The typical foreclosure will not result in an amount above and beyond that which is owed to the lender, and the defaulted borrower may be on the hook for the deficiency. New laws allow the deficiency of the borrowers to be limited to the difference between the amount of the sale and fair market value, not the amount of the loan. It is in deficiency situations that the recommendation is to negotiate a short sale with the lender, which will release the borrower from a deficiency. However, in some situations, such as a long term loan which is mostly paid off or a foreclosing junior lien, there may be funds left over from the sale, which under the typical deed of trust must be returned to the defaulted borrower.
The primary document which by Texas law governs foreclosures and the distribution of funds by a trustee or substitute trustee is the deed of trust. In the standard deed of trust the funds obtained from a foreclosure sale are to be distributed first to cover the costs of foreclosure and the trustee’s fees. The fees are required to be reasonable, which means the trustee should have a reasonable fee policy and should have documented all actions undertaken in the foreclosure process. There are no supreme court cases or laws regulating the reasonableness of trustee fees, however, one case has rejected a 10% fee because the trustee failed to properly account for the work performed. Another case permitted a 5% fee as reasonable, so the assumption is that a fee should be between 5% and 10% and the services performed should be well documented to be permissible.
Next the deed of trust should require the repayment of the foreclosed loan. There are no legal requirements for notification of either junior or senior lien holders, however, most trustees will probably notify junior lien holders at least, so that a future claim against the trustee does not materialize, for collusion with the foreclosing lender, for example. The trustee may pay off the junior liens on its own, in order of priority. If a conflict exists between junior lenders regarding priority, the trustee will likely interplead the funds into the registry of a court, and allow a judge to decide to whom the money belongs, and in what order. Strong case law dictates the trustee may not pay off senior liens without the permission of the defaulted borrower. There is no reason to do so, since the prior lien is still attached to the property, and the borrower is still on the hook for it.
Finally, the left over funds, after paying the junior liens should be distributed to the defaulted borrower. This process typically takes some months to work through the banking and trustee/attorney web of intrigue and indifference. Demands and communications with the trustee should be made early and frequently, with all demands sent certified mail and calls well documented, in order to prod them to conclude the process of returning the funds. Typically, litigation should not be required, because the case will probably never make it to trial, and result in needless legal expenses. The law in this area is relatively well settled, and only in rare cases will a dispute result in a prolonged court battle. Typically, in case of a dispute between claimants, such as multiple defaulted borrowers each claiming a share, the trustee will simply interplead the funds and let a court decide who gets paid what.
