March 26, 2020
Americans are now familiar with the “flatten the curve” tactic to prevent spikes in coronavirus cases from overwhelming health care systems. Governors impose limits on the number of people who may publicly congregate and encourage people to stay at home to slow viral communication. Otherwise, the ill may soon go to the hospital and discover that there are no beds or doctors available. There is another “curve” that poses a lesser-but-still-dangerous threat. Because of the restrictions on business, many wage earners and self-employs are now out of work. Even if workers can telecommute, closure of daycares and schools adds financial burden on families. Many Americans are now unable to make their rent or mortgage payments. Many citizens are at risk of eviction before the states lift stay-at-home orders. Defaults are worse beyond the reach of the public safety net into commercial property. Millions do not know how long they will be at home.
Washington, D.C. is trying to mitigate a spike in foreclosures, bankruptcies and evictions. The Washington Post recently reported (“Homeowners are getting federal mortgage relief, but renters aren’t so lucky”, Renae Merle, March 20, 2020) that the U.S. Department of Housing and Urban Development, Federal Housing Finance Agency, Fannie Mae, and Freddie Mac directed loan servicers to halt all foreclosures until mid-May 2020. The FHFA wants to establish a mortgage forbearance program as done in the 2008 financial crisis. Borrowers who cannot pay their mortgages can apply to the servicers for a deferral of their payments. They may still have to pay the money back later. Servicers do not have to automatically grant the loan modification request. Many people had bad experiences with that loan modification process. It is unclear whether this program will be more user friendly. These loan modifications don’t release the debt, they just push payment out. Pausing foreclosures until mid-May or beyond doesn’t make the loan defaults go away, it just postpones action.
As federal mortgage regulators hit the foreclosure “pause” button, the courts are restricting access to legal remedies for loan or lease defaults. The courts based their orders to defer scheduled hearings and trials in civil cases on social distancing concerns, not housing policy. In Virginia, all civil cases are continued through April 6th by general, emergency order of the state Supreme Court. Some local courts have stayed eviction orders. Continuance of “non-essential” civil cases will likely be pushed out past April 6th, but no one knows how long. The courts are under a lot of pressure to get things moving again while also promoting social distancing. The eviction or small claims dockets of some courts normally have hundreds of people in the courtroom. The longer courts push out unlawful detainer dockets, the greater the spike in cases after they return to their regularly scheduled dockets. These government actions aren’t flattening the curve on foreclosures, bankruptcies and evictions. They are merely postponing the increase until whenever restrictions disappear. Many owners will have less money then.
During the previous recession, mortgage servicers and foreclosure law firms made many mistakes because the sheer number of defaults overloaded the system. They frequently ignored the terms of mortgage documents and statutes to maximize volume-based profits. Sometimes servicers would foreclose on borrowers who went through a rough patch but had well-paying jobs. For example, if a worker has a decent salary from a government contractor, they could be furloughed if their employer lost a big contract to a competitor. The employee would then put their resume out to other government contractors. Months later they could find a new, good paying job. But loan servicing policies didn’t distinguish between such individuals from those who were incapable of making a mutually acceptable workout feasible. I predict that we are going to see similar things in 2020 and 2021 as workers go through periods of intense financial hardship before getting back to work.
During the 2008 financial crisis, I worked on numerous foreclosure-related litigation matters. I represented banks, borrowers or foreclosure sale purchasers. Many owners will have legal options for resisting foreclosures that will not be easily found by a keyword internet search. The servicers and foreclosure attorneys are going to be under a lot of pressure to handle a sudden, large volume of loan defaults. Borrowers will have some time in which to figure out how they are going to reinstate the loan or obtain a modification or forbearance. Even where they aren’t making mistakes, there are nonetheless opportunities to keep homes. The biggest mistake that owners or tenants can do is to simply ignore the notices that come in the mail or becoming easily discouraged by the confusing and unhelpful things that the servicers may be saying on the phone. Owners will not have unlimited time to stave off foreclosure and eviction. When there is a sudden explosion of foreclosures and evictions, there will be scam artists who will promise frightened borrowers that if they give their money to the foreclosure rescuer, then the foreclosure rescuer will stop the foreclosure and use the money to obtain a modification. However, these scams put owners ultimately in a worse position than had they done nothing. Owners receiving threatening letters from a foreclosure trustee or law firm may need to retain a qualified attorney to protect their rights. In a few days I’m planning on posting a “part two” to this that includes a timeline of what usually happens after a mortgage loan default in Virginia.
July 15, 2016
A disgruntled contractor or supplier may attempt to collect a payment from owners by filing a Memorandum for Mechanics Lien against the real estate. Under Virginia law, claimants (contractors or material suppliers) can interfere with owners’ ability to sell or refinance property by filing a lien in land records without first filing a lawsuit and obtaining a judgment.
A March 2016 opinion by federal Judge Leonie Brinkema shows why purchasers at Virginia foreclosure sales must give care to mechanics liens. In April 2013 and October 2015 Jan-Michael Weinberg filed a Memorandum of Mechanics Lien against a Fairfax County property, then owned by Ann & James High. J.P. Morgan Chase Bank later foreclosed on the High property. In early 2016, Mr. Weinberg brought a lawsuit to enforce the mechanics lien against J.P. Morgan Chase and the property.
