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FORECLOSURE OF REAL ESTATE MORTGAGE

If the principal obligation becomes due and the debtor defaults, the creditor, as mortgagee, may elect to foreclose the collateral.
Foreclosure of a real estate mortgage may be judicial or extrajudicial.
JUDICIAL FORECLOSURE
EXTRAJUDICIAL FORECLOSURE
Complaint for Foreclosure
A. Special Powers
A judicial foreclosure is initiated by a complaint. The complaint must contain:

The law recognizes the right of a mortgagee to foreclose a real estate mortgage upon the
1) Date and due execution of mortgage
mortgagors failure to pay his obligation, but it is imperative that such right be exercised
2) Assignments, if any
according to its clear mandate. The requirements of the law must be complied with;
3) Names and residences of the mortgagors and the
otherwise the valid exercise of the right ends.
4) mortgagee

Thus, a real estate mortgage may extra judicially foreclosed only if there is a special power
5) Description of mortgaged property
inserted or attached to the document in which the real estate mortgage appears and only in
6) Date of note or other documentary evidence regarding the
accordance with the provisions of Act No. 3135. This power to foreclose is not an ordinary
7) mortgage
agency that contemplates exclusively the representation of the principal by the agent. It is
8) Unpaid amount
primarily an authority conferred upon the mortgagee for its own protection. It is ancillary
9) Names and residences of all persons having or claiming an
stipulation supported by the same consideration for the mortgage and forms an essential
10) interest in the property with subordinate right to the
and inseparable part of it.
11) mortgagor.

The SPA is not a pactum commissorium. It is a special power required to extra judicially
foreclose.
Judgment on Foreclosure
B. Foreclosure Sale
If upon the trial in such action the court shall find the facts set forth in the complaint to be
true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, Requirement of Notice:
including interest and other charges as approved by the court, and costs, and shall render
Its object is to inform the public of the nature and condition of the collateral to be sold (and
judgment for the sum so found due and order that the same be paid to the court or to the
the time, place and terms of the sale). Its given for the purpose of securing bidders and to
judgment obligee within a period of not less than ninety (90) days nor more than one
prevent a sacrifice of the collateral.
hundred twenty (120) days from the entry of judgment, and that in default of such payment
the property shall be sold at public auction to satisfy the judgment.
GR: Under normal circumstances, statutory provisions governing posting of notice of
Summary: If court sees that its true, it shall ascertain the amount due to plaintiff and order
REM foreclosure sales must be strictly complied with. Even slight deviations will
invalidate the notice and render the sale voidable.
the sum to be paid to the court or to the judgment oblige within 90 to 120 days from the
Examples:
entry of judgment. In default, property shall be sold at public auction to satisfy judgment.
o If the sheriff sells the collateral without the required notice, and induced by the
mortgagee, and the purchaser is the mortgagee, the sale is absolutely void and no
title passes
o If mistakes or omissions occur in the notice of sale, calculated to deter or mislead
bidders, to depreciate the value of the property, or to prevent it from bringing a
fair price, such mistakes will be fatal to the validity of the notice and the
consequent foreclosure sale

A.

B.

XPN: If the objectives are attained, immaterial errors and mistakes may not affect the
sufficiency of the notice.
Examples:
o If what is lacking is the posting in three public places, not the publication in a
newspaper of general circulation, and considering the attendant circumstances,
the publication of the notice of sale in a newspaper general circulation alone has
been held to be more than sufficient compliance with the notice-posting
requirement of the law, specifically if the objectives are attained and there is no
showing that the collateral was sold for a price far below its value to insinuate
any bad faith, nor that there was collusion.

There is a greater probability that a notice published in a newspaper of general


circulation, which is distributed nationwide, shall be read by more people than a
notice posted in a public bulletin board, no matter how strategic its location.

