Introduction
On Friday, August 3, 2012, Governor Patrick signed H4323 – An Act Preventing Unlawful and Unnecessary Foreclosures (the “New Foreclosure Law”) – into law. The New Foreclosure Law has two main provisions. First, in response to the Supreme Judicial Court’s (“SJC”) recent decisions in U.S. Bank National Association v. Ibanez (“Ibanez”) and Eaton v. Federal National Mortgage Association (“Eaton”), the New Foreclosure Law requires mortgagees conducting foreclosures under the statutory “Power of Sale” to file documentation with the appropriate Registry of Deeds establishing their right to foreclose before initiating foreclosure procedures. Second, the New Foreclosure Law requires mortgagees holding “subprime” residential mortgages to modify the existing loan rather than foreclose on the mortgaged property if modification makes more economic sense. These changes, which take effect on November 1, 2012, are described in more detail below.
Power of Sale
The statutory “Power of Sale” in Massachusetts permits a mortgagee to foreclose on the mortgaged property and sell the property at public auction without obtaining prior judicial authority provided the foreclosing party first complies with the terms of the mortgage and with the statutes governing the foreclosure of mortgages via the “Power of Sale.” Mortgagees tend to favor exercising the statutory “Power of Sale” because the process does not include prior judicial oversight and the foreclosure can be effectuated more quickly. Because of this fact, courts reviewing a challenged foreclosure effectuated by the statutory “Power of Sale” apply the terms of the foreclosure statutes strictly to ensure that the borrower’s rights were not infringed upon. If a foreclosing party failed to strictly adhere to the foreclosure statutes prior to the sale of the foreclosed property at public auction, the sale may be deemed wholly void.
Eaton Case and the Authority to Foreclose
In the Eaton case, the SJC held that a mortgagee is only entitled to foreclose on a property under the statutory “Power of Sale” if it owns both the mortgage and the underlying mortgage note or is the authorized agent of the owner of the mortgage note. The SJC applied its decision prospectively so that it only applies to foreclosures under the statutory “Power of Sale” where statutory notice of the proposed sale is provided after June 22, 2012.
Eaton applies to all residential and commercial mortgages. The New Foreclosure Law contains the following additional requirement for foreclosures of residential property: a party foreclosing on residential property must record an affidavit in the appropriate Registry of Deeds certifying that the mortgagee is either the holder of the mortgage note or the authorized agent of the note holder prior to publishing a notice of foreclosure. An arm’s length third party purchaser for value may rely on the affidavit and will not have its title divested on account of the foreclosing party’s failure to fulfill its obligations with regard to the affidavit or having filed a false affidavit.
Ibanez Case and Proof of Assignment
In Ibanez, the SJC addressed the case where the originating mortgagee has sold the loan to another party. There the SJC stated that a valid assignment of a mortgage gives the then owner of that mortgage the statutory power to sell after the borrower defaults so long as a written assignment occurs prior to commencement of the statutory “Power of Sale” process. The court also stated that the assignment does not need to be in recordable form at the time of the notice of sale or the subsequent foreclosure sale. According to the court, the owner of the mortgage could record a written assignment executed after foreclosure so long as the mortgage owner had a valid assignment prior to the issuance of the foreclosure notice. The SJC noted, however, that recording the assignment(s) prior to issuance of the foreclosure notice “is likely the better practice.” The Massachusetts Legislature agreed in the New Foreclosure Law and made the better practice mandatory.
The New Foreclosure Law requires that prior to a foreclosing party issuing any of the notices required under M.G.L. c. 244, § 14 to commence the statutory “Power of Sale,” all assignments or the chain of assignments evidencing the assignment of the mortgage to the foreclosing party must be duly recorded in the appropriate Registry of Deeds and the foreclosure notice must list the recording information for all of the assignments. This requirement applies to all residential and commercial mortgages. If any of the entities in the chain of assignments has changed its name, the notice must inform the reader whether the name change was due to a merger, consolidation, amendment, conversion or acquisition of assets. The goal is apparent: to outline a complete chain of title establishing the right of the current mortgage holder to foreclose before the foreclosure process begins.
Modification of Loan Secured by Residential Property vs. Foreclosure
Pursuant to the New Foreclosure Law, prior to exercising the statutory “Power of Sale” for “subprime loans” secured by residential properties, the foreclosing party must notify the borrower of its plan to foreclose and take reasonable steps and make a good faith effort to avoid the foreclosure. A “subprime loan” is one that may have such features as a so-called “teaser rate” at least 2% lower than the fully indexed rate granted for a period of three years or less, interest-only payments, no requirement for full documentation of income or assets of the borrower, or a loan-to-value ratio at or above 90% while the ratio of the borrower’s debt to the borrower’s income exceeds 38%. For purposes of the New Foreclosure Law, “residential property” is a property that includes four or fewer household units, one or more of which the borrower occupies as his/her primary residence.
A foreclosing party is presumed to have made a good faith effort to avoid a foreclosure if, prior to causing publication of notice of the foreclosure sale in accordance with M.G.L. c. 244, § 14, the foreclosing party:
- Determines the borrower’s ability to make an affordable monthly payment based on the borrower’s verifiable income, debts, assets and obligations;
- Identifies a modified mortgage loan that achieves the borrower’s affordable monthly payment;
- Conducts an analysis comparing the net present value of the modified mortgage loan and the creditor’s anticipated net recovery that would result from foreclosure; and
- If the net present value of the modified mortgage loan exceeds the anticipated net recovery at foreclosure, agrees to modify the loan; or if the net present value of the modified mortgage loan is less than the anticipated net recovery of the foreclosure, provides a written summary to the borrower of the analysis and notifies borrower that no modified mortgage loan will be offered.
If no modification loan will be offered for the “subprime loan,” then prior to publishing a notice of foreclosure the foreclosing party must certify that it has complied with the loan modification procedures outlined in the New Foreclosure Law by recording an affidavit stating same in the appropriate Registry of Deeds. An arm’s length third party purchaser for value may rely on the affidavit and will not have its title divested on account of the foreclosing party’s failure to fulfill its obligations with regard to the affidavit or having filed a false affidavit.
The SJC’s decisions in the Eaton and Ibanez cases and the New Foreclosure Law will trigger additional title insurance requirements in the context of mortgagee title insurance related to foreclosed properties. Coordination and consultation with the title insurance companies will be necessary in order to proceed appropriately.
If you would like more information about any of the points above, please contact your usual Goulston & Storrs attorney or either of the following attorneys:
Michael J. Haroz
617.574.4008
mharoz@goulstonstorrs.com
Paige A. Manning
617.574.4038
pmanning@goulstonstorrs.com
This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
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