If a claimant pursues a Memorandum for Mechanics Lien correctly, the property may be sold to satisfy the secured debt. A Memorandum for Mechanics Lien is a two-page form that anyone can download online for general contractors or subcontractors. The filing fee is a few dollars. By contrast, removal of the lien may require significant time and attention by the owner. Overall, it is best for owners to work with their advisory team to avoid having contractors file mechanics liens in the first place. Sometimes, disputes cannot be easily avoided and owners must deal with recorded liens. A Memorandum for Mechanics Lien differs from a mortgage or a money judgment. Fortunately for the owner, Virginia courts apply strict requirements on contractors pursuing mechanic’s liens. Just because a contractor fills out all the blanks in the form that doesn’t meant it necessarily is valid. This blog post is a brief overview of key owner considerations. The Weinberg case provides a good example because the court found so many problems with that lien.
- Who? The land records system in Virginia index by party names. For this reason, the claimant must correctly list its own name and the name of the true owner of record. The owner’s team will need a title report and the construction contract. Whether the claimant is a general contractor, subcontractor or supplier will determine which form must be used. Mr. Weinberg’s Memorandum for Mechanics Lien claimed a lien of $195,000. Virginia law requires a contractor to have a “Class A” license for projects of $120,000 or more. Judge Brinkema found this Memorandum defective because Weinberg’s claim was not supported by a reference to a Class A license number. In some residential construction jobs, the Virginia Code requires appointment of a “Mechanic’s Lien Agent” to receive certain advance notices of performance of work from claimants that might later become the object of a mechanics lien. This creates an additional hurdle for the contractor, suppliers and subcontractors. In many construction projects, the builder works with the owner’s bank to obtain draws on construction loans. If mechanics lien disputes arise, owners can work with the bank to obtain documents.
- What? The Memorandum for Mechanics Lien must describe the dollar amount claimed and the type of materials or services furnished. The written agreement determines the scope of work, payment obligations and other terms. Generally speaking, only construction, removal, repair or improvement of a permanent structure will support a mechanics lien. Mr. Weinberg claimed that he conducted “grass, shrub, flower care,” “week killer,” “tree removal/cutting,” general property cleanup,” “infrastructure work,” “planting grass,” “site work,” “general household work” and “handy man jobs.” The Court found that this description of work was invalid. The work described was either landscaping or too vaguely connected to actual structures. Where the agreement was for work that could actually be the basis of a mechanics lien, the owner should consider how much of the work the contractor actually performed? Is the work free of defects? Does the Memorandum state the date the claim is due or the date from which interest is claimed?
- When? The contractor or supplier must meet strict timing deadlines for the mechanics lien. Generally speaking, the Memorandum for Mechanics Lien must be filed within 90 days from the last day of the month in which the claimant performed work. Judge Brinkema observed that Mr. Weinberg failed to indicate on the Memoranda the dates he allegedly performed the work. Also, no Memorandum may include sums for labor or materials furnished more than 150 days prior to the last day of work or delivery. Furthermore, the claimant must bring suit to enforce the lien no more than 6 months after recording the Memorandum or 60 days after the project was completed or otherwise terminated. Weinberg’s 2013 Memorandum was untimely because he did not sue to enforce it until 2016. Because Weinberg’s 2015 Memorandum was the same as the 2013 version, they both probably describe the same work on the property.
- Where? The Memorandum for Mechanics Lien must correctly describe the location of the real estate that it seeks to encumber. If it lists the wrong property, the lien may be invalid. Property description problems frequently arise in condominium construction cases because the same builder is doing work in the same building for multiple housing units. The Memorandum must be filed in the land records for the circuit court for the city or county in Virginia where the property is located.
- Why? There is usually a reason why a contractor decides to file a Memorandum for Mechanics Lien instead of pursuing some other means of payment collection. The Highs allegedly didn’t pay Weinberg for his landscaping and handyman services. The Highs’ weren’t able to pay their mortgage either. Weinberg filed for bankruptcy. In order to resolve a mechanics lien dispute with a contractor, an owner should consider how the dispute arose in the first place. Is someone acting out of desperation, confusion, or is the lien a predatory tactic? Could investigation need some other explanation?
- How? The owner must understand how the mechanics lien dispute with the contractor relates to the overall plan for the property. Mr. Weinberg tried to use mechanics liens to collect on debts. At the same time, he went through bankruptcy and the property went through foreclosure. Context cannot be ignored. Few owners can afford to remain completely passive in the face of a dispute with a contractor. The owner may have a construction loan or other debt financing to consider. An unfinished project is difficult to sell at a favorable price. Potential tenants won’t lease unfinished property.
On March 15, 2016, Judge Brinkema denied Mr. Weinberg’s motion to amend his lawsuit and dismissed the case. When a contractor or supplier files a Memorandum of Mechanics Lien against property, the owner must carefully consider whether to pay the contractor directly, deposit a bond into the court in order to release the lien and resolve the dispute with the contractor later, bring suit to invalidate the lien on legal grounds or simply wait 6 months to see if any suit is brought in a timely fashion to enforce the lien. Fortunately for owners, there are strict requirements on contractors for them to take advantage of mechanics lien procedures. A Virginia property owner should consult with qualified legal counsel immediately upon receipt of a Memorandum of Mechanics Lien to protect her legal rights.
Case Citation: Weinberg v. JP Morgan Chase & Co. (E.D. Va. Mar. 15, 2015)
July 7, 2016
This blog post discusses the role of the Summons for Unlawful Detainer in Virginia foreclosures. “Unlawful Detainer” is a legal term for the grounds for eviction from real estate. The foreclosure trustee and new buyer go to a real estate closing a few days after the foreclosure sale. Upon settlement, the title company records the Trustee’s Deed of Foreclosure in the local land records. In most land transfers, the giver and recipient of the ownership of the real estate participate voluntarily. In a foreclosure, the borrower may contest the validity of the foreclosure transaction and the Trustee’s Deed. The Trustee’s Deed is necessary to the new buyer to pursue eviction proceedings against the occupants of the property. The Trustee’s Deed is the buyer’s legal basis for filing the Summons for Unlawful Detainer form. A copy of what this form looks like is available on the website for the Virginia court system.