Conduct of Sale:
How:
By public auction, with the supervision of the sheriff, justice/auxillary justice of
municipality, or notary public.
When:
Between 9 AM and 4 PM
Where:
GR: In the province in which the real property is situated
XPN: When the place within said province is subject of stipulation, sale shall be made
in the place in the municipal building of the municipality in which the property or part
thereof is situated
Conducted by whom:
1. Sheriff of the province;
2. Justice or auxiliary justice of the peace of the municipality in which such sale has to
be made;
3. Notary public of said municipality entitled to a fee of P5 each day, in addition to
his expenses
Who may participate:
GR: (they are in the same condition as any other bidder)
1. Creditor
2. Trustee
3. Other persons authorized to act for the creditor (agent)
XPN: Contrary has been expressly provided in the mortgage or trust deed
How Conducted:
1. Bidding: Through sealed bids, submitted to the Sheriff. In case of a tie, open
bidding shall be conducted between the highest bidders.
2. Payment: In cash or in managers check (in Philippine currency), within 5 days
from notice.
3. Fees: Collected by the Clerk of Court, NON-REFUNDABLE (even if property
subsequently redeemed).
4. Report: Sheriff or notary public shall report name/s of the bidder/s to the Clerk of
Court.
5. Certificate of Sale: Issued and signed by the Clerk of Court upon presentation of the
appropriate receipts. Subject to approval of the Exec. Judge (in his absence, ViceExecutive Judge).
Bid Price:
The fact that the collateral is sold at an amount less than its market value is not sufficient
justification to annul a sale that was carried out with strict observance of the procedure
prescribed by law and without any irregularity to vitiate it unless the amount is shocking to
the conscience.
C.

Equity of Redemption
The period of grace, or equity redemption, is the right of the mortgagor to extinguish the

C. Right of Redemption

mortgage and retain ownership of the collateral after default in the performance of the
condition of the mortgage but before the foreclosure sale of the collateral, by paying the
mortgage obligation. Under Rule 68, the period is not less than 90 days but no more than
120 days from the entry of judgment.
It is the equity of redemption that is conferred by law on the mortgagors successors-ininterest or on third persons acquiring rights over the collateral from the mortgagor
subsequent and therefore subordinate to the mortgagors lien.
All lien holders acquire the right to subordinate to the superior lien of the first mortgagee.
A decree of foreclosure where junior lien holders are not parties, the equity of redemption
in their favor remains unforeclosed and unaffected. A selarate foreclosure proceeding
should be brought to require them to redeem from the first mortgagee under penalty of
losing the prerogative to redeem.
Mortgagees right to foreclose or assignees rights are defeated.

The right acquired by a purchaser of collateral at an extra judicial foreclosure sale is merely
inchoate. Ownership of the collateral remains in the mortgagor until the expiration of the
period granted by law for the exercise of a right of redemption. It is only upon the
expiration of the redemption period without the mortgagor having exercised the right of
redemption, that the ownership of the collateral sold becomes consolidated in the
purchaser.
General Rule: When REM is extra judicially foreclosed, Act No. 3135 grants the mortgagor the
right of redemption within one year from the date of registration of the certificate of foreclosure
sale.
XPN: Sec. 47 of RA No. 8791, or the General Banking Law of 2000, provides that when a REM
is extrajudically foreclosed, juridical mortgagors are granted the right to redeem until, but not
later than, the registration of the certificate of foreclosure sale, which in no case shall be more
than 3 months after foreclosure.

The difference of treatment between natural and juridical persons was based on the nature
of the properties foreclosed whether these are used for residence, in which case the oneyear redemption period applies, or used for industrial or commercial purposes, in which
case a shorter term is deemed necessary to allow mortgagees (usually banks) to dispose of
these acquired assets as soon as possible and reduce the period of uncertainty in the
ownership over such acquired assets.

Who may redeem: 1. Debtors; 2. Successors in interest; 3. Any judicial creditor or


judgment creditor of said debtor; 4. Any person having a lien on the property subsequent to
the mortgage or deed of trust under which the property is sold.
Juridical persons: May redeem until the registration of the certificate of foreclosure sale
(shall not be more than 3 months after foreclosure).
When:
1. Act 3135: 1 year from date of registration of certificate of sale
2. RA 8791: After the foreclosure or before registration of certificate of foreclosure,
whichever is earlier (which shall not exceed 3 months) bank must be the mortgagee
How: Rules of Court, Secs. 27-33.
How to determine if a right of redemption exists?
1. Identify the law that allows the right of redemption.
2. Apply its provisions to the specific case.

