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Top Ten Mortgage Foreclosure Questions Answered

The ATG Underwriting Department receives many questions about mortgage foreclosure procedure in the context of reviewing title. Here are answers to our most commonly asked questions:

1. When must I use the Illinois Mortgage Foreclosure Law (IMFL) to foreclose an installment contract?
Section 15-1106(a)(2) of the Code of Civil Procedure provides that a contract sellermustuse the IMFL to foreclose an installment contract on residential property if: (1) the contract states that the debtor has more than five years to repay the property's purchase priceand(2) the balance due under the contract is less than eighty percent (i.e., the purchaser has repaid more than twenty percent) of the original purchase price, including principal and interest due at the rate prior to default, at the time the seller files the foreclosure complaint. 735 ILCS 5/15-1106(a)(2). It should be noted that Sub-section 15-1106(c) declares that a contract sellermayelect to use the IMFL to enforce an installment contract even if the above requirements are not met.

2. How do I provide notice to unknown heirs of a deceased mortgagor?
A potential conflict involving this issue has developed between Illinois statutory law and case law in Cook County. Relevant statutes seem to allow unknown heirs of a deceased mortgagor to be notified by publication, while a case recently decided in Cook County declares that unknown heirs may not be named as substitutes for a deceased mortgagor in a foreclosure action.

The IMFL provides that a mortgagor is a necessary party in a foreclosure action. 735 ILCS 5/15-1501(a). It defines "mortgagor" as "(i) the person whose interest in the real estate is the subject of the mortgage and (ii) anyperson claimingthrough a mortgagor as successor [emphasis added]." 735 ILCS 5/15-1209. In addition, it states that any unknown owner of property subject to foreclosure may be made a party in a foreclosure suit if process by publication is served on such a person, who is designated an "unknown owner" or "unknown heir." 735 ILCS 5/15-1501(c) & 2-413. Finally, the statute declares that a judgment entered in the action will have the same effect with respect to an unknown party as it does regarding a named party. 735 ILCS 5/2-413. Thus, the statute appears to allow an unknown heir to replace a deceased mortgagor as defendant in a foreclosure action.

However, inWells Fargo Bank, N.A. v McQueen, 2007-CH-15348 (Cook Cy 2007), the Circuit Court of Cook County held that an unknown party could not be named in a mortgage foreclosure action as a substitute for the mortgagor. The court reasoned that an Illinois foreclosure is aquasi in remaction, which is "an adversary proceeding against the mortgagor." In such a proceeding, the mortgagor is a necessary party because he must have an opportunity to defend himself. The IMFL does not address the question of who should be named as defendant if the mortgagor dies before or after the commencement of the action. Thus, the answer must be found in the generally applicable Illinois civil procedure rules. Those rules do not allow an action to be commenced against a deceased person. Consequently, the court lacks jurisdiction in a foreclosure suit against a deceased mortgagor or his heirs. However, a mortgagee may bring an action against a deceased mortgagor's executors or administrators. Courts have extended the statute of limitations period for initiating foreclosure suits in cases in which the mortgagor dies before the normal limitation period ends.

Therefore, except in Cook County, unknown heirs of a deceased mortgagor may be notified by publication pursuant to Sections 15-1501(c) and 2-413 of Civil Procedure.

3. Do I have to provide notice to a mechanic's lien claimant whose notice is recorded after the lis pendens but relates back in priority to a date before the lis pendens?
No. It is sufficient to notify a "nonrecord claimant" by publication, as long as the party seeking to terminate that claimant's interest complies with the requirements of Section 15-1502(c) of the IMFL. 735 ILCS 5/15-1502(c) & 15-1510;Teerling Landscaping, Inc. v Chicago Title & Trust Co., 271 Ill. App. 3d 858, 649 NE2d 538, 541-43 (2nd D 1995). Section 15-1502(c) provides that the party must file an affidavit with the court either stating the name and place of residence of the nonrecord claimant or that such information is unknown to the party. It should be noted that the party seeking to terminate the claimant's interest is not required to investigate the claimant's name or place of residence if it is unknown to the party. 735 ILCS 5/15-1502(c).