Post-foreclosure evictions are not the only reason anyone files a Summons for Unlawful Detainer. Unlawful Detainer suits get into court in different situations. The most common is where a tenant fails to pay rent or defaults on the lease. However, it can be used for a variety of situations where an occupant entered onto the property with lawful authorization (such as a deed or lease) but has continued to occupy the premises after his right to do so ended. Every landlord knows that each month that the tenant holds over without paying is rental income that will likely never be collected. The General Assembly enacted legislation to streamline property owner’s rights to evict tenants and other persons unlawfully detaining possession of the real estate. This prevents an unfair result that might occur if a tenant could use lengthy court proceedings to live in the premises rent free when he may not have money to pay a judgment at the end. The buyer of the foreclosure property has made a financial commitment to own the property. Foreclosure investors want to evict the borrower, make any necessary repairs as soon as possible so that the property can be rented out or re-sold. So the summons for unlawful detainer form is a powerful, attractive tool for the new buyer in a foreclosure.
The investor or their attorney typically files the Summons for Unlawful Detainer in the local Virginia General District Court (“GDC”) after receiving the Trustee’s Deed. The GDC is the local court in Virginia most people are familiar with. This is where Virginians go for traffic ticket cases and suits for money under $25,000.00. The GDC has a “Small Claims Division” where parties litigate without lawyers. The Sheriff’s Office serves the Summons for Unlawful Detainer on the borrower and any other occupants. Upon receipt of the Summons for Unlawful Detainer, the borrower faces a “fight or flight” decision. Experienced lenders, trustees and purchasers know that the Trustee’s Deed of Foreclosure can be used as a weapon to try to crush the borrower’s opposition to the foreclosure. The Bank, trustee, and new buyer are can pursue these legal matters without the threat of having being evicted out of their base of operations. The borrower would not be in a foreclosure matter if there wasn’t a difficulty making payments. Once the Deed is in land records and the Summons is filed with the GDC, the borrower also has to mount a legal defense to keep possession of the home. A borrower is well advised to seek qualified legal counsel in his jurisdiction to help deal with these matters.
The Summons for Unlawful Detainer Summons must contain the name, address and point of contact for the new owner seeking to evict him. This will tell the borrower whether the property is now owned by the bank that requested the foreclosure or an unrelated investor. The Summons sets out when and where the borrower or his attorney must appear to contest the eviction proceeding. Every form states, “If you fail to appear and a default judgment is entered against you, a writ of possession may be issued immediately for possession of the premises.” A writ of possession is a document signed by the judge that authorizes the Sheriff’s Office to go out to the house and remove the people and belongings found there and turn it over to the new buyer and their locksmith.
What can a borrower do who has been wrongfully foreclosed upon and received a Summons for Unlawful Detainer? The earlier the borrower engages with legal counsel, the more there is that the attorney can do to help. On June 16, 2016, the Supreme Court of Virginia initiated legal reforms which dramatically shift the balance of power in these post-foreclosure evictions. If properly defended, the borrower may have an opportunity to get the dispute over the validity of the foreclosure decided before ordering eviction. This is good news. Prior legal precedent required many borrowers to defend against a Summons for Unlawful Detainer at the same time he pursued his own wrongful foreclosure claims against the bank and trustee. I discussed this new case in greater detail in my blog post, “The Day the Universe Changed” and in a radio show interview available in the “On the Commons” podcast library. While borrowers will continue to receive these “Summons for Unlawful Detainer” forms, they now have better options.
Unless the borrower does not intend to contest the eviction and foreclosure, borrowers receiving a Summons for Unlawful Retainer from the buyer of the foreclosure property should immediately seek qualified legal counsel in order to explore available options. The Virginia General Assembly is anticipated to enact new legislation in its next session to clarify the jurisdiction of the GDC and the appropriate court procedures when a borrower contests the validity of a foreclosure related to the eviction proceeding. With assistance, borrowers may be able to take advantage of these legal reforms.
July 6, 2016
Bankers and lawyers send many notices, letters and statements to borrowers struggling with their mortgage. The purpose of such paperwork is to collect on the mortgage debt. In Virginia, the Notice of Trustees Sale is very significant. In Virginia, the bank does not have to go to court first in order to obtain a foreclosure sale. The law permits the property to be sold by a trustee in a transaction outside of the direct supervision of a judge. The Foreclosure Trustee cannot conduct a valid foreclosure in Virginia without sending a proper Notice of Trustees Sale. The Trustees Sale is a public auction of the property to the highest bidder, usually on the courthouse steps. In order to protect her rights against abusive foreclosure tactics (examples discussed elsewhere on this blog), the borrower must understand the role this Notice of Trustees Sale plays. Borrowers exploring the possibility of contesting the foreclosure should retain qualified legal counsel when they receive the Notice of Trustees Sale.
When borrowers go to closing on the purchase or refinance of Virginia property, they review and sign a loan document called a Deed of Trust. Virginia judges treat Deeds of Trust as the “contract” between the borrower, lender and trustee regarding any foreclosure. The Deed of Trust imposes specific requirements on the lender if they want to foreclose. The bank is required to follow these requirements regardless as to whether the borrower is in default on the loan or not. Deeds of Trust describe what the Notice of Trustees Sale must include, who it must be sent to, requirements for it to be published in the newspaper, etc. The Virginia Code also has specific requirements about the Notice of Trustees Sale and its newspaper publication. The Notice of Trustees sale is more than a tool to intimidate the borrower or provide a courtesy to someone about to lose their home. The Notice is an essential building block. Absent this, the foreclosure is not valid.