Who May Redeem:


GR: The mortgagor has the right to redeem the collateral sold at an extrajudicial
foreclosure sale.
XPN: But parties who acquire a right to collateral under certain conditions are also
granted the right to redeem.
1. Successor in interest: includes, but not limited to:
a. One to whom the mortgagor has transferred the statutory right of
redemption;
b. One to whom the mortgagor has conveyed its interest in the collateral for
the purpose of redemption;
c. One who succeeds to the interest of the mortgagor by operation of law;
d. One or more joint debtor-mortgagors who were joint owners of the

collateral sold
Note: A surety CANNOT redeem the collateral of the debtor-mortgagor
because the surety, by paying the debt of the debtor-mortgagor, stands in the
place
of the creditor, not the debtor-mortgagor, and consequently is NOT a
successor in interest in the collateral.
2. Redemptioner is a creditor of the mortgagor with a lien on the collateral subsequent
to the lien was the basis of the foreclosure sale (said creditor is called a junior
encumbrancer) (example: second mortgagee).

If the lien of the creditor is PRIOR to the lien under which the collateral was sold
(senior encumbrancer as, for example, a senior mortgagee), it is NOT a redemptioner
and cannot redeem but said senior encumbrancer is fully protected, since any
purchaser at the foreclosure sale of the collateral takes the property subject to such
prior lien (mortgage follows the property), which must first be satisfied. Unlike a
mortgagor, a redemptioner must PROVE its right to redeem by producing the
documents required by Rule 39.

How to Redeem:
Requisites for a valid redemption:
1. The redemption must be made within 12 months from the date of registration of the
sale in the Office of the Register of Deeds
2. Payment of the purchase price of the collateral involved, plus 1% interest per
month, together with the amount of any assessments or taxes if any, paid by the
purchaser after the sale with the same rate of interest. Under RA 8791, Art. III, Sec.
47, the right to redeem is exercised by paying the amount due under the mortgage
deed (not the purchase price, as above indicated).
3. Written notice of the redemption must be served on the officer who made the sale
and a duplicate filed with the Register of Deeds of the province.
GR: Not sufficient that a person offering to redeem manifests its desire to do so; actual
and simultaneous tender of payment must accompany the statement of intention
o Bona fide redemption necessarily implies a reasonable and valid
tender of the entire redemption price; otherwise, rule on the
redemption period may easily be circumvented.
XPN: But filing of a judicial action, made simultaneously with the deposit of the
redemption price, within the redemption period, may be necessary to preserve the
right of redemption for future enforcement even beyond such period
o Filing of a complaint to enforce redemption, within the
redemption period, is equivalent to an offer to redeem and has the
effect of preserving the right of redemption.
o Nothing in the law prohibits piecemeal redemption of collateral
sold at a foreclosure (Yap v. Dy, et al.).
D.

Foreclosure Sale

D. Right to Deficiency

E.

Under Sec. 3 Rule 68, the acceptance of a bid at the foreclosure sale confers no title to
the purchaser. Until the court has validly confirmed the foreclosure sale, the purchaser
is nothing more than a preferred bidder.
Title vests only when the court has validly confirmed the foreclosure sale. It is the
confirmation by the court of the foreclosure sale that divests the mortgagor of his
rights to the collateral and vests such rights in the purchaser at the foreclosure sale.
A foreclosure sale is not complete until it is confirmed and before confirmation, the
court retains control of the proceedings. Thus after the foreclosure but before its
confirmation, the court may grant the judgment debtor or mortgagor the equity of
redemption that is an opportunity to pay an amount equal to the proceeds of the sale,
and thus refrain from confirming the sale.
In order that the court may validly confirm a foreclosure sale, it is necessary that a
motion is filed and a hearing is given the interested parties to show cause why the sale
should not be confirmed. The mortgagor should be notified of the hearing and lack of
notice vitiates the confirmation of the sale. Notice and hearing of a motion for
confirmation of sale are essential to the validity of the order of confirmation not only
to enable the interested parties to resist the motion but also to inform them of the time
when the equity of redemption was cut off. The mortgagor may still exercise the
equity of redemption over the collateral after the rendition of a void order confirming
the sale.
Nevertheless, the failure to obtain a judicial confirmation of the sale only prevents the
title to the property from being transferred to the purchaser, but it does not give rise to
any right in favor of the mortgagor or successor in interest to take back the property
already validly sold through public auction. Nor does such failure invalidate the
foreclosure proceedings. To maintain otherwise would render nugatory the judicial
foreclosure and foreclosure sale thus unduly disturbing judicial stability.

