FORECLOSURE

• A legal proceeding to enforce payment of a debt through the sale of property on

which the creditor holds lien.
• Denotes a procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself.

REPUBLIC ACT 133: AN ACT TO AUTHORIZE THE MORTGAGE OF PRIVATE REAL

PROPERTY IN FAVOR OF ANY INDIVIDUAL, CORPORATION, OR ASSOCIATION
SUBJECT TO CERTAIN CONDITIONS

Section 1. Any provision of law to the contrary notwithstanding, private real property
may be mortgaged in favor of any individual, corporation, or association, but the
mortgagee or his successor in interest, if disqualified to acquire or hold lands of the
public domain in the Philippines, shall not take possession of the mortgaged property
during the existence of the mortgage and shall not take possession of the mortgaged
property except after default and for the sole purpose of foreclosure, receivership,
enforcement or other proceedings and in no case for a period of more than 5 years from
actual possession and shall not bid or take part in any sale of such real property in case
of foreclosure: Provided, that said mortgagee or successor in interest may take
possession of said property after default in accordance with the prescribed judicial
procedures for foreclosure and receivership and in no case exceeding 5 years from
actual possession.

Section 2. All laws, orders, or regulations, or parts thereof inconsistent with the
provisions of this Act, are repealed or modified accordingly.

Section 3. This Act shall take effect upon its approval.

NOTES ON RA 133:
i. You can mortgage to a foreigner. RA 133 sanctions this. Ownership is not
equivalent to mortgage. Nonetheless, he can only institute judicial proceedings
and not extrajudicially foreclose the mortgage. Furthermore, he cannot bid or
take part in the sale of the real property.
ii. The foreigner may not take possession of the property during the mortgage. He
could only possess the same as a lessee.
iii. The foreigner may only take possession of the mortgaged property after default,
and for the sole purpose of foreclosure, enforcement or other proceedings. This
should not exceed the period of 5 years from actual possession.

VALIDITY AND EFFECT OF FORECLOSURE

• The right to foreclose the mortgage and to have the property seized and sold with
a view to applying the proceeds to the payment of the principal obligation.
• A mortgage contract may contain an acceleration clause—on occasion of the
mortgagor’s default, the whole sum remaining unpaid automatically becomes due
and payable.
• Essence of mortgage contract—property has been identified and separated from
a mass of the property of the mortgagor to secure the payment of a principal
obligation.
• Once the proceeds have been applied to the payment of the principal obligation,
the debtor cannot anymore be asked to pay unless there is deficiency.

KINDS OF FORECLOSURE

1. JUDICIAL FORECLOSURE
A judicial foreclosure is done by filing a complaint in the Regional Trial Court of
the place where the property is located. The judge renders judgment, ordering
the mortgagor to pay the debt within a period of 90–120 days. If the debt is not
paid within the said period, a foreclosure sale satisfies the judgment.
JUDICIAL FORECLOSURE UNDER RULE 68, RULES OF COURT

1) The mortgagee should file a petition for judicial foreclosure in the court
which has jurisdiction over the area where the property is situated.
2) The court will conduct a trial. If, after trial, the court finds merit in the
petition, it will render judgment ordering the mortgagor/debtor to pay the
obligation within a period not less than 90 nor more than 120 days from
the finality of judgment.
3) Within this 90 to 120 day period, the mortgagor has the chance to pay the
obligation to prevent his property from being sold. This is called the
EQUITY OF REDEMPTION PERIOD.
4) If mortgagor fails to pay within the 90-120 days given to him by the court,
the property shall be sold to the highest bidder at public auction to satisfy
the judgment.
5) There will be a judicial confirmation of the sale. After the confirmation of
the sale, the purchaser shall be entitled to the possession of the property,
and all the rights of the mortgagor with respect to the property are severed
or terminated. The equity of redemption period actually extends until the
sale is confirmed. Even after the lapse of the 90 to 120 day period, the
mortgagor can still redeem the property, so long as there has been no
confirmation of the sale yet. Therefore, the equity of redemption can be
considered as the right of the mortgagor to redeem the property BEFORE
the confirmation of the sale.
6) After the confirmation of the sale, the mortgagor does not have a right to
redeem the property anymore. This is the general rule in judicial
foreclosures – there is no right of redemption after the sale is confirmed.