Upon receiving the Notice of Trustees Sale, Borrowers must take seriously the trustee’s stated intention to foreclose on the property at the date written. For various reasons, lenders and trustees will cancel or postpone trustee’s sale, but they won’t do this simply upon request by the borrower. If the lender or trustee indicates that the sale has been temporarily cancelled or postponed, the borrower may request for written confirmation.
The Notice of Trustee’s Sale is an invitation to make an offer to enter into a contract for the property with the purchaser at the sale. The two main documents in a Trustees Sale are the Memorandum of Sale and the Trustee’s Deed of Foreclosure. The Memorandum of Sale is a written contract between the trustee and the new buyer. Some Deeds of Trust require that the trustee and the buyer make their contract on the terms set forth on the Notice of Trustee’s Sale. Sometimes trustees put additional terms into these Memoranda which create other contractual rights which may be of interest to the borrower. The Trustee’s Deed is the document conveying ownership of the property to the new buyer. A borrower investigating the validity of the foreclosure should carefully review the Deed of Trust, Notice of Trustees sale, Memorandum of Sale and Trustee’s Deed to determine whether any of the latter documents breach of the Deed of Trust. If the trustee refuses to provide a copy of the Memorandum of Sale, the borrower should seek the assistance of qualified legal counsel. Both the borrower and any potential purchasers are generally entitled to rely upon the terms of the Notice of Trustees Sale in making informed decisions about it. If the lender and trustee sell the property on terms and methods contrary to the Notice of Trustees Sale, then the Trustee’s Deed may be invalid. The validity of the Foreclosure Trustee’s Deed is an issue of great interest to any victim of wrongful foreclosure.
Many homeowners fighting foreclosure observe many contradictions between their loan documents, mailings received from the bankers and their lawyers, and the things they are told on the phone by the bankers and the banker’s lawyers. The banks have experienced foreclosure attorneys whom they may have instructed to aggressively pursue the foreclosure and eviction. The Notice of Trustees Sale is one of the essential “gears” in the “foreclosure factory” borrowers contend with. Receipt of this document may be the best time to contact qualified legal counsel to discuss your rights and options available for keeping your home.
July 1, 2016
In the classic comedy, Ferris Bueller’s Day Off, Ferris’s mother meets with the assistant principal to discuss his absenteeism. She had no idea he took 9 sick days. The school official bluntly explains: “That’s probably because he wasn’t sick. He was skipping school. Wake up and smell the coffee, Mrs. Bueller. It’s a fool’s paradise. He is just leading you down the primrose path.” Mothers of truant teenage sons aren’t the only ones succumbing to the temptation of wanting to believe that everything is fine when it isn’t. Owners busy with their jobs and families would like for their home to be worry-free. Unfortunately, the Ferris Bueller’s of the world sometimes grow up to service mortgages, manage HOA’s and handle customer service for home builders. The real estate and construction industry has some predators who lead consumers on the “primrose path.” We are not talking here about mere “sales talk” and “puffery” (for example, someone merely says that they will “treat you like family”). Promissory Fraud is when someone makes promises with no intent to follow-through but with every desire for the listener to rely upon it. In the past few years, borrowers have sued mortgage servicers for false promises of loan modifications in fraudulent foreclosure cases. Loan servicers stand in the shoes of the original mortgage lender as far as the borrower is concerned. Servicers send out the loan account statements, collect the payments and make disbursements. These cases allege that the servicers used “primrose path” tactics to conduct foreclosure fraud.
Leading along the primrose path is a powerful ploy because of the psychological roller-coaster the consumer experiences. Financial struggles, default notices and foreclosure letters causes stress and troubles that impact owners’ resources, time and relationships. Promises of time extensions, foreclosure avoidance and loan modifications are spellbinding. They invite the consumer to the much-missed happy place of living their life without threat of catastrophic financial loss. If the servicer says just the right thing, the borrower will very naturally want to let down their guard and forego more arduous tasks of forging a legal and financial solution to the problems. The false sense of security is intoxicating. When the borrower later experiences foreclosure instead of the promised modification, they are left trying to pick up the pieces.
Randolph Morrison vs. Wells Fargo Bank:
Mortgage servicers often get away with this because borrowers don’t always pay close attention to what they are actually being told. When borrower listen and take notes, they protect themselves. In 2014, a federal judge in Norfolk considered a claim for fraud based on telephone misrepresentations that Wells Fargo Bank allegedly made in the foreclosure context. When Virginia Breach homeowner Veola Morrison died in 2009. Her family received a notice that the property would be foreclosed on January 19, 2011. Veola’s son Randolph offered to assume the mortgage and requested an interest rate reduction. On January 12, 2011, a Wells Fargo employee told Randolph that he was approved for a loan modification and that the January 19, 2011 foreclosure would not take place. Wells Fargo sent Randolph a letter dated January 14, 2011 offering him a special forbearance agreement, requiring him to make his first payment on February 1, 2011. A “forbearance” is when the lender agrees to hold off on foreclosure and collection activities for a period of time in anticipation that the borrower will resolve short-term cash flow difficulties. They said that the foreclosure would be suspended so long as Randolph kept to the terms of the agreement. In spite of these representations, Wells Fargo Bank’s substitute trustee conducted the foreclosure sale anyway on January 19, 2011. In his suit, Randolph alleged that he reasonably relied upon a telephone statement by Wells Fargo that the January 19, 2011 foreclosure would not occur. He relied upon the subsequent letter saying when he had to make his next monthly payment. Relying on these representations, Randolph did not take other actions to prevent foreclosure such as hiring an attorney. After he discovered what happened, Randolph sued Wells Fargo. The Court denied Wells Fargo’s initial motion to dismiss the case and allowed Randolph’s claim for promissory fraud to proceed in Court. The case settled before trial.
