In Texas, most foreclosures are conducted by the trustee under a deed of trust without the involvement of a court. However, many types of loans require the use of special procedures involving the Texas court system. This article seeks to summarize these various types of loans and provide citations to the relevant laws governing the methods employed in foreclosing on such special loan types.
Terminology for the Major Three Types of Foreclosure Sales. In Texas, “nonjudicial sale” means a foreclosure auction that occurs without any court involvement. The term “quasi-judicial” generally means a foreclosure auction that occurs with limited court involvement by use of the court procedures in Rules 735 and 736 of the Texas Rules of Civil Procedure. The term “judicial sale” generally means a regular lawsuit, usually in a district court, wherein the plaintiff/mortgagee asks the court to authorize and supervise a foreclosure auction. Non-judicial sales are the easiest and fastest. Quasi-judicial sales are slower and do involve a court order, however, the procedures for getting the court order are relatively simple and fast. Also, in a quasi-judicial foreclosure, the issues that the court can determine are strictly limited and the court must follow strict timelines in making the court’s decision. Judicial sales involve a regular lawsuit, which means that, unless the defendants default by failing to file a written answer, the lawsuit must be set for trial, which will likely take several months or even years.
Property Tax Loans
Under Section 32.065(c) of the Texas Tax Code, private property tax lenders are “prohibited from exercising a remedy of foreclosure or judicial sale where the transferring taxing unit would be prohibited from foreclosure or judicial sale.” Accordingly, private property tax lenders must follow the same judicial procedures that the taxing municipalities must follow in order to foreclose on a private property tax loan.
The Type of Foreclosure for a Property Tax Lien Changes Depending on the Date that the Loan was Originated. Property tax loans originated after May 29th, 2013 can no longer be foreclosed by quasi-judicial procedures under rules 735 and 736 of the Texas Rules of Civil Procedure because Senate Bill 247 (SB 247) of the 83rd Regular Legislative Session amended Section 32.06(c) of the Texas Tax Code to take out the parts authorizing quasi-judicial sales, which has the effect of limiting private property tax lenders to the same judicial foreclosure procedures that the taxing municipalities must follow. A copy of SB 247 can be found here.
Before September 1st, 2007, Section 32.06(c) of the Texas Tax Code provided that property tax lenders were “entitled to foreclose the lien . . . in the manner specified in Section 51.002, Property Code, and Section 32.065 of [the Tax Code].” Section 51.002 of the Texas Property Code is the section governing regular, nonjudicial trustee’s sales. Section 32.065 of the Tax Code contains various provisions related to tax lien foreclosures. So, private tax loans originated before September 1st of 2007 could be foreclosed nonjudicially.
Senate Bill 1520 (SB 1520), of the 80th Regular Session of the Texas Legislature, available here, went into effect on September 1st. 2007. Under SB 1520, Section 32.06(c) of the Texas Tax Code changed to say that property tax lenders were “entitled to foreclose the lien . . . in the manner specified in Section 51.002, Property Code, and Section 32.065 of [the Tax Code], after the transferee or a successor in interest obtains a court order for foreclosure under Rule 736, Texas Rules of Civil Procedure.” (emphasis added) Additionally, Section (c-1) was added to Texas Tax Code § 32.06 by SB 1520 to provide a few extra requirements on property tax lien foreclosures under Rule 736 that did not apply to home equity loans.
So, accordingly, from September 1st of 2007 to May 29th of 2013, private tax liens originated during that timeframe could be foreclosed quasi-judicially through the expedited judicial foreclosure process in Rules 735 and 736 of the Texas Rules of Civil Procedure. Private tax loans originated before September 1st of 2007 could be foreclosed nonjudicially.
The current procedures for foreclosing on a property tax lien are too complex and voluminous to explain in this article. Much of the time, private property tax lenders just wait for the taxing authorities to start the foreclosure process and then file a petition in intervention in the judicial foreclosure tax suit filed by the municipalities’ law firm. The private tax lenders then let the government’s law firm handle the details of the foreclosure sale. For a private tax lender to foreclose, they must follow the same procedures that the municipalities must follow.
Home Equity Loans
A home equity loan occurs when the borrower uses the borrower’s equity in the house (the difference between the value of the house and amounts owed on liens) to borrow cash as opposed to borrowing purchase money or funds necessary to refinance existing liens. Home equity loans were illegal in Texas until 1997. Home equity loans may not be foreclosed without a court order. See Tex. Const. art. XVI § 50(a)(6)(D). Under Tex. Const. art. XVI § 50(r), the Texas Supreme Court has been charged to “promulgate rules of civil procedure for expedited foreclosure proceedings related to foreclosure of liens . . . that require a court order.” The Texas Supreme Court did so with the promulgation of Rules 735 and 736 of the Texas Rules of Civil Procedure. The forms created by the Texas Supreme Court can be found here: http://www.txcourts.gov/rules-forms/forms/
Reverse Mortgages
Under Tex. Const. art. XVI § 50(r), the Texas Supreme Court has been charged with promulgating rules for foreclosure of both home equity loans and reverse mortgages. The Texas Supreme Court has promulgated the same rules for both, being Rules 735 and 736 of the Texas Rules of Civil Procedure.
