What Is Reforeclosure?

Maybe you’ve already lost your home to foreclosure, and you’re trying to recover—both emotionally and financially. Now imagine this: You get a letter from the bank that foreclosed your home saying that you own the property again. The letter also says you have to bring the mortgage payments current to keep the home. But you already went through a foreclosure. What’s happening? It sounds like you’re about to go through a reforeclosure.

In this article, you’ll learn why, when, and how a reforeclosure might happen.

Purpose of a Foreclosure

Foreclosure is the legal process that allows a lender or the subsequent loan owner (the "bank") to sell a property to satisfy a homeowner's debt. The goal of a foreclosure is to eliminate the owner’s interest in the home, as well as wipe out any junior interests in the property. So, before foreclosing, the bank will order a title search from a title company. The title search will show all of the parties with an interest in the subject property—like lienholders, judgment holders, and others. The foreclosing bank will then name the parties whose interests it wishes to foreclose as defendants in the foreclosure action to clear them off title.

Purpose of a Reforeclosure

Homeowners occasionally face back-to-back foreclosures when the title to the property has problems after the first foreclosure. (Often, a foreclosing bank is able to amend its foreclosure complaint to add parties who were left out of the original complaint; but the bank must amend the document before the foreclosure is complete.)

When a subordinate lienholder or other junior interest is omitted from a foreclosure action, its lien or interest isn’t extinguished—unlike the lien or interest of a party that’s properly named and served in the lawsuit. The purchaser at the foreclosure sale (usually the foreclosing bank) then takes title to the property subject to the omitted lien or party. Unless the excluded parties agree to release their lien or sign a quitclaim deed, a court’s assistance is required to clear up the title.

Without clear title, the bank can’t resell the property to a new owner. So, the bank might then (depending on state law) opt to reforeclose to deal with the parties who were inadvertently left out of the foreclosure action. The reforeclosure action cleans up the property's title and gives the bank clear ownership.

What Kinds of Mistakes Might Lead to Reforeclosure

A bank might choose to reforeclose if the foreclosure sale has already taken place and, for instance:

• The title company neglected to include a junior lien on the title report after searching the public records and, as a result, the bank's attorney didn't include the junior lienholder in the foreclosure.
• The title company didn’t include a judgment lien in the title report after searching the public records, and, as a result, the bank's attorney didn't include the judgment holder in the foreclosure.
• The bank’s attorney didn't name a particular defendant (like a nonborrowing spouse) or didn't name the defendant correctly (such as naming a trustee as both an individual and in his or her capacity as a trustee) in the lawsuit.
• The bank’s attorney didn’t properly review the title search and therefore didn’t name all parties who have an interest in the property as defendants in the foreclosure.

How Reforeclosure Generally Works

Generally, the right to reforeclose passes with the property's ownership. Because the foreclosing bank is usually the high bidder at the foreclosure sale (and becomes the home's new owner), it will typically conduct the reforeclosure. But if a third party buys the home at the foreclosure sale, that person or entity might reforeclose.

The reforeclosure complaint (lawsuit) will allege that the omitted lienholder or other party’s interest is inferior—that is, it has a lower priority—than the foreclosed mortgage. The complaint will further state that the lienor or other party was inadvertently left out of the foreclosure action and, if it had it been included, the foreclosure sale would have removed it from title.

Assuming the newly-named defendants don’t answer the suit or redeem the property by paying off the mortgage, the court enters a judgment of foreclosure. The lien or other interest is then extinguished, and another foreclosure sale is held. The purchaser at the foreclosure sale gets title to the property free of the interests of all parties foreclosed in the original lawsuit, as well as those named in the reforeclosure.

When to Talk to a Lawyer

Losing your home foreclosure once is stressful enough, let alone twice. If you’ve received notice that the bank is reforeclosing and have further questions, consider talking to a local lawyer to learn about the process and your rights.