Alan & Jackie Cook vs. CitiFinancial, Inc.:
Just because a false reassurance is not in writing doesn’t mean that the borrower can’t sue for fraud. Virginia Federal Judge Glen Conrad considered this question in 2014. Jackie & Alan Cook owned a property in Lovington, Virginia. In September 2011, Mr. Cook explained to his lender CitiFinancial, Inc. that he was current on his loan but struggling to make payments. The branch manager suggested that he pursue a loan modification through the Home Affordable Modification Program (“HAMP”). The manager told Mr. Cook that if he stopped paying, the lender would “have to modify the loan” and it would probably be able to cut the interest rate and principal owed. Mr. Cook became leery and asked questions. The manager reiterated that he should just stop making payments and ignore the bank’s letters until he received a notice with a date for the foreclosure sale. The customer services rep told Mr. Cook that once he got the foreclosure notice he could call the number on it and get started. Per the manager’s instructions, Mr. Cook stopped making payments and ignored the servicer’s default letters.
On June 17, 2013, Cook received a notice that on July 17, 2013, foreclosure trustee Atlantic Law Group would sell his Nelson County property in foreclosure. Remembering what CitiFinancial originally said, Cook tried to call the loan servicer 20 times, receiving no answer or he was hung up on. Finally, on July 11, 2013, Mr. Cook got ahold of CitiFinancial who told him what information they needed for a loan modification. When Mr. Cook talked to another employee of the servicer, he was told that his case would remain on “pending/hold status” for 30 days in order for him to obtain the necessary documents, and that the scheduled foreclosure would be postponed during that time. On July 17, 2013, the noticed day of foreclosure, one employee of the servicer told him on the telephone the “great news” that he was awarded a loan modification. Later that day, he talked to another employee of the servicer who told him that the foreclosure would indeed proceed as originally scheduled, because he failed to provide them with necessary documents. When Mr. Cook asked her about the 30-day hold period that he was previously given, she replied that “she had never heard of such a thing” and that there was nothing to be done to stop the foreclosure sale. Notice how the servicer used a new misrepresentation about the 30-day period to keep Mr. Cook on the “primrose path” even after he struggled to communicate with him after defaulting per their instruction. Mr. Cook rushed to an attorney’s office but by the time the trustee received the attorney’s letter the sale had already occurred. Use of the primrose path strategy is particularly damaging because the new buyer can use the foreclosure trustee’s deed to initiate eviction proceedings. Citi bought this property at the trustee’s sale and brought eviction proceedings against Mr. Cook. Cook filed suit, basing fraud claims on the servicer’s false promises. CitiFinancial initially moved for the court to dismiss the lawsuit, arguing that Cook could not have reasonably relied upon the false oral representations because the promissory note and deed of trust provided unambiguous terms for foreclosure in the event of default. Citi seemed to be saying that only things that are in writing are official in the mortgage context. Judge Glen Conrad rejected this argument because the question of whether Cook was justified to rely upon Citi’s oral statements was an evaluation of the credibility of witnesses at trial.
Jackie & Alan Cook’s case settled before trial. An agreed order reversed the foreclosure sale. While a servicer misrepresentation doesn’t have to be in writing to constitute fraud, the dispute may come down to a “he-said she-said” at trial. Few borrowers will take careful notes at the time these discussions take place. While defendants may be required to make document disclosures, homeowners can’t count on getting copies of servicer notes and internal messages during the litigation. Search warrants are not available in civil cases.
The experiences of the Morrisons and Cooks are common amongst different lenders all across the country. It’s best for homeowners struggling with their mortgages avoid the “primrose path” promises made by some servicers, foreclosure trustees and foreclosure rescue scams. If it sounds too good to be true, then it deserves thorough review and consideration. However, there are many situations where relying upon the representations of a lender or trustee is the only reasonable option. Once the foreclosure trustee’s deed is recorded, the borrower may face eviction proceedings. If a trustee or servicer breaches the mortgage documents or makes misrepresentations in conducting a foreclosure, the borrower should contact qualified legal counsel immediately.
June 21, 2016
My parents are retired schoolteachers. Growing up, we watched our share of public television. I remember watching a British documentary by James Burke called, “The Day the Universe Changed.” This program focused on the history of science in western civilization. Scientific developments affect public perceptions of man’s place in the world. Each episode dramatically built up to a momentous change in scientific perception. For example, when scientists determined that the earth circles the sun (and not the opposite), it felt as though the “universe changed.” The title of the final episode was, “Worlds Without End: Changing Knowledge, Changing Reality.” Provocative stuff for 1985. I went on to study the history of science for four years in liberal arts college.
Property: Ownership & Possession:
In the law there is a difference between the reality of how people think and act in real life, on the one hand, and the reality of courthouse activities on the other. For example, people frequently lie when under the stress of questioning. Courts developed a comprehensive set of evidence rules to determine what documents and testimony are acceptable. The rules of evidence are not a formalization of the way people ordinarily evaluate truth-claims. As another example, outside of Court, non-lawyers understand the difference between the right of ownership and the right to possess or occupy any property. The right of ownership is superior to, and often includes the right to possess. These rights are distinct but unseverably connected. Attorneys and nonlawyers understand the difference between being an owner, a tenant, or an invited guest. By contrast, since before the Civil War, Courts in Virginia enforced the conceptual separation between the right to claim ownership and the right to evict an occupant and gain exclusive possession. The courts did this by not allowing an occupant to raise a competing claim of ownership as a defense in an eviction suit. In many cases, attorneys would have to “lawsplain” why a borrower could not effectively assert the invalidity of the foreclosure in the eviction case brought by the new buyer. Practically speaking, the borrower had to defend the eviction case while also filing another, separate lawsuit of her own to raise her claims to rightful title to protect her property rights. The rules required a financially struggling borrower to litigate overlapping issues in two separate cases at the same time against overlapping parties. If you are reading about this and think that it makes no sense, you are right, it doesn’t. But this was the way that the Virginia eviction world worked for a very long time.
