By: Robert A. Ballinger, Attorney at Law, Director of Operations, King River Title and Abstract

In the fourteenth and fifteenth centuries, a specific set of common-law principles applicable to mortgages developed in England. These principles treated the mortgagor especially harshly. For example, if a mortgagor failed to make the required payment on its due date, known as law day, the mortgagor forfeited all ownership interest in the property. In other words, the mortgagor lost all equity in the property. The rule allowing forfeiture at law day was absolute until the courts of equity intervened. Equity courts allowed mortgagors to tender the amount owed and retain, or redeem, the property, even after law day, if the mortgagor failed to pay because of fraud, misrepresentation, accident, or duress. Eventually, equity courts granted this relief so routinely that the mortgagor had a right to redeem the property within a reasonable time after law day by paying both the principal and interest. This right of redemption became recognized as an equitable estate in the land.

The mortgagor’s equity of redemption “is one of the oldest and most important concepts in mortgage law.” However, the development of this equity of redemption created difficulties for the mortgagee, who could never be sure that the mortgagor would not exercise the equity of redemption long after law day. In response, equity courts developed the mortgagee’s right to foreclose on the property. Upon the mortgagee’s request, the equity court could issue a decree requiring the debtor to pay the debt, interest, and costs within a fixed time period. If the mortgagor failed to pay, the mortgagor forever lost the equity of redemption in the property.

This procedure is known as strict foreclosure because the property reverts to the mortgagee without sale and the mortgagor loses all equity. Today, most states permit strict foreclosure only in special circumstances, but a few allow it in normal foreclosure proceedings. In the United States, most foreclosures involve a public sale of the property.

Prior to 1987 there were two procedures for foreclosure in Arkansas. The first was a judicial foreclosure, which is a sale by a court in equity. The second was a power of sale foreclosure, which gave mortgagee the right to have mortgaged property sold at private sale without court involvement. Of these two methods the vast majority of Arkansas’ foreclosures were judicial. This was because of substantial advantages to the mortgagee associated with judicial foreclosures. The power of sale foreclosure was rarely used because it offered no method for waiver of the statutory right of redemption. It also lacked the assurance of good title associate with judicial foreclosure. Deficiency judgments were also not possible under Arkansas’ power of sale foreclosure, and under the power of sale foreclosure a mortgagee was not allowed to be a purchaser at the foreclosure sale. Finally, under power of sale foreclosure there was an appraisal requirement not associated with judicial foreclosures.

On February 18, 1987, The Statutory Foreclosure Act became effective in Arkansas. In 1989 the act was amended do to inconsistencies in the language of the statutory foreclosure procedures. And then in 1999, the statute was once again amended so that sales would be “considered final, and all rights of the grantor or mortgagor, be terminated, immediately upon the conclusion of the public foreclosure auction.” Finally, in 2003, the act was amended to restrict “foreign entities not authorized to do business in the State of Arkansas” from “availing themselves to the provisions of the Statutory Foreclosure Act of 1987….”

The purpose of the Statutory Foreclosure Act was to establish a non-judicial procedure to “provide an efficient and fair procedure for the liquidation of defaulted mortgage loans to the benefit of both the homeowner and the mortgage lender.” Arkansas’ General Assembly also indicated they created this Act because “the present laws regarding foreclosures are awkward, requiring appraisals before the sale and giving the homeowner a one year statutory right of redemption that may not be waived.”