Homeowner’s Association Liens aka Property Owner’s Association Liens
Homeowner’s association liens (aka “HOA Liens”) cannot be foreclosed without a court order. Tex. Prop. Code § 209.0092(a) (Judicial Foreclosure Required). If the declarations create the authority for the association to exercise a power of sale, then the expedited foreclosure process under Rule 736 of the Texas Rules of Civil Procedure can be used. See id. Texas Property Code section 209.0092(a) is not written very clearly, but when read in context with subsections (d) and (e) seems to suggest that a power of sale must be in the dedicatory instruments in order to utilize the expedited quasi-judicial sale procedures of Tex. R. Civ. P. 736. Otherwise, the lien should be foreclosed by traditional judicial foreclosure. See Tex. Prop. Code § 209.0092(e). Most of the rules governing foreclosure of a Property Owners Association (POA) lien can be found in Title 11, Chapter 209 of the Texas Property Code, also known as the Texas Residential Property Owners Protection Act. Describing all of the procedures and requirements for foreclosure of a homeowner’s association lien under the Texas Residential Property Owners Protection Act (the POP Act), and other provisions of Title 11 of the Texas Property Code, goes beyond the scope of this article. A few important takeaways, however, include that:
(1) Foreclosure sale is prohibited if the debt securing the lien consists solely of “fines assessed by the association, attorney’s fees incurred by the association solely associated with fines assessed by the association, or amounts added to the owner’s account as an assessment under Texas Property Code Section 209.005(i) or 209.0057(b-4).” Tex. Prop. Code § 209.009;
(2) Even though Tex. Prop. Code § 204.010(a)(10) allows a homeowner’s association to “impose interest” and “late charges,” the remedy of foreclosure is not available for interest or late charges if interest and late charges are not referenced in the deed restrictions. Brooks v. Northglen Ass’n, 141 S.W.3d 158, 171 (Tex. 2004); and
(3) When a trustee conducts a nonjudicial foreclosure sale pursuant to a deed of trust, the trustee and lienholder typically have no obligation to notify junior lienholders, however, property owner’s associations do have a statutory duty to notify junior lienholders. Tex. Prop. Code § 209.0091.
Homesteads and HOA Liens. Homeowner’s association liens can be foreclosed against a homestead so long as the lien arises from dedicatory instruments on file at the time that the homeowner acquired the property. Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 636 (Tex. 1987).
Condominium Association Liens
Unlike homeowner’s association liens, condominium liens can be foreclosed nonjudicially by trustee’s sale. Tex. Prop. Code § 82.113(d), (e). Condominium associations have greater statutory protections than homeowner’s associations because, with condominiums, the shared ownership of the common areas causes a greater need for enforcement of shared maintenance and other obligations. The condominium association rules are found in Title 7, Chapters 81 and 82 of the Texas Property Code. Chapter 82 is the Texas Uniform Condominium Act, while Chapter 81 applies to condominiums created before the adoption of the uniform condominium act (i.e., before January 1, 1994). Usually, the legal description in a condominium deed will refer to the property by a unit or building number rather than by a lot and block number for a subdivision. A condominium must have a declaration filed in the deed records, which typically references either the old Texas Condominium Act, the Texas Uniform Condominium Act, or some form of condominium regime. Tex. Prop. Code § 82.051(a).
The Statutory Condominium Lien. Unlike homeowner’s association liens, condominium liens can arise by statute even when the condominium declaration on file in the deed records fails to create a lien. Tex. Prop. Code § 82.113(a). The statutory lien is broad, defining “assessments” as including regular and special assessments as well as “does, fees, charges, interest, late fees, fines, collection costs, attorney’s fees, and any other amount due to the association by the unit owner or levied against the unit by the association.” Id. The lien encumbers not only the unit, but also any “rents and insurance proceeds received by the unit owner and relating to the owner’s unit.” Id. Condominium associations “may not foreclose a lien for assessments consisting solely of fines.” Id. at (e). The association can bid on the unit at the foreclosure sale as a common expense. Id. at (f).
Statutory Condominium Lien Priority. The statutory condominium lien has priority over any other lien except (1) property taxes, (2) encumbrances recorded before the condominium declaration is recorded, (3) “a first vendor’s lien or first deed of trust lien recorded before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules;” and (4) “unless the declaration provides otherwise, a lien for construction of improvements to the unit or an assignment of the right to insurance proceeds on the unit if the lien or assignment is recorded or duly perfected before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules.” Tex. Prop. Code § 82.113(b). Condominium associations, unlike property owners associations, generally do not have to notify junior lienholders of foreclosure sale, unless the declaration contains such requirement or the lienholder provides a written request for notice pursuant to Tex. Prop. Code § 82.113(h).
| Foreclosure Type Matrix | ||
| Lien Type | Foreclosure Type | Citation |
| Property Tax Loans Originated after May 29th, 2013 | Judicial | Tex. Tax Code § 32.06(c); Senate Bill 247 (SB 247), 83rd Regular Session |
| Property Tax Loans Originated Between September 1st of 2007 and May 29th of 2013 | Quasi-Judicial | Tex. Tax Code § 32.06(c); Senate Bill 1520 (SB 1520), 80th Regular Session |
| Property Tax Loans Originated Before September 1st of 2007 | Nonjudicial | Tex. Tax Code § 32.06(c) prior to SB 1520, 80(R) and SB 247, 83(R) |
| Property Owner’s Association Lien | Quasi-Judicial | Tex. Prop. Code § 209.0092(a) |
| Condominium Association Lien | Nonjudicial | Tex. Prop. Code § 82.113(d), (e) |
| Home Equity Loan | Quasi-Judicial | Tex. Const. art. XVI § 50(r); Tex. Const. art. XVI § 50(a)(6)(D) |
| Reverse Mortgage | Quasi-Judicial | Tex. Const. art. XVI § 50(r); Tex. Const. art. XVI § 50(a)(6)(D) |
Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.
Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.