Instant Legal Reform:
And then June 16, 2016 was the day the entrenched worldview of foreclosure contests and evictions in Virginia changed forever, or at least until the General Assembly holds its next session. The Supreme Court of Virginia published a new opinion overturning 150-200 years of precedent in this area. This opinion is important to anyone who lives or works in any real estate with a mortgage on it. Virginia appellate law blogger Steve Emmert observed that this decision represents a “nuclear explosion” and that “. . . dirt lawyers are going to erupt when they read . . .” This case is a game-changer that unsettles much of real estate litigation in Virginia.
My Professional Interest:
Since the foreclosure crisis exploded in 2008, I have litigated foreclosure cases in Virginia on behalf of borrowers, lenders and purchasers. Before June 16, 2016, few expected the rules of the road to change dramatically. The Supreme Court of Virginia has hundreds of years of precedent underlying the existing state of affairs. The banking industry maintains an effective lobbying presence with the General Assembly. Victims of foreclosure abuses play the game of survival; few become activists. Yet, common-sense would dictate that having two separate lawsuits (the eviction case and ownership dispute) proceeding through the court system at the same time wastes resources for everyone. This impacts borrowers the most because they are in the least favorable position to pursue multiple lawsuits at the same time.
Parrish Foreclosure Case:
Teresa and Brian Parrish took out a $206,100 deed of trust (mortgage) on a parcel of real estate in Hanover County, Virginia. This deed of trust’s provisions incorporated certain federal regulations into its terms. These regulations prohibited foreclosure if the borrower submitted a complete loss mitigation application (a.k.a., loan modification application packet) more than 37 days before the trustee’s sale. Federal National Mortgage Association (“Fannie Mae”) had an interest in the home loan. The Parrishes timely submitted their application packet. Regardless, in May 2014, ALG Trustee, LLC sold the Parris property to Fannie Mae at the foreclosure sale. Fannie Mae then filed an unlawful detainer (eviction) lawsuit against the Parrishes in the General District Court (“GDC”). The GDC is the level of the court system that most Virginians are familiar with. People go to the GDC for traffic tickets, collection cases $25,000.00 or less, evictions and “small claims” cases. In the GDC, the Parrishes did not formally seek to invalidate the foreclosure sale. Instead, they argued that they were entitled to continue to possess the property because ALG conducted the foreclosure sale while the loan modification application was pending. The GDC judge took a look at the Trustee’s Deed that ALG made to Fannie Mae and ordered the sheriff to evict the Parrish family. The Parrishes appealed the case to the Circuit Court. The Circuit Court granted a motion affirming the lower decision in Fannie Mae’s favor. The Parrishes sought review of the case by the Supreme Court. The Supreme Court of Virginia’s June 16th opinion is a mini-treatise for the new landscape of foreclosure legal challenges.
Questions of Ownership and Occupancy Are Inextricably Intertwined:
The Justices directly addressed the question of the GDC’s jurisdiction. Unlike the Circuit Court, the GDC does not have the statutory legal authority to decide competing claims to title to real estate. That said, in each post-foreclosure unlawful detainer case the GDC must base its decision on whether the presentation of the Trustee’s Deed of Foreclosure is sufficient evidence of title to grant the eviction. Under longstanding legal precedent, the Parrishes’ contention about their loan modification application would not be heard in the unlawful detainer case because the borrowers can’t invalidate the foreclosure deed in the GDC. But on June 16, 2016 that all changed. The majority found that the validity of the foreclosure purchaser’s claimed right to possess the premises cannot be severed from the validity of that buyer’s claimed title because that title is the only thing from which any right to occupy flows. “The question of which of the two parties is entitled to possession is inextricably intertwined with the validity of the foreclosure purchaser’s title.”
From this insight, one must call to question the practical requirement for the borrower to bring his own separate lawsuit against the buyer, trustee and lender to reverse the foreclosure, confirm the right to possess and other relief. Why not have a procedure where all of the related claims can be combined?
What Are Lawyers to Do Now?
Okay, now the “universe has changed.” How do borrowers raise this issue in defense of post-foreclosure evictions? Is there anything that the foreclosure buyer can do about this? The Supreme Court recognizes many reasons why a borrower might have a legitimate claim that the foreclosure sale was legally defective, including but not limited to:
- Fraud (by the lender and/or foreclosure trustee)
- Collusion (between the trustee and the purchaser)
- Gross Inadequacy of Sale Price (so low as to shock the conscience of the judge)
- Breach of the Deed of Trust (for example the regulations about the loan modification application)
The Supreme Court’s new opinion states that the homeowner could allege facts to put the validity of the foreclosure deed in doubt. By the court’s new standard, if the borrower sufficiently alleged such a claim, the GDC becomes “divested” of jurisdiction. When the judge determines that he has no jurisdiction because there is a bona-fide title dispute, he must dismiss the entire case. From there, the new buyer would have to re-file the case in the Circuit Court where the parties would then litigate everything.
