. 221 (Bankr. M.D. Ala. 1991); McGowan v. Clayton, 679 So. 2d 1136 (Ala. Civ. App. 1996), reh’g denied, cert. denied; Mann v. Bank of Tallassee, 694 So. 2d 1375 (Ala. Civ. App. 1996), reh’g denied, cert. denied.
 Equity of redemption is that interest in the real property retained by a borrower after executing a mortgage in favor of a lender.
 The right to redeem is a personal right governed by statute permitting a mortgagor andcertain other individuals with a statutory interest in the real property to repurchase the real property following a foreclosure sale. See Ala. Code §§ 6-5-247 et seq. (1991).
 Bailey Mortg. Co. v. Gobble-Fite Lumber Co., Inc., 565 So. 2d 138 (Ala. 1990); Mid-State Homes, Inc. v. Butler, 253 So. 2d 511 (1971); Cameron v. Meadowbrook Group, 730 So. 2d 234 (Ala. Civ. App. 1999).
 Ala. Code §§ 35-10-1, -5, -12 (1991). See also Davis v. Huntsville Production Credit Ass’n, 481 So. 2d 1103 (Ala. 1985).
 Please note, a mortgage, either first or second, must be in default or must contain cross default provisions for a lender to institute foreclosure proceedings.
 Dorty v. Soles, 26 So. 2d 261 (1946).
 Ala. Code § 6-5-248(b) (1993).
 Ala. Code § 6-5-240(a) (1993) allows real estate to be redeemed by the following: (1) Any debtor, including any surety or guarantor; (2) Any mortgagor, even if such mortgagor is not personally liable for payment of a debt; (3) Any junior mortgagee, or its transferee; (4) Judgment creditor, or its transferee; (5) Any transferee of the interests of the debtor or mortgagor, either before of after the sale; (6) The respective spouses of all debtors, mortgagors, or transferees of any interest of the debtor or mortgagor, who are spouses on the day of the execution, judgment or foreclosure sale; or, (7) Children, heirs, or devisees of any debtor or mortgagor.
 Ala. Code § 8-8-10 (2002) (this amount is currently set at 12%).
 Ala. Code § 6-5-253(a) (1993).
 Dicie v. Morris, 285 Ala. 650, 235 So. 2d 796 (1970); Wilkes v. Hood, 185 So. 748 (Ala. 1939).
 Garvich v. Associates Financial Services Co., 435 So. 2d 30 (Ala. 1983).
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