4. What do I do about a federal tax lien notice recorded after the lis pendens?
A federal tax lien arises at the time that the tax is assessed and continues until it is satisfied or "becomes unenforceable by reason of lapse of time." 26 USC &§ 6322. See alsoIn re Nowicki, 202 BR 729, 738 (Bankr ND Ill 1996). However, a federal tax lien is not valid against a "purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor" until it has been recorded. 26 USC &§ 6323. See alsoApollo Savings & Loan Ass. v Burow, 39 Ill App 2d 273, 188 NE2d 900, 902 (2nd D 1963) (stating that "Congress unquestionably intended by Section 6323 to give priority to the claim of a mortgagee where the notice of lien was filed after the mortgage was recorded");In re Nowicki, 202 BR at 740 (holding that a federal tax lien did not take priority over a judgment lien because it was recordedafterthe judgment lien was recorded). Thus, alis pendensrecorded before a federal tax lien will eliminate the need to provide notice of a mortgage foreclosure to the IRS.

5. Which municipal liens will be eliminated upon completion of a mortgage foreclosure?

• A demolition lien will not be eliminated upon completion of a mortgage foreclosure because it is superior to all prior existing liens, except taxes, if it is recorded within 180 days after the completion of the demolition work. 65 ILCS 5/11-31-1(a); Village of Lake Zurich v American Nat'l Bank & Trust Co., Not Reported in F Supp, 1992 WL 166579 (ND IL 1992).

 

• A certificate sold by a receiver in a building code violation case will not be eliminated upon completion of a mortgage foreclosure. This because it is superior to all prior existing liens, except taxes, if the certificate holder records the lien within 90 days of the transfer from the receiver to the holder. 65 ILCS 5/11-31-2(a).

 

• A lien for unpaid garbage and debris removal services will not be eliminated upon completion of a mortgage foreclosure. This because it is superior to all prior existing liens, except taxes, if it is recorded within 60 days after the removal costs are incurred. 55 ILCS 5/5-1118.

 

• A lien for the extermination of pests, such as rats or termites, will not be eliminated upon completion of a mortgage foreclosure. This because it is superior to all prior existing liens, except taxes, if it is recorded within 60 days after the extermination costs are incurred. 65 ILCS 5/11-20-8.

 

• A lien for unpaid water and sewerage services will be eliminated upon completion of a foreclosure. 55 ILCS 5/5-15021 (providing that "[t]he county shall have no preference in any such lien over the rights of . . . any lien holder arising prior to the notice of filing of such lien"); 65 ILCS 5/11-141-7. Be aware, however, that despite the lien's foreclosure, the municipality may still refuse to provide water or sewer services to the property until the outstanding charges are paid.

6. Are notices (lis pendens) for building code violation cases (City of Chicago) or demolition liens removed from title by a foreclosure?
No. As stated above, both are superior to all prior existing liens, except taxes. 65 ILCS 5/11-31-2(a); 65 ILCS 5/11-31-1(a). Therefore, neither type of lien is removed from title by a foreclosure.

7. Who is responsible for paying condominium assessments due during the period of foreclosure? What about real estate taxes?
A purchaser at a judicial foreclosure sale, other than a mortgagee, or a "purchaser who acquires title from a mortgagee" must pay any unpaid condominium assessments that became due during the six months prior to the filing of an action to enforce the condominium assessments. 765 ILCS 605/9(g)(4).

A receiver appointed by the court to maintain property subject to foreclosure has the authority to pay real estate taxes levied against the property during the period of foreclosure.

735 ILCS 5/15-1704(a)-(b). However, a mortgagee may pay such taxes to protect that mortgagee's interest in the property. In that situation, some courts hold that the mortgagee is entitled to recover those payments. See, for example,Brockway v McClun, 243 Ill 196, 199 (Ill 1909).

