April 22, 2016
When an owner defaults on her mortgage, sooner or later she must determine if she is willing and able to keep the property. In my last blog post, I considered a situation where an owner might find their HOA attempting to force the bank to expedite a delayed foreclosure. In my opinion, neighbors and HOAs should not interfere with an owner’s bona fide efforts to save their home and avoid foreclosure. However, the owner does not always desire to keep the property. Some owners want their property to be sold to cut off their obligations to maintain the property, pay taxes, and HOA assessments. What rights does an owner have to force a lender to expedite the foreclosure? What interest does the city or county have to hurry up foreclosure? In Wisconsin, the City of Milwaukee is in a tussle with banks over zombie foreclosures. On February 17, 2015, the Supreme Court of Wisconsin decided that where a bank files suit to foreclose and when the court determines that the property is abandoned, the sale must occur within a reasonable period of time. The banking industry would prefer to postpone completing foreclosure if expediting things would force them to pay fees to acquire property they don’t actually want. Wisconsin Assembly Bill 720 currently sits on Governor Scott Walker’s desk, which if signed would give banks greater flexibility in delaying or abandoning foreclosures. Why are the banks seeking to amend the foreclosure statutes in response to this judicial opinion?
As Fairfax attorney James Autry says, an abandoned home is a liability, not an asset. Unoccupied residences can be victimized by vandals, squatters, arsonists, and infested by vermin. In the winter the pipes can burst, causing thousands of dollars of damage. Local governments struggle to collect taxes on the property and HOAs are not able to collect assessments and fines for the home. The abandoned homes may become an eyesore and affect neighboring property values. The hallmark of truly “zombie” properties is that no one wants them because their costs and liabilities exceed their value.
The subprime mortgage crisis transformed many properties in Milwaukee into “zombie foreclosures”. On April 11, 2016, Mayor Tom Barrett published an op/ed stating that there are currently 341 properties in Milwaukee that are simultaneously vacant and in foreclosure proceedings. He fears that if the governor signs the new legislation, the city would be forced to conduct tax sales and take ownership of the properties to remove the blight. In these situations, neither the owner, the bank, nor the city are interested in maintaining the home or expediting a sale. These homes are so distressed that the city and the banks are fighting over who doesn’t have to assume responsibility for them.
AB 720 came as a response to the very pro-municipality court decision BNY Mellon v. Carson. This case provides a good example of a “zombie” foreclosure. Shirley Carson put up her home on Concordia Avenue in Milwaukee as collateral to borrow $52,000 from Countrywide Home Loans. Wisconsin is a judicial foreclosure state where the bank has to file a lawsuit as a prerequisite to obtaining a foreclosure sale of the property. However, merely filing the foreclosure lawsuit does not transfer title to the distressed property. In Wisconsin, the court needs to order a sale. When Ms. Carson defaulted on her mortgage, the Bank of New York, as trustee for Countrywide filed a lawsuit for foreclosure.
The bank attempted to serve the lawsuit on Carson at her residence. The process server could not find her. He observed that the garage was boarded up, snow was un-shoveled and the house emptied of furniture. The property was burglarized. Vandals started a fire in the garage. The City of Milwaukee imposed fines of $1,800 against Carson because trash accumulated and no one cut the grass. The bank obtained a default judgment against Carson. Even 16 months after the default judgment, the bank still had not scheduled the foreclosure sale. At this point, Carson filed a motion asking the court to deem the property abandoned and ordering a sale to occur within 5 weeks. Carson supported her motion with an affidavit admitting the abandonment and describing the property’s condition. The opinion does not explain why Ms. Carson filed the motion. However, I assume that she did not want any more fines from the city. She probably wanted the sale to cut off her liability to maintain the property. The local judge denied the motion, deciding that Ms. Carson didn’t have standing to ask the court to expedite the foreclosure sale date contrary to the desires of the bank.
