In the Philippines, a mortgage is a contract where a debtor (mortgagor) secures a principal obligation by subjecting real property to a lien in favor of a creditor (mortgagee). When a borrower fails to meet the scheduled payments, the loan becomes delinquent, and the bank may exercise its right to foreclose on the collateral.
Foreclosure is the legal process by which the mortgagee terminates the mortgagor’s equitable right of redemption to satisfy the debt from the proceeds of the sale of the property.
1. The Trigger: Default and Demand
A loan is generally considered in default when the borrower fails to pay an installment on the due date. Most loan agreements include an Acceleration Clause, which stipulates that upon default of one or more installments, the entire balance becomes due and demandable.
Before proceeding to foreclosure, the bank must usually:
- Send a Notice of Default: Informing the borrower of the missed payments.
- Issue a Formal Demand Letter: Demanding the full payment of the outstanding obligation within a specific period. Failure to comply with this demand gives the bank the legal standing to initiate foreclosure.
2. Modes of Foreclosure
Philippine law provides two primary methods for foreclosing a real estate mortgage: Judicial and Extrajudicial.
A. Extrajudicial Foreclosure (Act No. 3135)
This is the most common method used by banks because it is faster and does not require a full-blown court trial. It is only possible if the mortgage contract contains a Special Power of Attorney (SPA) authorizing the mortgagee to sell the property at a public auction.
Petition: The bank files a petition for sale with the Executive Judge through the Clerk of Court.
Notice Requirements: * Posting: Notices of the sale must be posted in at least three public places in the municipality or city where the property is located for at least 20 days.
Publication: If the property is worth more than ₱400.00, the notice must be published in a newspaper of general circulation once a week for three consecutive weeks.
Public Auction: Conducted by the sheriff or a notary public. The property is sold to the highest bidder, which is often the bank itself (via credit bidding).
Certificate of Sale: Issued to the winning bidder and registered with the Register of Deeds.
B. Judicial Foreclosure (Rule 68, Rules of Court)
This involves filing a complaint in the Regional Trial Court (RTC).
- Trial: The court hears the case to determine the amount of the debt.
- Judgment: If the court finds the claim valid, it renders judgment ordering the borrower to pay the debt within 90 to 120 days.
- Foreclosure Sale: If the borrower fails to pay within the period, the court orders the sale of the property at a public auction.
- Confirmation of Sale: Unlike extrajudicial foreclosure, the sale must be confirmed by the court to operate as a divestiture of rights.
3. The Right of Redemption
Redemption is the right of the mortgagor to reacquire the property after it has been sold.
| Type of Mortgagor | Foreclosure Mode | Redemption Period |
|---|---|---|
| Natural Person | Extrajudicial | One (1) year from the date of registration of the Certificate of Sale. |
| Natural Person | Judicial | Generally, no right of redemption, only an Equity of Redemption (90-120 days). |
| Juridical Person (Corporation) | Extrajudicial | Until, but not after, the registration of the certificate of foreclosure sale, which shall in no case be more than three (3) months after foreclosure. |
Note: Under the General Banking Law of 2000 (R.A. 8791), juridical persons (corporations) have a significantly shortened redemption period when the mortgagee is a bank.
4. Consolidation of Title
If the mortgagor fails to redeem the property within the applicable period:
- Affidavit of Consolidation: The bank executes an affidavit stating that the redemption period has expired without redemption being made.
- Cancellation of Old Title: The Register of Deeds cancels the mortgagor's Transfer Certificate of Title (TCT).
- Issuance of New Title: A new TCT is issued in the name of the bank.
5. Writ of Possession
Once the bank owns the property (or even during the redemption period in extrajudicial cases, provided a bond is posted), it can apply for a Writ of Possession. This is a court order commanding the sheriff to place the bank in actual possession of the property. This is a ministerial function of the court, meaning it is granted as a matter of right.
6. Deficiency Judgment
If the proceeds of the foreclosure sale are insufficient to cover the total outstanding debt (including interest and penalties), the bank has the right to sue the borrower for the deficiency.
- In extrajudicial foreclosure, the bank must file a separate collection suit in court.
- In judicial foreclosure, the bank can move for a deficiency judgment within the same proceedings after the sale is confirmed.