8. When in the foreclosure process does title pass and when are liens foreclosed from title?
Title passes when the foreclosure sale has been confirmed and the deed to the property has been issued. 735 ILCS 5/15-1509(b);Kling v Ghilarducci, 121 NE2d 752, 756 (Ill 1954);Cocanig v Chicago, 173 NE2d 482, 484 (Ill 1961). A mortgage lien "is not terminated until confirmation of [a] judicial sale."In re Kohler, 107 BR 167, 169 (Bankr SD Ill 1989). See alsoIn re Shnupp, 64 BR 763, 766 (Bankr ND Ill 1986). Therefore, a mortgagee holds only a lien against the property until a foreclosure sale is confirmed and the mortgagee receives the deed to the property.

9. What happens if the foreclosed mortgagor bids at the auction? What if a relative of the mortgagor bids?
If the mortgagor or anyone acting on the mortgagor's behalf bids successfully at the auction, then the property remains encumbered by unsatisfied liens.Knickerbocker v McKindley Coal & Mining Co., 50 NE 330, 333 (Ill 1898) (stating that where an owner or a representative of an owner of property burdened by liens redeems that property at a judicial sale, then the "purchase is nothing more than a payment of the debt" and the property is "subject to a subsequent judgment"). See alsoConsaer v Wisniewski, 293 Ill App 529, 13 NE2d 93, 95 (1st D 1938);French v Toman, 31 NE2d 801, 804 (Ill 1940). It should be noted, however, that if a third party not connected with or colluding with a mortgagor purchases property at a foreclosure sale and later sells it back to the mortgagor, then prior liens unsatisfied at the sale willnotbe revived.French, 31 NE2d at 804-05 (holding that liens are not revived in this situation because no Illinois statute mandates such revival).

10. What happens if a mortgagor who is trying to sell property that is the subject of a foreclosure ends up passing title after the judicial sale?
The Divisions of the Illinois First District Appellate Court (Divisions), where all cases regarding the issue were found, are split.

The IMFL provides that a judicial sale is not complete until a court affirms it.

735 ILCS 5/15-1508;Household Bank, F.S.B. v Jewel Lewis, 373 Ill App 3d 420, 869 NE2d 351, 353 (1st D, 2nd Div. 2007);Citicorp Savings of Ill. v First Chicago Trust Co. of Ill., 269 Ill App 3d 293, 645 NE2d 1038, 1045 (1st D, 6th Div. 1995). A court must confirm a foreclosure sale unless it finds that notice of the sale was not properly given, the sale was unconscionable or conducted fraudulently, or "justice was otherwise not done." 735 ILCS 5/15-1508.

In addition, the IMFL states that a mortgagor who defaults on a loan has a specified period to redeem the mortgaged property. 735 ILCS 5/15-1603. The right of redemption may not be revived after it expires and is not enforceable after a judicial sale.Id.; 735 ILCS 5/15-1605.

Most Illinois courts have interpreted the foregoing provisions to require a court to confirm a judicial sale unless it was unfair and prejudicial to an interested party.Household Bank, 869 NE2d at 353;Washington Mutual Bank, F.A. v Boyd, 369 Ill App 3d 526, 861 NE2d 1041, 1043 (1st D, 3d Div. 2006). However, the courts disagree over what is unfair and prejudicial to an interested party. The Second and Third Divisions have each compelled lower courts to confirm judicial sales even though subsequent sales to private buyers yielded more money to satisfy liens on the property sold.Household Bank, 869 NE2d at 353;Washington Mutual, 861 NE2d at 1043. This was because the private sales took place after the redemption periods expired, and there was no evidence absent the selling prices that the judicial sales were unfair.Household Bank, 869 NE2d at 353;Washington Mutual, 861 NE2d at 1043.

In contrast, inMortgage Elec. Registration Sys., Inc. v Thompson, the Sixth Division upheld a lower court's refusal to confirm a judicial sale because the private buyer agreed to pay a higher price for the encumbered property.Mortgage Elec. Registration Sys., Inc. v Thompson, 368 Ill App 3d 1035, 859 NE2d 621, 624-25 (1st D, 6th Div. 2006). The court reasoned that justice would not be done if it forced the lower court to confirm the foreclosure sale.Id. This was because the extra money from the private sale could be used to satisfy two lien-holders who would otherwise not have been compensated.Id.

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[Last update: 8-31-09]