FORECLOSURE

> Remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgage was given

> Denotes a procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself

VALIDITY AND EFFECT OF FORECLOSURE

> The right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation

> A mortgage contract may contain an acceleration clause—on occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and payable

> Essence of mortgage contract—property has been identified and separated from a mass of the property of the mortgagor to secure the payment of a principal obligation

> Once the proceeds have been applied to the payment of the principal obligation, the debtor cannot anymore be asked to pay unless there is deficiency

KINDS OF FORECLOSURE

1. Judicial

2. Extrajudicial

AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL PROPERTY IN FAVOR OF ANY INDIVIDUAL, CORPORATION, OR ASSOCIATION SUBJECT TO CERTAIN CONDITIONS

Section 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not take possession of the mortgaged property during the existence of the mortgage and shall not

take possession of the mortgaged property except after default and for the sole purpose of foreclosure, receivership, enforcement or other proceedings and in no case for a period of more than 5 years from actual possession and shall not bid or take part in any sale of such real property in case of foreclosure: Provided, that said mortgagee or successor in interest may take possession of said property after default in accordance with the prescribed judicial procedures for foreclosure and receivership and in no case exceeding 5 years from actual

possession.

Section 2. All laws, orders, or regulations, or parts thereof inconsistent with the provisions of this Act, are repealed or modified accordingly.

Section 3. This Act shall take effect upon its approval.

NOTES ON RA 133:

1. You can mortgage to a foreigner. RA 133 sanctions this. Ownership is not equivalent to mortgage. Nonetheless, he can only institute judicial proceedings and not extrajudicially foreclose the mortgage. Furthermore, he cannot bid or take part in the sale of the real property.

2. The foreigner may not take possession of the property during the mortgage. He could only possess the same as a lessee.

3. The foreigner may only take possession of the mortgaged property after default, and for the sole purpose of foreclosure, enforcement or other proceedings. This should not exceed the period of 5 years from actual possession.

JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

1. The mortgagee should file a petition for judicial foreclosure in the court which has jurisdiction over the area where the property is situated

2. The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render judgment ordering the mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment.

3. Within this 90 to 120 day period, the mortgagor has the chance to pay the obligation to prevent his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD.

4. If mortgagor fails to pay within the 90-120 days given to him by the court, the property shall be sold to the highest bidder at public auction to satisfy the judgment.

5. There will be a judicial confirmation of the sale. After the confirmation of the sale, the purchaser shall be entitled to the possession of the property, and all the rights of the mortgagor with respect to the property are severed or terminated. The equity of redemption period actually extends until the sale is confirmed. Even after the lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the equity of redemption can be

considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale.

a. After the confirmation of the sale, the mortgagor does not have a right to redeem the property anymore. This is the general rule in judicial foreclosures – there is no right of redemption after the sale is confirmed.

The proceeds of the sale of the property will be disposed as follows:

a. First, the costs of the sale will be deducted from the price at which the property was sold

b. The amount of the principal obligation and interest will be deducted

c. The junior encumbrances will be satisfied

d. If there is still an excess, the excess will go back to the mortgagor. In mortgage, the mortgagee DOES

NOT get the excess (unlike in pledge).

i. If there is a deficiency, the mortgagee can ask for a DEFICIENCY JUDGMENT which can be imposed on other property of the mortgagor. The rule on extrajudicial foreclosure is different. The mortgagee must go to court and file another action for the collection of the deficiency.

ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE:

1. Judicial foreclosure is costly, since the parties would need to hire lawyers. But then again, the present rules provide that court fees are needed to be paid in extrajudicial proceedings also.

2. The parties have very little control over the sale because there is court intervention.

3. More susceptible to stalling/dilatory tactics by the mortgagor, since he can file all sorts of motions in court to prevent the sale.

4. It is more efficient to have extrajudicial proceedings since for judicial proceedings, there is a minimum lapse of time of 6 years.

EXTRAJUDICIAL FORECLOSURE

(UNDER ACT 3135/4118 AND SC ADMINISTRATIVE CIRCULAR)

WHERE SHOULD AN EXTRAJUDICIAL FORECLOSURE SALE BE DONE?

> Sale cannot be made legally outside the city or province wherein the property sold is situated. In case the place has been stipulated, it shall be made in the municipal building of the said place

NOTICE OF THE SALE

1. POSTING of the notices of the sale FOR NOT LESS THAN 20 DAYS in at least 3 public places of the municipality or city where the property is situated

2. IF THE PROPERTY IS WORTH MORE THAN P400, such notice shall also be published once a week at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city. (You don't need to count 6 days between publications.)

