Two Uncommon Types of Foreclosure - Strict and By Entry and Possession

Most homeowners facing foreclosure will have to deal with either a judicial foreclosure or the nonjudicial type, as these are the two most common methods that states allow lenders to take back properties. However, a few states still allow two different methods, one called strict foreclosure and the other called foreclosure by entry and possession. While they are used in only a minority of cases, borrowers should be aware of them.

In strict foreclosure states, once the homeowners have fallen behind, the lender goes into court and obtains an order that states the borrowers are in default of the mortgage contract. At this point, the judge is able to transfer the title to the property directly to the lender, without there ever being a foreclosure auction or involvement by the sheriffs department in conducting a sale.

Title to the property is transferred through court order directly from the homeowners to the bank, without a sale. Homeowners are usually given the right to redeem the property by paying the balance due on the loan, but the court decides how long this period will be for. At the end, if the property has not been redeemed, the lender owns the house and is able to have the borrowers evicted.

Obviously, strict foreclosure is an extremely unfair deal for homeowners, and the more equity they have in the property, the more unfair it becomes. A property underwater may not be a great loss to borrowers, but one that has several hundred thousand dollars in equity results in a huge transfer of wealth to the lender. Because there is no sale, there is no possibility the homeowners will receive any proceeds from their equity.

Because of the inherent inequality of the strict foreclosure process, only two states still allow them, Connecticut and Vermont. For homeowners in these two states, facing strict foreclosure can be a harrowing event, as all of their equity will simply be transferred over to the lender, which will then be able to list the property on the market and take all of the profits as their own. For making years of payments, homeowners will get nothing.

The second type of foreclosure that is used in only a small number of states is called foreclosure by entry and possession. This is allows lenders to enter into a property and take over possession for a period of time, at the end of which the lender becomes the sole owner of the house. It is also often paired with foreclosure by a power of sale, which allows lenders to sell a house at a trustee sale without initiating a lawsuit in court.

After the sale of the home through the power of sale clause, the homeowners are typically given the right to redeem the property for a period of time. However, the lender may enter the house or property and gain constructive possession. At the end of the redemption period, ownership of the house is finally transferred to the lender. This type of foreclosure is usually used to supplement a nonjudicial foreclosure.

The states that allow for a foreclosure by entry and possession are Maine, Rhode Island, New Hampshire and Massachusetts. This is a few more states than use strict foreclosure, but the terms of this type are not as severely negative to the borrowers. In order to defend against a foreclosure by entry and possession, though, homeowners will have to initiate a lawsuit in court and attempt to obtain a temporary restraining order.

Although these two types of foreclosure are not often used by lenders, homeowners should be aware of what other tactics banks can use against them to take properties. While foreclosure by entry and possession is seemingly benign, strict foreclosure can erase homeowners' hard-earned equity in a home through nothing more than a court order. Thus, borrowers should be on guard against any legal tactics their banks may use against them.