Right of Redemption
A foreclosure sale, when confirmed by an order of the court divests the mortgagor of his
rights to the collateral, and vests such rights in the purchaser at the foreclosure sale subject
to the right of redemption under the law.
It is a principle well established that the right of redemption is a statutory right and does not
exist in the absence of the statute. The references in Rule 68 and Rule 39 to the right of
redemption are not grants of this statutory prerogative.
To claim a right of redemption in judicial foreclosure, there must be a specific law that
exceptionally allows it. For example, R.A. No. 8791, or the General Banking Law of 2000,
provides that in a judicial foreclosure by a bank, quasi-bank or trust entity, the mortgagor
shall have the right within one year after the sale of the collateral to redeem the property by

While Act 3135 does not specifically provide for a mortgagees right to recover the
deficiency from the application of the proceeds of the foreclosure sale, the said law ALSO
does NOT prohibit it.

The mortgagees recovery of the deficiency is supported by the principle that a real estate
mortgage is a security transaction and not a satisfaction of indebtedness of the debtor. The
REM does not in, in any way, limit nor minimize the amount of the principal obligation, as
its only function is to secure its fulfillment. Hence, the creditor-mortgagee may proceed
against the debtor-mortgagor in a proper action to recover such deficiency. By filing a
complaint for the collection of a sum of money. The creditor-mortgagee must be able to
prove the basis for the deficiency judgment that it seeks. The right to recovery of the
deficiency only arises when the proceeds are determined to be insufficient to cover the
obligation and other costs of the sale.

Hence, the amount of the obligation prior to the foreclosure and the proceeds of the
foreclosure are important in enforcing a claim for the deficiency.

The exception to the rule that the creditor-mortgagee may recover the deficiency is when
the extrajudicial foreclosure of a mortgage arises out of a settlement of estate. In such a
case, Rule 86 grants three distinct and independent remedies to the creditor-mortgagee.
GR: The creditor-mortgagee, in a separate action, may recover the deficiency from the debtormortgagor when it has been established that the proceeds of the foreclosure sale is insufficient to
pay the amount of the obligation and the other costs of the sale.
XPN: If the extrajudicial foreclosure of mortgage arises out of a settlement of the estate, then
the right to recover the deficiency does NOT apply. However, Rule 86 priovides for three
distinct, independent, and mutually exclusive remedies, which the
mortgagee may pursue, alternatively, to satisfy the principal obligation. These three remedies
are:
1. WAIVE the mortgage and CLAIM the principal obligation from the estate of the
mortgagor as an ORDINARY CLAIM.
2. FORECLOSE the mortgage judicially and prove any deficiency as an ORDINARY
CLAIM.
3. RELY on the mortgages exclusively, EXTRAJUDICIALLY FORECLOSING the
same at any time BEFORE it is barred by prescription, WITHOUT right to file a claim
for any deficiency.
Note: An election of one remedy operates as a waiver of the other, the plain result of
adopting the last mode of extrajudicial foreclosure is that the mortgagee waives its
right to recover any deficiency from the estate.
E. Right to Surplus

Should there be a surplus from the proceeds of the foreclosure sale, the
mortgagee MUST account for them. Note that the application of the
proceeds from the foreclosure sale is an act of payment and does NOT
constitute a dacion en pago. The mortgagees right to foreclosure
extends only up to the amount of the principal obligation, and, hence, he
cannot keep the excess. To sanction the mortgagee to keep the expense,
he would have been to allow unjust enrichment. The surplus stands in
the place of the collateral itself. It belongs to the mortgagor, and may be
constructively considered as real property. This right of the mortgagor
over the surplus is substantial right that will not be defeated by rules of

paying the amount due under the mortgage deed, with interest at the rate specified in the
mortgage and all the costs and expenses incurred by the bank or institution from the sale
and custody of said property less the income derived therefrom.

F.