The proceeds of the sale of the property will be disposed as follows:

a. First, the costs of the sale will be deducted from the price at which
the property was sold.
b. The amount of the principal obligation and interest will be deducted.
 c. The junior encumbrances will be satisfied.
d. If there is still an excess, the excess will go back to the mortgagor.
In mortgage, the mortgagee DOES NOT get the excess (unlike in
pledge).
e. If there is a deficiency, the mortgagee can ask for a DEFICIENCY
JUDGMENT which can be imposed on other property of the
mortgagor. The rule on extrajudicial foreclosure is different. The
mortgagee must go to court and file another action for the collection
of the deficiency.

ONE WOULD SHY AWAY FROM A JUDICIAL FORECLOSURE:

1. Judicial foreclosure is costly, since the parties would need to hire lawyers.
But then again, the present rules provide that court fees are needed to be
paid in extrajudicial proceedings also;
2. The parties have very little control over the sale because there is court
intervention;
3. More susceptible to stalling/dilatory tactics by the mortgagor, since he can
file all sorts of motions in court to prevent the sale; and
4. It is more efficient to have extrajudicial proceedings since for judicial
proceedings; there is a minimum lapse of time of 6 years.

2. EXTRAJUDICIAL FORECLOSURE
In an extrajudicial foreclosure, the mortgagee need not initiate an action in court
but may simply file an application before the Clerk of Court to secure attendance
of the Sheriff who conducts the public sale. This is done pursuant to a power of
sale.
EXTRAJUDICIAL FORECOSURE UNDER REPUBLIC ACT 3135/4118 AND SC
ADMINISTRATIVE CIRCULAR
1. WHERE AN EXTRAJUDICIAL FORECLOSURE SALE SHOULD BE
DONE? Sale cannot be made legally outside the city or province wherein
the property sold is situated. In case the place has been stipulated, it shall
be made in the municipal building of the said place.

2. NOTICE OF THE SALE

a. POSTING of the notices of the sale FOR NOT LESS THAN 20
DAYS in at least 3 public places of the municipality or city where
the property is situated
b. IF THE PROPERTY IS WORTH MORE THAN P400, such notice
shall also be published once a week at least 3 consecutive weeks
in a newspaper of general circulation in the municipality or city.
(You don't need to count 6 days between publications.)
NOTE: There is sufficient notice when there is publication.

3. PUBLIC AUCTION/SALE
a. Time shall be between 9AM and 4PM. It shall be made in the
direction of the sheriff of the province, the justice or auxiliary justice
of the peace of the municipality, or of the notary public of the
municipality, who shall be compensated with P5 for each day of
actual work or performance in addition to his expenses.
b. Anyone may bid at the sale, unless there are stipulations in the
agreement.

4. POSSESSION
a. Upon foreclosure, if the mortgagor is in possession of the property,
he will retain possession during the redemption period—1 year from
the date of sale.
 b. If the winning bidder wants possession during the redemption
period, he may execute a bond in the amount equivalent to the use
of the property for 12 months, to indemnify the debtor in case it be
shown that the sale was made without violating the mortgage or
without complying with the requirements of the Act. Upon approval,
a writ of possession will be issued in his favor.
c. If the winning bidder is able to secure possession, the mortgagor
may petition that the sale is set aside and the writ of possession be
cancelled on the ground that he wasn't in default or that the sale
wasn't made in accordance with Act 3135. This must be filed within
30 days from issuance of the writ of possession.

5. RIGHT OF REDEMPTION
a. The debtor, his successors-in-interest, or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under which
the property is sold, may redeem the same at any time WITHIN
THE TERM OF 1 YEAR FROM AND AFTER THE DATE OF THE
SALE and such will be governed by the Rules of Court;
b. When the property is redeemed after the purchaser has been given
possession, the redeemer is entitled to deduct from the price of
redemption any rentals that said purchaser may have collected in
case the property or any part thereof was rented. If the property
was used as his own dwelling, it being town property, or used it
gainfully, it being rural property, the redeemer may deduct from the
price the interest of 1% per month provided in the Rules of Court.