I expect that the General Assembly will enact new legislation in its next session that will clarify the jurisdiction of the GDC and the procedures for post-foreclosure unlawful detainers. At least until then, purchasers and lenders will not have the same ability to use the unlawful detainer suit as a weapon in their struggles with borrowers in foreclosure contests. Homeowners’ abilities to fight foreclosures will be streamlined. Justice McClanahan wrote a dissent where she explained the meaning of this in remarking that the majority of justices,
practically eliminated the availability of the summary [i.e. expedited] proceeding of unlawful detainer to purchasers of property at foreclosure sales. The majority’s new procedure for obtaining possession operates to deprive record owners of possession until disputes over “title” are adjudicated after the record owner has sought the “appropriate” remedy in circuit court.
The Supreme Court of Virginia reversed the decision of the Circuit Court and dismissed the unlawful detainer proceeding brought against the Parrishes.
I welcome the Court’s recognition that the rights of title and possession are “inextricably intertwined”. In post-foreclosure disputes between the borrower, purchaser, lender and trustee, bona fide ownership claims should certainly be decided in court before the sheriff kicks anyone out of their house. Eviction procedures should not be used as a weapon to railroad homeowners out of their houses. It makes no sense for there to be more than one legal case about the same thing. Hopefully the General Assembly will adopt new legislation accepting these revelatory developments while clarifying and streamlining court jurisdiction and procedures so that the parties need not litigate any more than is necessary to properly decide who has the right to own and possess the foreclosure property. The universe has changed, and we are closer to a future where the court procedures do not unfairly burden one side over the other and it is easier for each case to be decided on its merits and not who runs out of money first.
UPDATE: I was interviewed by Shu Bartholomew on her radio show/podcast, “On the Commons” about this Parrish v. Fannie Mae case. The podcast is now available.
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.
October 19, 2015
What reasonable steps can investors take to build a better foreclosure property portfolio? People who have access to more information tend to make better decisions in the long haul. In the 1990’s Sci-fi TV show, The X Files, David Duchovny portrayed a rogue FBI agent determined to uncover a government conspiracy to cover-up the existence of UFO’s. In the opening sequences announcing the name of the show and the cast there was a message, “The Truth is Out there.” While few people claim to be able to relate to experiences with UFO’s (not me), shows like The X Files are popular because everyone experiences feelings of curiosity, distrust and fear from time to time. In the world of real estate foreclosure, investors owe it to themselves to get to as much of the “truth” as may be “out there” before making a commitment to purchase a property shrouded in mystery. There are ways purchasers protect themselves at foreclosure sales.
On March 4, 2015, I published a blog post comparing buying real estate through brokers vs. foreclosure sales. That article explained how foreclosures come at lower prices because of greater risks. These concerns rightfully discourage many shoppers from looking for a personal residence at a foreclosure sale. For those investors for whom bidding at foreclosure sales makes sense, how can they manage the risks and increase the likelihood that the purchase will be a rewarding? Even before making a bid, the purchaser makes a time investment by reading the classified advertisements, researching sales data, driving by the property, lining up the purchase money and going to go to the auction. Why should a purchaser spend any more time on one opportunity than it deserves? The following are strategies that foreclosure investors can easily take to increase their success:
- Research the Property. In some commercial foreclosures, the trustee evicts the occupants first and holds an open house for potential buyers. When this is not available, a potential purchaser can at least drive by the property. What are the neighboring land uses? The bidders can obtain comparable sales data online first to see what is happening in the neighborhood. City or county tax assessment data is publically available online.
- Research Pending Lawsuits. The purchaser is already at the courthouse to bid on the property. Why not check to see if there are any active lawsuits involving the property? Hopefully, the trustee would know this and react appropriately, but a bidder can only know for sure by checking.
- Obtain a Title Examination. Ordinarily, a purchaser would not worry about title problems until someone alerted them. This is normally the concern of the settlement company in origination of the title policy. Many investors assume that the trustee conducting the foreclosure will not sign the deed unless they are prepared to stand behind it. Experienced investors purchase title insurance as a precaution. While these steps are reasonable, there is nothing that prevents an investor from spending a couple hundred dollars on a title report or taking time to research land records themselves. Any deviation in the foreclosure process from the terms of the deed of trust may be grounds for a suit filed by the borrower. I discussed this in a May 14, 2014 blog post about a lender’s failure to conduct a pre-foreclosure face-to-face meeting with the borrower. In Squire v. VDHA, the deed of trust incorporated HUD regulations requiring an effort to conduct such a meeting. The Supreme Court of Virginia observed that,
A trustee’s power to foreclose is conferred by the deed of trust. That power does not accrue until its conditions precedent have been fulfilled. The fact that a borrower is in arrears does not allow the trustee to circumvent the conditions precedent.
Foreclosure trustees may be under various pressures to ignore provisions in the loan documents. Without a copy of the deed of trust, the bidder won’t know whether things are off course until after making a substantial deposit.
- Investigate the Community Association. Many properties are subject to covenants, rules and regulations of the neighborhood property owner’s association. A new purchaser will be bound by the governance of the board of directors and their property manager. Covenants and bylaws are found in the land records. Some associations post their rules and regulations on the internet. Whatever the new purchaser wants to do with the property may be limited by how the HOA rules are enforced. Associations can range from boards that reasonably collect and spend dues to cover essential maintenance of common areas to aggressive debt collectors using fines for rule violations to generate revenue. Under Virginia law, a purchaser becomes a party to the HOA covenants (contract) at the consummation of the sale. While not strictly a foreclosure related issue, dealing with the HOA is a part of the true cost of ownership. Many investors incorrectly believe their HOA responsibilities are limited to paying the monthly dues.