On appeal, the Supreme Court took a hard look at Wis. Stat. § 846.102, the foreclosure statute that applies when a property is abandoned. The bank insisted that the statute allowed them to conduct the sale at any time within five years after the five-week redemption period. The Supreme Court rejected this view and determined that the procedures were mandatory, not permissive. The local court has the authority to order the bank to bring the property to sale soon after the five-week deadline despite any preference of the bank. The court stated that the trial court shall order such sales within a “reasonable” time after the five-week redemption period. The appellate court did not specifically define what a reasonable period of time would be. However, Mayor Barrett’s op/ed suggests that this means much less than 12 months.
The Supreme Court of Wisconsin stated that the statute was intended to “help municipalities deal with abandoned properties in a timely manner.” It is not clear whether foreclosure sales would be expedited by the courts’ case management procedures or on the motions of the owners, lenders, or municipalities. This opinion does grant Ms. Carson the relief she requested. However, it was mostly a victory for local governments in their crusade against the Zombie Foreclosure Apocalypse by shifting its burden to the banks. In cases where the borrower contests a finding of abandonment, this opinion might strengthen the hand of the locality and weaken the borrower’s ability to contest the foreclosure proceeding.
Justice David Prosser wrote a concurring opinion which agrees with the majority’s outcome. However, Justice Prosser remarked that “the majority opinion radically revises the law on mortgage foreclosure” by the following:
- The majority did not disavow the view that the local court’s authority to expedite foreclosure arises out of its power to hold parties in contempt of court. Owners should be concerned about broadening of courts’ discretion to impose sanctions on banks for not expediting foreclosure proceedings. Cases should generally be decided on their merits.
- Prosser observed that the plain meaning of the statute does not permit a municipality to bring an action to obtain the foreclosure sale because the statute limits the local government’s role to providing testimony or evidence. The new legislation AB 720 specifically gives the bank or municipality, but not the owner, standing to move for the property to be deemed abandoned. The government already has authority to foreclose for failure to pay property taxes. If the municipality also gets standing to intervene to expedite bank foreclosures, this raises questions about government intrusion into contract and property rights.
- Even with the majority’s opinion, nothing would stop lenders from thwarting the municipalities’ desire that they expedite foreclosures simply by delaying filing the foreclosure lawsuit to begin with.
- Prosser points out that other Wisconsin statutes provide standing to owners to petition the courts to exercise equitable principles to order a judicial sale of real estate. Ruling in favor of Carson in this case could have relied upon established principles of law instead of expanding substantive policy interests of municipalities at the expense of owners and banks.
Sometimes “solutions” to a short-term crisis can create greater problems later. In BNY Mellon v. Carson, the majority’s interpretation of the statute opens the door for potential abuse of foreclosure procedures. A bank or locality could try to use this improperly to quickly foreclose on a borrower who has a willingness and ability to rectify the loan default. A crack in a window, a delay in mowing grass, or a temporary un-occupancy should not be used as a pretext in order to expedite foreclosure.
The fundamental question posed by BNY Mellon v. Carson and AB 720 is who should bear the burdens of acquiring and holding these “zombie” properties. The banks’ interests in the properties are defined by the mortgage documents. They don’t want their rights to be diminished by the localities’ activities in the courts or legislature. The City of Milwaukee doesn’t want to budget to foreclose on properties it doesn’t want. Owners want to either save their home from foreclosure or give it up without facing more fines or HOA assessments. Justice Prosser’s concurrence appears to point to balancing these competing interests through the proven equitable principles that courts have applied to address crises for hundreds of years. Perhaps this can be used to protect the interests of owners. It will be interesting to see if Scott Walker signs the bill.