>RULES OF COURT, RULE 39, SECTIONS 29 TO 31, AND 35

Sec. 29. Effect of redemption by judgment obligor, and a certificate to be

delivered and recorded thereupon; to whom payments on redemption made.
If the judgment obligor redeems, he must make the same payments as are
required to effect a redemption by a redemptioner, whereupon, no further
redemption shall be allowed and he is restored to his estate. The person to
whom the redemption payment is made must execute and deliver to him a
certificate of redemption acknowledged before a notary public or other officer
authorized to take acknowledgments of conveyances of real property. Such
certificate must be filed and recorded in the registry of deeds of the place in
which the property is situated, and the registrar of deeds must note the record
thereof on the margin of the record of the certificate of sale. The payments
mentioned in this and the last preceding sections may be made to the purchaser
redemptioner, or for him to the officer who made the sale.

Sec. 30. Proof required of redemptioner.

A redemptioner must produce to the officer, or person from whom he seeks to
redeem, and serve with his notice to the officer a copy of the judgment or final
order under which he claims the right to redeem, certified by the clerk of the court
wherein the judgment or final order is entered; or, if he redeems upon a
mortgage or other lien, a memorandum of the record thereof, certified by the
registrar of deeds; or an original or certified copy of any assignment necessary to
establish his claim; and an affidavit executed by him or his agent, showing the
amount then actually due on the lien.

Sec. 31. Manner of using premises pending redemption; waste restrained.

Until the expiration of the time allowed for redemption, the court may, as in other
proper cases, restrain the commission of waste on the property by injunction, on
the application of the purchaser or the judgment obligee, with or without notice;
but it is not waste for a person in possession of the property at the time of the
sale, or entitled to possession afterwards, during the period allowed for
redemption, to continue to use it in the same manner in which it was previously
used; or to use it in the ordinary course of husbandry; or to make the necessary
repairs to buildings thereon while he occupies the property.
Sec. 35. Right to contribution or reimbursement.
When property liable to an execution against several persons is sold thereon,
and more than a due proportion of the judgment is satisfied out of the proceeds
of the sale of the property of one of them, or one of them pays, without a sale,
more than his proportion, he may compel a contribution from the others; and
when a judgment is upon an obligation of one of them, as security for another,
and the surety pays the amount, or any part thereof, either by sale of his property
or before sale, he may compel repayment from the principal.

GENERAL BANKING LAW OF 2000, SECTION 47

Sec. 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure,

whether judicially or extra-judicially, of any mortgage on real estate which is
security for any loan or other credit accommodation granted, the mortgagor or
debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate, to
redeem the property by paying the amount due under the mortgage deed, with
interest thereon at 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. However, the purchaser at the auction sale
concerned whether in a judicial or extra-judicial foreclosure shall have the right to
enter upon and take possession of such property immediately after the date of
the confirmation of the auction sale and administer the same in accordance with
law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only
upon the filing by the petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.
 Notwithstanding Act 3135, juridical persons whose property is being sold
pursuant to an extrajudicial foreclosure, shall have the right to redeem the
property in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which in
no case shall be more than three (3) months after foreclosure, whichever is
earlier.

Owners of property that has been sold in a foreclosure sale prior to the effectivity
of this Act shall retain their redemption rights until their expiration.

NOTES:
i. For judicial foreclosure, the redemption period is within one year. For
extrajudicial, its 90 days from sale or registration.
ii. The purpose is to give concession to the banks. Banks cannot get
properties mortgaged by those in financial distress.
iii. The redemption price would be the mortgaged obligation plus the interest
as stipulated in the original obligation. Compare this with judicial
foreclosure wherein the redemption price is the original price. In this case,
you have to pay more when redeeming from a bank.
iv. There is immediate possession
v. A motion to enjoin would not be entertained unless secured by a bond.
vi. Court will fix the amount of the bond. Normally, this would be the liability of
the bank plus costs. This remedied the loopholes in Act 3135—protects
the bank during foreclosures. This makes it hard to secure injunctions and
it shortens the redemption period.