The foreclosure process can be complex. It can be even more complex when the person who takes out a mortgage dies and the property passes to their beneficiaries or heirs.
This can raise questions about the legal and financial responsibilities of both the inheritors of the property and the lender. Who is responsible for the mortgage payments after the owner’s death? Can the bank foreclose on an inherited property? How does the probate process affect the foreclosure? These are the types of questions that often confound both beneficiaries and lenders alike.
The recent Wells Fargo Bank, National Association v. Loveday, No. 4:22-cv-0341-P (U.S. Dist. – Fort Worth 2022), provides an enlightening opportunity to consider these issues within the specific legal framework of Texas law.
Facts & Procedural History
The facts and procedure in this case are pretty simple. The decedent purchased a property in 1973. She then took out a mortgage on the property.
The decedent died in 2013. She did not have a will. The decedent’s daughter inherited the property under Texas intestacy laws.
The mortgage was still outstanding when the decedent died. Thus, the title transferred to the daughter subject to the outstanding mortgage.
The payments on the mortgage were not made timely in 2021. The mortgage company sent notice of its intent to foreclose to the address of the property, but received no response. It then filed suit to foreclose on the inherited property.
Foreclosure When Someone Dies
When a person who has a mortgage (known as a mortgagor) dies, the ownership of their property doesn’t just float in limbo. It automatically goes to the people they’ve named in their will (known as devisees) or, if there’s no will, to their closest relatives (known as heirs). If a probate process—a court-supervised process to distribute a deceased person’s assets—is initiated, the property becomes part of the deceased person’s estate. A person appointed by the court, known as a “personal representative,” takes charge of managing these assets, including the property.
Normally, when someone doesn’t pay back their mortgage, the bank can start a foreclosure process to take back the property. But when the person who has the mortgage dies, the problem isn’t about missed payments; it’s about determining who legally owns the property now. The bank can’t proceed with foreclosure until it’s clear who holds the title to the property. This is essential for the bank to avoid future legal complications.
If the bank decides to go ahead and foreclose on the property without sorting out the ownership issues, it opens itself up to legal risks. People who later prove they had a rightful claim to the property can sue the bank. Even if the bank successfully forecloses, the foreclosure could invalidate the mortgage note and the security instrument (the legal documents behind the mortgage), making it difficult for the bank to sell the property later on.
In Texas, a specific type of probate process known as “dependent administration” can be started up to four years after the mortgagor’s death. This is significant because if someone initiates this process after the bank has already foreclosed on the property, that foreclosure can be reversed. The personal representative managing the deceased person’s estate can then bring the property back into the probate process and may even sue the bank for wrongful conversion of the property.
Notifying the Bank of the Death
Once probate is opened, the estate’s administrator has specific responsibilities towards the lender. They must notify all creditors about the opening of the probate process, usually by publishing a notice in a local newspaper. In addition, if the estate’s administrator knows about a secured debt like a mortgage, they are required to notify the creditor directly within two months of being appointed. Failure to do so can make the administrator liable for damages to the creditor, assuming the creditor didn’t have other means of finding out about the probate process.
The Bank’s Foreclosure Choices in Probate
If a property with a mortgage is inherited and the mortgage payments are not made, the situation becomes complex, especially when probate—the legal process for settling a deceased person’s estate—is involved. The lender, often a bank, has two main choices under Texas law for how to deal with the unpaid mortgage in probate.
First, the lender can choose to treat the unpaid mortgage as a “matured secured claim.” This would mean that the lender gives up the right to foreclose on the property, at least without specific permission from either the court or the estate’s administrator. However, the lender can still claim a deficiency against the estate if the property’s value isn’t enough to cover the debt.
The second option is to treat the unpaid mortgage as a “preferred debt and lien.” This allows the lender to go ahead with foreclosure to recover the debt. The downside for the lender is that they can only look to the property itself for repayment and cannot claim any deficiency against the deceased person’s broader estate. Most lenders choose this option because it allows them to directly recover their money by selling the property.
Before probate begins, it’s up to the lender to find out if the borrower has passed away. This can be particularly challenging with certain types of loans where the lender doesn’t maintain close contact with the borrower. One way lenders might verify if the borrower has passed away is by checking the Social Security Administration’s Death Master File, although this method is not entirely reliable.
Foreclosing on Inherited Property After Probate
That brings us back to this case. In this case, the probate case appears to have been closed. The daughter made payments on the mortgage for the property for nearly a decade. Thus, the lender was able to proceed with a foreclosure as in any other case.
In this specific situation, the lender followed a clearly outlined process to initiate foreclosure proceedings, abiding by both the terms of the Loan Agreement and the Texas Property Code. First, the lender identified that the Loan Agreement was in default, with payments overdue beginning from the July 1, 2021, installment.
Subsequently, on February 3, 2022, a Notice of Default was sent to the Decedent’s address via certified mail. This notice is a crucial step as it formally alerts the property owner to the default situation and outlines the steps necessary to rectify it. The Notice of Default specified that to cure the default, the entire total amount past due, along with any amount due in the interim, must be received by March 10, 2022.
The notice also warned that failure to cure the default by the specified date would lead to the acceleration of the sums secured by the Security Instrument. Acceleration means that the entire outstanding balance becomes immediately due and payable. Moreover, the notice clarified that non-compliance would result in the sale of the property to recover the debt.
By adhering to these steps, the lender ensured they were in full compliance with legal requirements, thereby enabling them to proceed with foreclosure proceedings in a manner that minimizes legal risks. This is particularly important when dealing with properties that have gone through or are going through the probate process, as failure to adhere to legal norms could result in complications and potential legal challenges.
The Takeaway
This case provides an opportunity to consider how the foreclosure process works when there is a probate. Merely inheriting a property doesn’t absolve one from the responsibility of maintaining mortgage payments. On the lender’s side, there are additional steps to take when there is an open probate case. This requires extra due diligence for the lender. It also imposes notice requirements for the executor or administrator of the estate. After the probate case is closed, the foreclosure process generally follows the same method as property outside of the probate process.
Do you need help with a probate matter in San Antonio or the surrounding area? We are San Antonio probate attorneys. We help clients navigate the probate process. Call today for a free confidential consultation, (210) 239-8518.
Our San Antonio Probate Attorneys provide a full range of probate services to our clients, including helping with probate disputes. Affordable rates, fixed fees, and payment plans are available. We provide step-by-step instructions, guidance, checklists, and more for completing the probate process. We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.
Disclaimer
The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.