Laws provide local government with the power to foreclose on properties for failure to pay real estate taxes. If these localities want to expedite foreclosure, the could use those statutes or even lobby to have them streamlined. On March 1, 2016, the Virginia General Assembly enacted new legislation to address the issue of “zombie” foreclosures in the Old Dominion (thanks to Jeremy Moss & Leonard Tengco for alerting me to this). Senate Bill 414 authorizes local governments to create “land bank entities” that would use grants or loans to purchase, hold, and sell real estate without having to pay property taxes. These land banks can be set up as governmental authorities or nonprofit corporations. I’m interested to see how prevalent land banks will become and who will ultimately benefit from their participation in the real estate market.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.
Case Citation: Bank of N.Y. Mellon v. Carson, 2015 WI 15 (Wisc. Feb. 17, 2015).
April 4, 2016
In the contemporary dystopia, property ownership provides ordinary people with space in which to live, work and play in peace, safety, and freedom. Americans also see real estate as an investment. My high school friend Tom was one of my first classmates to purchase a home. Years ago, he explained that the great thing about a home is that it is an investment and you also get to live in it. Unfortunately, there are many predators in the marketplace seeking to capitalize on consumers’ commitment to home ownership. Some loan servicers, debt collectors, and contractors see owners as opportunities. Their trade groups lobby state capitals. Owners have to stick up for themselves in Court and with their elected representatives to protect themselves from becoming someone else’s cash drawer. Sometimes unscrupulous people get what they want by conceptually framing a crisis to shape the perceptions of decision-makers. Fear is one of the easiest emotions to manipulate. Owners should be skeptical of how the housing industry describes the Zombie Foreclosure Apocalypse.
In a recession, financial struggles can render owners unable to make payment obligations to mortgage lenders and HOA’s. In many cases, these personal crises are temporary. Job loss or illness of the owner or a family member can cause a temporary but acute financial crunch. The problems may be fixable by a new job or resuming work after addressing a family member’s needs. Unfortunately, lenders and HOA’s tend to treat all defaults in payment obligations the same. In the past few years, HOA’s have waited for assessment income when banks delayed foreclosing on homeowners. In these so-called “zombie foreclosures,” banks delay completing foreclosures for years because there is little economic incentive to adding the distressed property to their own real estate inventory. If they buy the property, they become responsible for it as the new owner. Usually the owners stop paying their HOA dues around the time they can’t pay their mortgage. The HOA industry sees themselves suffering financial losses at the hands of loan servicers who fail to timely foreclose and put a new owner in the property with the willingness or ability to pay the HOA assessments.
On March 25, 2016, Dawn Bauman posted an article on the Community Associations Institute’s (“CAI”) blog titled, “Clean Up Foreclosures in Your Community.” Ms. Bauman argues that because the banks delay foreclosure, other owners must pick up the tab of the struggling neighbor to support an HOA’s budget. This blog post calls upon neighbors to file citizen complaints with the Consumer Financial Protection Bureau (“CFPB”) when banks delay foreclosing on neighboring homes. The blog post contains links and instructions for submitting complaints. I understand Ms. Bauman’s point that Boards might have to make budget changes if there is a spike in “zombie” foreclosures. These budget decisions might include increasing dues for other owners, slashing budgets or even raiding reserves to pay for major repairs. However, I’m not convinced that a campaign to expedite foreclosures would really advance the interests of other owners. As films and books such as “The Big Short” illustrate, the foreclosure crisis is a complex phenomenon. When a borrower falls into default, wouldn’t the community’s interests be better advanced by helping them get back on track with their existing lender and HOA? There is no guarantee that the CFPB would have the resources, authority and/or will to take regulatory action upon receipt of a complaint submitted through web forms on the internet. This CAI blog post seems to perpetuate the stereotype of debt collection as the common denominator of a HOA community. Yes, communities require accountability, but that should go both ways.
