What Is a Foreclosure Trustee?

When a mortgage lender forecloses on your home, they need to follow certain procedures that are determined by state law. Generally speaking, there are two types of foreclosures: judicial foreclosures and nonjudicial foreclosures. Although some states only allow judicial foreclosures, most states allow both.

When a borrower defaults on their home loan and a nonjudicial foreclosure is used, a foreclosure trustee is appointed to oversee the foreclosure process. In this article, we’ll explain the foreclosure trustee’s role in the foreclosure process and who can legally be a trustee.

The Foreclosure Trustee

Foreclosure trustees are appointed to move a nonjudicial foreclosure process forward. They’re not used in judicial foreclosures because judges oversee those foreclosures. Foreclosure trustees are usually appointed by your mortgage lender and often have some sort of connection with your lender. Depending on state law, trustees can be individuals, banks, or title companies.

To best understand what the foreclosure trustee’s role is in the foreclosure process, it’s important to be aware of the documents you signed when you took ownership of the property.

Important Documents Involved in a Foreclosure

Unlike other purchases, real estate transactions require specific documents to transfer property to a new owner. If you bought a home as a borrower (using a home loan), you had to sign the following two documents: a promissory note and a security instrument.

A promissory note is a document that creates the mortgage agreement between the borrower and the loan servicer, which is a mortgage company. Basically, it’s a legal agreement specific to real estate. It will include the amount of money borrowed - called the principal - the interest rate of the loan, and the term (length) of the loan. The two most common term lengths are 15 years and 30 years. The promissory note is the contract that creates a borrower’s obligation to pay the money back.

The second document can be either a mortgage or a deed of trust. Both of these documents do the same thing: they give your lender the right to take the home back if you default on your loan. This is called a security document because it secures the loan with the house.

In the case of a mortgage, the agreement is between you and the lender. In the case of a deed of trust, the agreement is between you, your lender, and a trustee. The trustee will hold the deed to the house until you’ve paid back the mortgage loan in full. The trustee's deed is what gives the trustee the ability to proceed with a foreclosure. The trustee becomes the foreclosure trustee if you default on the loan.

Judicial vs. Nonjudicial Foreclosures

Judicial foreclosures require the mortgage lender to file a lawsuit against the homeowner. The process is overseen by a judge. The lender has to give notice of the lawsuit to the homeowner and then prove to the judge in court that the homeowner has defaulted on their loan. This is how the lender can exercise the power of sale clause in the mortgage. This clause lets the mortgage lender repossess the house and sell it to the highest bidder through a foreclosure sale.

No foreclosure trustee is involved in a judicial foreclosure. Judicial foreclosures are usually seen as better for homeowners because they provide the homeowner with more legal protections.

The following states only allow judicial foreclosures: Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, South Carolina, and Vermont.

Nonjudicial Foreclosures

Nonjudicial foreclosures are sometimes called trustee foreclosures since they’re overseen by a trustee instead of a judge in court. Usually, the trustee issues a notice of default and of the foreclosure to alert the homeowner of the pending foreclosure sale. State law outlines how much notice they are required to give. 

The following states only allow nonjudicial foreclosures: Michigan, New Hampshire, Tennessee, Utah, Washington D.C., and West Virginia. 

Many states allow both nonjudicial and judicial foreclosures, including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Iowa, Minnesota, Mississippi, Missouri, Montana, Nevada, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Texas, Virginia, Washington, Wisconsin, and Wyoming.

In states where both are allowed, deeds of trusts are usually the most popular choice of security instrument because they provide for a nonjudicial foreclosure. Nonjudicial foreclosures are usually better for lenders because they give the lender more power in the foreclosure process and allow them to choose the foreclosure trustee. Lenders usually don't want to go through a judicial foreclosure because it costs more money and increases uncertainty for them.

Foreclosure Sales

All foreclosures conclude with a foreclosure sale, often called a foreclosure auction or a trustee's sale, in nonjudicial foreclosures. This is a public auction where successful bidders must bid with either cash or a cashier's check. The foreclosure trustee is charged with selling the foreclosed property at the trustee's sale. To open this auction, the trustee will usually place an opening bid, called a credit bid. If the home doesn't sell, the home will become real estate-owned property (REO). 

Who Can Be a Foreclosure Trustee?

Who can legally be a foreclosure trustee depends on a particular state's laws. Most commonly, trustees are attorneys, banks, or title companies. Some trustees serve as trustees until there is a default and the bank wants to move forward with a foreclosure. Then, a new foreclosure trustee is assigned and a notice of trustee is given to the homeowner containing the foreclosure trustee's contact information.

Foreclosure trustees are supposed to be neutral. But as noted above, the mortgage lender gets to choose the trustee. In these situations, the trustee usually has a financial interest in pleasing the mortgage lender since they make money by doing business with the lender. This can seriously impact how the trustee behaves toward homeowners in the process. If they want future business from mortgage lenders, they’re much more likely to do whatever they can to make sure the foreclosure sale benefits the lender, which is often worse for the homeowner.

Although this may be unfair, there is no real conflict of interest rule that governs the appointment of foreclosure trustees, except in the state of North Carolina. Under a new law in North Carolina, an attorney can't serve as the trustee in a foreclosure proceeding if they're also assisting the lender with the foreclosure. This would seem to be an obvious forbidden conflict, but only North Carolina has made it illegal. It’s currently unknown what kind of impact this law will have on North Carolina, but many other states will be watching.

Foreclosure Trustees Must Follow State Foreclosure Laws

Regardless of their interests, foreclosure trustees still need to follow the law, including when a home is in pre-foreclosure. For example, they’re required to provide you a notice of default on your mortgage and a notice of sale, which needs to include the foreclosure sale date and time. 

They also have to respect your right to cure the default, which is your right to reinstate the mortgage if you pay back all of your missing mortgage payments. The right of reinstatement doesn't last forever, but if you decide to cure the default, the trustee must accept those payments up until a deadline that is defined by state law.

Let’s Summarize…

Foreclosure trustees are an interesting part of nonjudicial foreclosures. They’re supposed to be neutral parties, but they’re often incentivized to favor mortgage lenders over homeowners.

Unfortunately, there isn’t much you can do about who the foreclosure trustee is, but they still need to follow the law. If you’re trying to avoid foreclosure, remember that it’s the trustee who typically accepts cure payments up until a certain deadline dictated by state law. They must accept these payments and follow the law.

If you believe the trustee is not acting fairly, you should get a referral for a foreclosure attorney. A foreclosure attorney can help you navigate the process, and help you avoid a deficiency judgment or the foreclosure altogether depending on your goals.