Foreclosing on Secured Collateral

Collections Training Resource
June 29, 2012 — 1,141 views  
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Upon entering a credit or loan agreement, lenders often require the borrower to pledge the property as collateral to secure the loan. It acts as security for the lender to ensure the obligated debt is paid and is therefore referred to as secured collateral. According to a paper titled "Foreclosure of Security Interests in Personal Property" by the University of Minnesota, the borrower must default on their obligation before ever entering the foreclosure process. The Uniform Commercial Code (UCC) contains no set definition of default, but allows it to be defined by the two parties involved. Consequently, every lending agreement will typically have a broad definition.

 

Once a default has occurred under the terms of the loan agreement, a lender may begin to seek compensation.  Here are a few of the steps that may need to be taken:

 

Identify collateral

Once a bank has taken physical possession of the property, it will need to confirm that all affairs are in order. Any previous tenants must be evicted in accordance with state and federal laws. Then the lender will need to evaluate and make a note of all components of the property, including but not restricted to garages, extensions or on-site features.

 

Evaluate the physical condition of collateral

It is considered smart practice to hire a professional housing inspector to come into the home and conduct a thorough evaluation of the condition of the property. Very often the previous tenants of a foreclosed home were unable to afford maintenance costs and would have let the property fall into disrepair.

 

Determine the condition of the title

Lender lawyers and foreclosure process professionals will work to ensure that all documentation, including the title of the property, is up-to-date and authentic. Before a property can be placed on the market for sale, the paperwork must be in order.

 

Appraise collateral

Hire a real estate professional that is knowledgeable about property values in the area of the secured collateral. He or she will determine the worth of the house upon evaluating the space, materials used and the desirability of the location.

 

Protect the asset

Once a bank has claimed the property, it will need to hire a property management company as well as file a new ordinance to notify all necessary parties, such as the town and federal agencies, according to business law firm Much Shelist. Securing the safety of the home against vandals and thieves will help ensure the property receives a better sale price.

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