NOTE: there is jurisprudence, which held that there is sufficient notice when there is publication.

PUBLIC AUCTION/SALE

1. Time shall be between 9AM and 4PM. It shall be made in the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality, or of the notary public of the municipality, who shall be compensated with P5 for each day of actual work or performance in addition to his expenses.

2. Anyone may bid at the sale, unless there are stipulations in the agreement.

POSSESSION

> Upon foreclosure, if the mortgagor is in possession of the property, he will retain possession during the redemption period—1 year from the date of sale

> If the winning bidder wants possession during the redemption period, he may execute a bond in the amount equivalent to the use of the property for 12 months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of the Act. Upon approval, a writ of possession will be issued in his favor.

> If the winning bidder is able to secure possession, the mortgagor may petition that the sale is set aside and the writ of possession be cancelled on the ground that he wasn't in default or that the sale wasn't made in accordance with Act 3135. This must be filed within 30 days from issuance of the writ of possession.

RIGHT OF REDEMPTION

> The debtor, his successors-in-interest, or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time WITHIN THE TERM OF 1 YEAR FROM AND AFTER THE DATE OF THE SALE and such will be governed by the Rules of Court

> When the property is redeemed after the purchaser has been given possession, the redeemer is entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented. If the property was used as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the

price the interest of 1% per month provided in the Rules of Court.

RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35

Sec. 29. Effect of redemption by judgment obligor, and a certificate to be delivered and recorded thereupon; to whom payments on redemption made. If the judgment obligor redeems, he must make the same payments as are required to effect a redemption by a redemptioner, whereupon, no further redemption shall be allowed and he is restored to his estate. The person to whom the

redemption payment is made must execute and deliver to him a certificate of redemption acknowledged before a notary public or other officer authorized to take acknowledgments of conveyances of real property. Such certificate must be filed and recorded in the registry of deeds of the place in which the property is situated, and the registrar of deeds must note the record thereof on the margin of the record of the certificate of sale. The payments mentioned in this and the last preceding sections may be made to the purchaser r redemptioner, or for him to the officer who made the sale.

Sec. 30. Proof required of redemptioner.

A redemptioner must produce to the officer, or person from whom he seeks to redeem, and serve with his notice to the officer a copy of the judgment or final order under which he claims the right to redeem, certified by the clerk of the court wherein the judgment or final order is entered; or, if he redeems upon a mortgage or other lien, a memorandum of the record thereof, certified by the registrar of deeds; or an original or certified copy of any assignment necessary to establish his claim; and an affidavit

executed by him or his agent, showing the amount then actually due on the lien.

Sec. 31. Manner of using premises pending redemption; waste restrained.

Until the expiration of the time allowed for redemption, the court may, as in other proper cases, restrain the commission of waste on the property by injunction, on the application of the purchaser or the judgment obligee, with or without notice; but it is not waste for a person in possession of the property at the time of the sale, or entitled to possession afterwards, during the period allowed for redemption, to continue to use it in the same manner in which it was previously used; or to use it in the ordinary course of husbandry; or to make the necessary repairs to buildings thereon while he occupies the property.

Sec. 35. Right to contribution or reimbursement.

When property liable to an execution against several persons is sold thereon, and more than a due proportion of the judgment is satisfied out of the proceeds of the sale of the property of one of them, or one of them pays, without a sale, more than his proportion, he may compel a contribution from the others; and when a judgment is upon an obligation of one of them, as security for another, and the surety pays the amount, or any part thereof, either by sale of his property or before sale, he may compel repayment from the principal.

GENERAL BANKING LAW OF 2000, SECTION 47

Sec. 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due

course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the

restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision

until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.

Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

NOTES:

1. For judicial foreclosure, the redemption period is within one year. For extrajudicial, its 90 days from sale or registration.

2. The purpose is to give concession to the banks. Banks cannot get properties mortgaged by those in financial distress.

3. The redemption price would be the mortgaged obligation plus the interest as stipulated in the original obligation. Compare this with judicial foreclosure wherein the redemption price is the original price. In this case, you have to pay more when redeeming from a bank.

4. There is immediate possession

5. A motion to enjoin would not be entertained unless secured by a bond.

6. Court will fix the amount of the bond. Normally, this would be the liability of the bank plus costs. This remedied the loopholes in Act 3135—protect the bank during foreclosures. This makes it hard to secure injunctions and it shortens the redemption period.

Sources: https://batasnatin.com/law-library/civil-law/obligations-and-contracts/823-foreclosure-of-mortgage-redemption.html