FORECLOSURE, in the law of mortgage, the extinguish ment by order of the court of a mortgagor's equity of redemption. In the law of equity the object of every mortgage transaction is eventually the repayment of a debt, the mortgaged property being incidental by way of security. Therefore, although the day named for repayment of the loan has passed and the mortgagor's estate is consequently forfeited, equity steps in to mitigate the harshness of the common law and will decree a reconveyance of the mortgaged property on payment of the principal, interest and costs. This right of the mortgagor to relief is termed his "equity of redemption." Under the new legislation this estate is no longer merely equitable, but legal. However, this has not changed its attributes, which are that it can only be defeated by the mort gagee taking possession of the mortgaged property and retaining it for 12 years without acknowledging the mortgagor's title, or by the decree of the court ordering the foreclosure of it or the sale of the mortgaged property, or by a sale by the mortgagee under his statutory powers. A foreclosure action is brought by the mort gagee against the mortgagor in the chancery division of the High Court in England claiming that an account may be taken of the principal and interest due to the mortgagee, and that the mort gagor may be directed to pay the same, with costs, by a day to be appointed by the court and that in default thereof he may be foreclosed his equity of redemption. In such an action the court may always order a sale instead of foreclosure. English county courts have jurisdiction in foreclosure actions where the mortgage or charge does not exceed £5oo, or where the mortgage is for more than Loo, but less than that sum has been actually advanced. In a Welsh mortgage there is no right to foreclosure.
(J. A. United States.—The American law on foreclosure is like the English in perpetuating a mortgagor's right to redemption until it is barred by valid foreclosure—typically but not always by way of action in equity—or, if the mortgagee has obtained possession under the mortgage, by the statute of limitations (q.v.). But the American law is otherwise highly diversified among the several States, and differs often radically from the English. In part the differences reflect the early American reaction against that flat forfeiture of the mortgagor's land to the mortgagee which was involved in the English conception of mortgage; hence "strict" foreclosure can be had, even by judicial decree, almost nowhere outside of New England. The further differences and divergences arise from the various devices employed in an effort to accomplish the next to impossible, viz., to assure to an unfortunate mortgage debtor some return for the supposed excess in value of his land over the amount of the debt. The practical impossibility arises from two fairly obvious facts : first, that failure to pay off the mortgage commonly proves either that the land mortgaged is a losing proposition, or that conditions (either in general or in real estate) have become such as to make advantageous sale difficult; second, that forced sale is a poor way to make anything realize its value. On the other hand, differences and divergences appear be cause of the steady pressure of mortgage-lenders and their counsel to invent a quick, sure way to liquidate the debt despite the law.
The first expedient to avoid forfeiture was the substitution of foreclosure by compulsory sale for foreclosure by forfeiture; and, often, a requirement that the premises should be sold in parcels, if possible, so as to save what might be saved. Experience showed, however, that the anticipated surplus for the mortgagor rarely materialized; indeed, the mortgagee is himself commonly forced by lack of competition to purchase at such a sale. Especially through the middle West, where debtor and farmer influence was strong, there then resulted the enactment of a statutory further period of redemption—redemption from the purchaser at the fore closure sale—the period running from six to 18 months. These provisions operated in part as a sort of poor law, assuring the mortgagor a chance to live undisturbed and make another crop; in part as an opportunity to canvass still further, perhaps under con ditions changing for the better, the chances of private sale or of refinancing. But they greatly retarded the realization by the mort gagee, and often decreased his security because of the tendency of mortgagors to exploit the foreclosed premises, or let them run down, during the statutory period of grace. Lenders' efforts to avoid these difficulties have taken the form, chiefly, of incorporat ing into the mortgage at the outset a power of private sale of the land if default should occur. Where allowed full effect, such a power does away with court and sheriff's costs, and makes fore closure quick. On the other hand, it is obviously subject to abuse. The States have varied in their attitude toward such informal foreclosure. Some sustain the power as written, even if it requires no notice to the mortgagor that a sale is intended. Commonly, the sale is required to be by auction. Commonly, too, a fixed number of advertisements of the sale is required, or the mailing of notice to the mortgagor, or both. In some States the statutory redemp tion period is made to apply even after sale under such a power; and such is the policy of the proposed Uniform Mortgage Act. On the other hand, in some States the restrictions on such powers of sale which are insisted upon in mortgages made directly to the mortgagee seem to be avoided if the transaction is put in the form of a deed to a third person as trustee, to secure the mortgage debt ; in which case the security deed of trust comes practically to displace the strict mortgage form. On the whole, it is worth note that even under strict foreclosure by forfeiture, a mortgagor has sometimes a fair chance of realizing something from his "equity," indirectly, since junior mortgagees or judgment creditors are entitled to redeem the premises if he does not—in which case any surplus that may thereafter be realized will wipe out a debt of the mortgagor in addition to the mortgage debt. Under the statutory redemption system this chance is definitely increased : for the junior lienor redeems not by paying off the senior mortgage, but by paying off the price (plus interest and expenses) realized at foreclosure sale. It should further be noted that foreclosure by judicial action (whether resulting by way of sale or of forfeiture) is effective only against those persons having an interest in the premises who are duly served with legal process; whereas informal foreclosure under power of sale, wherever sustained, is free from this danger and expense to the mortgagee. And, finally, that unu sually slow, or complicated, or expensive foreclosure of course reacts to raise interest rates on mortgages, even though a legal prohibition exists against charging interest at more than a fixed rate. Hence the net social effect of compulsory delays in foreclos ure approaches roughly that of compulsory mutual insurance, in which all mortgage debtors pay a somewhat heavy premium for the partial benefits any of them will derive who are forced to default.
Where the mortgaged premises are so leased as to produce in come from the rents, as in the case of apartment or office build ings, foreclosure proceedings are commonly accompanied by the appointment of a receiver to collect the rents pending determina tion of the suit, and thereby insure against an inadequate price being realized at the sale. The use of the receiver is also common in foreclosing large mortgages, especially those securing bond issues, on corporate assets ; and it should be noted that in such cases the sale under foreclosure is never for cash, but for part or all of the bonds secured—it being, in view of the values involved, practically impossible to produce a cash (or even a rival) bidder. The result is a corporate reorganization, in which the original holders of the bonds foreclosed are the dominating factors; the participation of stockholders (who correspond to the mortgagor) in the new corporation being not a matter of right, since they have been foreclosed, but a matter of expediency, since the new capital needed can commonly be collected from them under the inducement of some participation in the new organization. (See also MORTGAGE.) BIBLIOGRAPHY.--Wiltsie, Mortgage Foreclosure (end ed., 1926) ; Bibliography.--Wiltsie, Mortgage Foreclosure (end ed., 1926) ; Durfee and Doddridge, 23 Mich. Law Rev. 825 (1925) ; J. L. Weiner, 27 Col. Law Rev. 132. (K. N. L.)