What is happening here? Imagine that a prospective buyer met with a realtor or property manager to discuss a home in an HOA. What if the real estate professional candidly told the prospective buyer that in this community, if you default on your mortgage, your neighbors and HOA will contact regulatory authorities to make sure the bank expedites your eviction. The prospective buyers are expected to also do the same against to their neighbors. The home shoppers innocently ask, “Why is this?” The manager candidly explains that the local government has outsourced its functions to the HOA. That HOA has a big budget. The locality and the HOA have an interest in keeping property assessments high. If the homebuyers are rational, they will walk out of that meeting and never come back to that development. Home owners want neighbors who support each other, or at least leave each other alone. No one wants to live in a community where neighbors are expected to tattle. If that’s necessary, then there is something wrong with the community association model. To sustain themselves, the community associations should seek to advance the interests of their members and not the other way around. The task of creating communities traditionally belonged to local governments, developers and the owners themselves. However, real estate is also a national policy concern because of the roles of Fannie Mae, Freddie Mac, the CFPB and a host of other federal agencies. At a March 29, 2016 town hall meeting, Republican presidential candidate Donald Trump identified “housing, providing great neighborhoods” was one of the top three responsibilities of the federal government. Such statements are easily dismissed as political pandering. However, Mr. Trump, however controversial, seems to have a knack at getting into the minds of many voters.
When an owner falls into a persisting default, usually the lender, HOA, and local government want to start over with a new owner. In fact, the HOA industry and local governments want to work together to eliminate these “zombie foreclosures.” Fairfax County holds an annual “Community and Neighborhood Leaders Conference” to provide face-time between HOA board members and county agencies with authority to enforce laws and ordinances. This alliance puts the elderly and disabled at a particular disadvantage when it comes to complying with local ordinances about how property should be maintained. Owners may find their lenders, HOA’s, and local governments taking action against their property interests.
If owners find themselves in default of their loan and assessment payment obligations, what can they do to protect their financial interests and property rights? Fortunately, there are some strategies that work.
- Avoid Falling into Default in the First Place. If the owner isn’t in default, then the lender or HOA doesn’t have a basis to institute foreclosure or debt collection proceedings. For many owners, the financial crunch of making the payments is less costly than digging themselves out of a persistent default.
- Know Your Rights. Many owners rely upon what bank representatives or HOA board members say in order to determine their rights. However, in court a judge can be expected to apply what the mortgage or HOA documents say to resolve any dispute. Owners should organize and understand the applicable legal documents and not rely on hearsay.
- Have a Plan. The bank representative or property manager is not going to take the lead on how to resolve the payment default. Debt collectors are looking to get paid as much as possible and/or to push the owner out. The owner must determine whether they want to keep or relinquish the property. The circumstances of each case are unique and which strategies to employ is outside of the scope of this post.
- Present Well. If a property appears to be abandoned, then the local government, HOA, and lender will treat it as such and move aggressively. If an owner keeps the property up, they are less likely to be bullied. Likewise, in negotiating with a lender’s or HOA’s representatives, an owner should consider how their actions and works are likely to be interpreted. If the owner has unrealistic expectations or appears to show signs of weakness, then the industry professionals are less likely to take them seriously.
- Have a Team. Board members, property managers, and collection attorneys are working together to maximize the accounts receivable of the HOA and minimize their own hassle. The lenders have account representatives and lawyers to service the loan. Owners should have a team of their own. Allies in a community can look out for each other and guard against bullies. Many state legislators want to take up the cause of property ownership. Lenders and HOA’s have experts and attorneys of their own on call to advance their interests. Out of experience they are able to think two or three steps ahead of consumers. If a lender or HOA behaves in a mysterious manner, it may be that they contemplate future legal action. Many times owners need legal assistance of their own.
An owner who struggles with financial difficulties is not a “zombie.” What is really “undead” is the complex web of loan documents, HOA rules, and public policies putting an owner’s property rights and financial condition at unnecessary risk. Financial challenges do not have to result in intractable crises. When told about the pending Zombie Foreclosure Apocalypse, owners need to understand what is really “undead.” The industry should educate and advocate for owners in these situations in order to keep the HOA model from turning into an unsustainable dead end. Until then, owners must work together and with qualified professionals to protect their rights.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.