In Colorado, a non-judicial process administered by Public Trustees is available to lenders foreclosing on deeds of trust. Liens other than deeds of trust (e.g., mechanics’ liens) must be foreclosed through the courts. The judicial process is similar to that described below.
Foreclosing on a deed of trust through the Public Trustee’s office is a process governed by statute. Article 38 of the Colorado Revised Statutes creates a timeline, beginning with the filing of a Notice of Election and Demand (“Notice”) and ending with the issuance of a Confirmation Deed to the holder of the Certificate of Purchase or the last Certificate of Redemption. Learning the timeline is an excellent starting point if you wish to understand the complexities of the foreclosure process. In addition to the timeline, you should remember the following rules:
- No liens are extinguished if the default is cured.
- All liens senior to that of the foreclosing lender survive foreclosure. First lien position is not a precondition to foreclosing. However, foreclosing from a junior lien position will leave the property subject to senior liens.
- The owner has a right to cure, but no right to redeem.
- Lien holders with liens junior to that of the foreclosing lender and recorded before the Notice have cure and/or redemption rights.
THE CURE PERIOD
The foreclosure process begins1 when the lender sends the Notice to the Public Trustee. The Notice is recorded and thereby alerts the general public to the foreclosure. For a secured lien that is not foreclosed through the Public Trustee’s office (e.g., a mechanics’ lien) the process begins with a court action that is evidenced in the public records by a lis pendens. Subject to delays caused by procedural non-compliance (e.g., untimely delivery of cure figures to the Public Trustee) or bankruptcy, the foreclosure sale (“Auction”) will be held 110-125 days after recordation of the Notice (215-230 days after the Notice if the property is “agricultural”). The time between the Notice recordation date and the Auction date is the cure period.
Curing a default simply means bringing the loan payments current. The cure amount will include all past due principal and interest, any late fees and the costs associated with initiating the foreclosure. Curing a default has the effect of restoring the owner and the lender to their original status – the owner keeps the property and must resume regular mortgage payments and the lien of the lender remains in force and effective.
THE REDEMPTION PERIOD
On the Auction date, the Public Trustee announces the property and opens bidding. The foreclosing lender must bid; other bids are voluntary. The Auction is a public event and anyone with certified funds sufficient to cover a bid can participate. In general, the lender will bid what it is owed (including fees and interest); or less if it believes the property is not worth what is owed. Competitive bidding by the public may occur, particularly if the value of the property is perceived to be significantly more than the amount of the lender’s bid (i.e., the property has equity).
The high bidder at the Auction2 receives a Certificate of Purchase from the Public Trustee. A Certificate of Purchase is not a deed. Colorado law creates a redemption period which must expire before the Public Trustee can issue a deed. The redemption period affords each lien holder junior to the foreclosing lender the opportunity to buy the property. The process is best understood by example:
Blackacre has a fair market value of $100,000.00 and is encumbered by three deeds of trust – a first to L1 for $60,000.00, a second to L2 for $20,000.00 and a third to L3 for $10,000.00. Suppose L1 forecloses and is high bidder at the Auction with a $60,000.00 bid. During the redemption period, L2 has the first opportunity to redeem3. To do so it must file a Notice of Intent to Redeem and then pay $60,000.00 (plus accrued interest) to the Public Trustee before the expiration of the L2 segment of the redemption period.
Following the L2 segment, L3 may redeem, assuming timely filing of a Notice of Intent to Redeem, for $60,000.00 plus $20,000.00 (plus all accrued interest). Note that the amount collected from the first redeeming party is the amount paid by the Auction high bidder. Each succeeding redeemer pays that amount plus the amount due the prior redeemer. As the last redeemer, L3 would get the property, free and clear of the liens of L1 and L2. It could then sell the property and apply the difference between the cost of redemption and the sale price to satisfy its own $10,000.00 debt.
Following an Auction, there are two possible scenarios:
- No one redeems. In this case, the Public Trustee will issue a Confirmation Deed to the holder of the Certificate of Purchase4.
- A junior lien holder redeems. The Public Trustee will issue a Certificate of Redemption to each redeeming lien holder in succession. A Certificate of Redemption acts as an assignment of the Certificate of Purchase. The holder of the last Certificate of Redemption5 will deliver it to the Public Trustee in exchange for a Confirmation Deed.
1. Delivery of the Notice to the Public Trustee marks the beginning of the “formal” foreclosure process. The process actually begins informally at the moment of default, if not before. At that time, many owners will begin considering their options (e.g., refinancing or selling). In addition, owners and lenders may have extensive communication between the time of default and delivery of the Notice regarding alternatives to foreclosure (e.g., a customized repayment schedule, loan modification, deed in lieu).
2. A third party may be the Auction high bidder. In this case, the Public Trustee collects certified funds from the third party and pays off the foreclosing lender. As a practical matter, many foreclosures end with the foreclosing lender owning the property.
3. In Colorado, redemption is a serial process – the junior lien holder with the senior-most lien relative to the lien of the foreclosing lender has the first redemption right. The next senior-most junior lien holder has the second right, and so on. If an association (HOA) has a lien, it automatically redeems first.
4. A Certificate of Purchase can be assigned to another party. A Confirmation Deed will not be issued until the Certificate of Purchase is submitted to the Public Trustee (at the end of the redemption period) and the grantee on the deed will be the assignee, if applicable.
5. A Certificate of Redemption can be assigned to another party. A Confirmation Deed will not be issued until the last Certificate of Redemption is submitted to the Public Trustee (at the end of the redemption period) and the grantee on the deed will be the assignee, if applicable.