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40 ADDRESSING THE PARADOX OF DECEASED BORROWERS Texas is viewed in mortgage servicing circles as having one of the fastest foreclosure processes in the country. In most cases, that's accurate. For the vast majority of nonjudicial foreclosures, the entire process can be completed within 60-90 days. Compared to the year or more that is often required in some states, the Texas foreclosure process is downright quick. However, when a borrower passes away before the underlying mortgage obligation has been satisfied, servicers often find themselves unable to foreclose or oth- erwise enforce their contractual rights for months, and in some cases, years. When we talk to default servicing clients, it's not uncommon to hear that "we don't have too many issues in Texas … except for deceased borrower foreclosures." at percep- tion is certainly a reality for many servicers and is rooted in a few nuanced principles and a body of case law that has developed over the past century. ere are a couple undisputed legal principles that create a paradox for servicers when a bor- rower has passed away. e first principle is that debt is not inherited. Upon an individual's death, outstanding debts of the deceased are not inher- ited by the heirs. e debt becomes part of the deceased individual's "estate." e estate comes into existence at the moment of death, regardless of any further legal action taken, and includes all the decedent's property. Any obligations that the deceased had in the moment before death immediately become obligations of the estate … but not obligations of the heirs. e second principle is that the beneficial interest in estate property immediately passes to the heirs at the moment of death. When a person dies, the beneficial interest in all of decedent's property passes immediately to: (1) the decedent's heirs, if there is no will (intestate) 1 , or (2) the devisees named in a valid will of the decedent (testate) 2 . An heir or "distributee" 3 is any person who is entitled to receive a distribution from the estate, whether under the statutes of descent and distribution or a lawful will. e heirs or distrib- utees may become vested with legal title to the property through a probate administration. Together, these two principles define the paradox: mortgage debt is not inherited by the heirs, but the heirs are immediately vested with a beneficial interest in the real property encum- bered by that mortgage debt. Stated differently, the heirs inherited real property subject to a mortgage debt they do not owe. Yet, the security interest in the real property remains unaffected. It is through administration of the decedent's estate that the paradox can be reconciled (by satisfying the mortgage obligation and passing clear, legal title to the heirs). In addition, the Texas Estates Code provides for a four-year period within which the heirs may reconcile the paradox. 4 Specifically, the code provides that any "interested person" may file an application to commence an administration at any point before the fourth anniversary of an individual's death. 5 is allows the heirs or distributees a four-year window from the date of death to initiate an administration, acquire legal title to the estate property and satisfy any obligations of the estate. Because of this legal framework, foreclosure of real property when a borrower has passed away isn't necessarily a legal problem for the servicer. It is a practical problem. For more than 100 years, Texas courts have consistently held that a properly conducted nonjudicial foreclo- sure within four years of a borrower's death is a perfectly legitimate sale 6 . It is sufficient to pass legal title to the foreclosure sale purchaser. e power of sale contained within a deed of trust is not suspended merely by virtue of the death of the borrower. However, there's a catch. e Texas Supreme Court has made it crystal clear that if a nonjudicial foreclosure sale takes place within the four-year period, that sale will be voided at the request of a dependent administrator should an administration be timely commenced. 7 at is the practical problem for the servicer whose borrower has recently passed away. e servicer is perfectly within its legal rights to com- plete a nonjudicial foreclosure; title conveyed at foreclosure sale is not void. However, it is voidable should an interested party choose to contest it. And because title acquired through a nonjudicial foreclosure sale is voidable within four years of the borrower's death, the servicer is effectively unable to liquidate the REO asset. Prospective purchasers are disinclined to purchase real estate knowing that the conveyance could potentially be unwound, and title insurance companies are unwilling to assume the risk that no heirs will Legal Industry Update By: Thuy Frazier & Cole Patton