Right of Surplus or Deficiency


The mortgagor is entitled to the surplus, if there be any after the payment of the proceeds of
the sale in accordance with Section 4.
On the other hand, the mortgagee is entitled to a deficiency judgment in the same
proceeding for judicial foreclosure in accordance with Section 6.
The right to recover the deficiency extends to the judicial foreclosure of mortgage arising
out of a settlement estate. In such a case, Rule 86 grants to the mortgagee three distinct,
independent and mutually exclusive remedies that can be alternatively pursued by the
mortgagee for the satisfaction of the principal obligation:
(1) Waive the mortgage and claim the principal obligation from the estate of the
mortgagor as an ordinary claim;
(2) Foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and
(3) Rely on the mortgage exclusively, extra judicially foreclosing the same at any time
before it is barred by prescription without right to file a claim for any deficiency.

technicality.
The surplus gains importance in cases where there are junior
encumbrancers (ex, subsequent mortgagees). The surplus is applied to
the subsequent mortgages in the order of their priority. A second
mortgagees right not only includes redemption but the right to apply, to
the payment of its credit, the surplus from the foreclosure sale.
In effect, a junior mortgagees lien on the collateral is transferred to the
surplus; in turn, the senior mortgagee is considered are a trustee for the
benefit of the junior Encumbrancers. Even if the mortgagee retains the
surplus, such will not affect the validity of the sale but only gives the
mortgagor a cause of action for the recovery of the surplus.

GR: Payment of purchase price is to the sheriff.


XPN: Payment to the mortgagee (only the amount of the mortgage), then
pay the surplus to the sheriff.
F. Right to Possession
During Redemption Period:

Right to possession should be granted to the purchaser. Sec. 7 of Act 3135 directs the
issuance of a writ of possession in favor of the purchaser that seeks possession of the
foreclosed collateral during the redemption period. In issuing this writ, there is no
discretion left on the part of the court; any question regarding the validity and regularity of
the sale must be ventilated in a subsequent proceeding. This writ is issued in an ex-parte
proceeding, involving only the purchaser, without need for notice to or consent from any
person who is adversely interested (ex. mortgagor).

Sec. 8 provides that the plain, speedy and adequate remedy in opposing the issuance of
such a writ. A party may file a petition to set aside the foreclosure sale and to cancel the
writ of possession. This may be filed in the Court which issued the writ of possession.

However, if the appeal interposed was from an order granting the issuance of the writ, then
the order shall continue to be in effect during the pendency of the appeal.
After Consolidation of Ownership:

If the purchaser is entitled to the possession of the foreclosed collateral, then it is all the
more reason that such possession be granted to the purchaser once ownership has been
consolidated in his favor.

Sec. 7 of Act 3135 again provides for the issuance of such a writ. At this point however,
there is no need to file a bond and have it approved, as the writ of possession shall be
issued as a matter of course and as a matter of right. Such issuance by the Court is merely a
ministerial function and may be compelled through mandamus. Once possession is secured,
the purchasers unassailable right to possession is now founded on the right of ownership.
Inchoate right is now ripened into full ownership
Exceptions: When Held by a Third Party
GR: In extrajudicial foreclosures, possession of the collateral may be awarded to the purchaser
during the redemption period, or after its lapse, without the need of a separate and independent
action.
XPN: Such rule will not apply where a third party holds/possesses the collateral adversely to the

debtor-mortgagor. Sec. 16 of Rule 39 provides two remedies to a third party who holds the
foreclosed property adversely against the debtor mortgagor:
1. Terceria, in order to determine whether the sheriff has rightly or wrongly taken hold
of a property not belonging to the mortgagor. This action is filed against the sheriff or
officer effecting the writ, by serving on him an affidavit of title with a copy to the
purchaser. By this action, the sheriff/officer is not bound to keep the collateral and
could be held liable for damages if he does.
2. An independent and separate action to vindicate its claim of ownership or
possession over the collateral, filed before a forum of competent jurisdiction, even
before or without filing a claim in the court that issued the writ of possession. The
object of this action is the recovery of ownership and/or possession of the collateral
seized by the sheriff or officer who effected the writ of possession.

These remedies can be exercised cumulatively; they can be availed of, independently or
separately from each other. If the property is held by a third party, there must be a separate
action.