- Review the Memorandum of Sale. If the purchaser makes the highest bid, the trustee will give her a Memorandum of Sale. This written agreement functions similar to the Regional Sales Contracts that real estate agents complete for their clients. Foreclosure sales typically occur in front of the courthouse. Buyers may not feel motivated to carefully read these Memoranda. Everyone is standing up, the weather may be unpleasant and people are waiting to leave. These distractions do not diminish the commitment represented by signing the document and making the deposit. The terms of the Memorandum of Sale will define the rights of the parties in anticipation of the real estate closing. This includes if and when the Trustee or the purchaser can get out of the contract. A purchaser can compare the Notice of Sale, Trustee Appointment and the Deed of Trust to the Memorandum of Sale before signing anything. The Deed of Trust reflects the trustee’s authority to conduct the sale. A Trustee may even be willing to share a copy of their form before the sale occurs.
- Ask the Trustee Questions. Purchasers can have a hard time talking with people associated with a property. The current occupants probably aren’t talking much. When asked questions, the trustee may respond that they have duties to the lender and the borrower. The trustee may not volunteer as much information as a realtor would in a conventional transaction. However, to the extent the trustee and the purchaser are both signing the Memorandum of Sale, the purchaser has a reasonable expectation that the trustee answer questions about those terms.
Time constraints may not allow an investor to investigate all of these issues before every trustee’s sale. The property may go into litigation or have problems with its physical condition even if these steps do not reveal a problem. The same could be said about any investment. One of the other messages related in the opening sequences of The X Files was “Trust No One.” This reflect one extreme on the trust/distrust spectrum. People who live on this extreme are less likely to put themselves at litigation risk but often find themselves living in isolation or vulnerable to manipulation. In the world of real estate, many investors want to make quick, substantial returns while investing as little time as possible. Under these pressures, it is easy to operate to far on the opposite, overly trustful side of the spectrum. Potential buyers with the financial means to make this kind of investment have the discretion and the right to decide how much of these issues they want to deal with up front and which they can live with as a risk of doing business. Careful purchasers protect themselves at foreclosure sales. Expect the trustee to be an experienced foreclosure lawyer. Anyone investing in foreclosures should have qualified legal counsel of their own retained even before they make their first bid.
March 18, 2015
Successful law firms cultivate, among other things, professional referral sources and a reputation for responding to client needs. Can these best practices be taken too far? This topic came up in a federal court opinion issued in a class action lawsuit brought by home loan borrowers against Friedman & MacFadyen, a Richmond debt collection law firm and its foreclosure trustee affiliate.
On February 27, 2015, I wrote an entry about the Fair Debt Collection Practices Act claim in this case, Goodrow v. Friedman & MacFadyen. The law firm had a practice of sending letters to borrowers, threatening to file lawsuits. Later correspondence referred to lawsuits. However, the borrowers alleged in their class action that no such lawsuits were ever filed. The FDCPA claim sought money damages for the alleged False Representations. What would motivate a law firm to threaten to sue and later make references to non-existent suits if the goal was foreclosure? Another part of the judge’s opinion suggests an answer.
Fannie Mae and its loan servicers retained Friedman & MacFadyen and F&M Services, Inc., to collect on home loan debts by foreclosing on deeds of trusts in Virginia. The borrowers allege that this specific arrangement incentivized the law firm to complete foreclosures quickly and discouraged delays and loan modification workouts. In the foreclosure, the lender appointed F&M Services, Inc., as substitute trustee under the mortgage documents. A third-party, Lender Processing Services, Inc., played a significant role. LPS maintained a rating system for foreclosure law firms. Timely completion of matters timely would earn a firm a “green” rating. Mixed results earned a “yellow” designation. If matters got bogged down, a “red” rating could result in loss of future referrals (the opinion does not reference any colored cupcakes). This foreclosure law firm rating system played a key role in the facts of the case. LPS required the law firm to pay a referral fee for each case. At the end of each matter, Friedman & MacFayden filed a trustee’s accounting with the local Commissioner of Accounts. According to the plaintiffs, the $600.00 trustee’s commission listed on the accountings included an undisclosed referral disbursement to LPS.
The class action lawsuit accused the defendants of breaching their trustee’s duties in the foreclosures. The borrowers also alleged that the law firm engaged in impermissible “fee-splitting” with the non-lawyer referral company LPS. A foreclosure trustee is forbidden from purchasing the property at the sale. The Trustee’s own compensation is subject to review in the filed accounting. In foreclosure matters, courts in Virginia interpret a foreclosure trustee’s duties to include a duty to act impartially between the different parties who may be entitled to the property or disbursement of the proceeds of the sale, including the lender, borrower and new purchaser. Concurrent with such trustee duties, the defendants had their arrangement with Fannie Mae and LPS.
This is where the representations in the correspondence to the borrowers seem to fit in. If borrowers demanded loan modifications, made repeated inquiries, requested postponement or filed contesting lawsuits, then matters could be delayed. The law firm’s colored rating with LPS might be downgraded and cases might stop coming.
The law firm was not purchasing the properties itself in the sales at a discount. However, they were alleged to be financially benefiting from the disbursement of the proceeds of the sale in a manner not reflected in the trustee’s accounting statements. Further, any amount paid to LPS from the sale went neither to reduction of the outstanding loan amount or for allowable services in the conduct of the sale.
In considering the facts, the federal court denied the defendant’s motion to dismiss the borrowers’ Breach of Fiduciary Duty claim. The court found those claims to adequately state a legal claim that would potentially provide grounds for relief.
Whether a borrower has grounds to contest a real estate foreclosure action in court depends upon the facts and circumstances of each case. The Goodrow case illustrates how many of those circumstances may not be apparent from the face of the loan documents, correspondence or trustee’s accounting statements. If you have questions about the legality of actions taken in a foreclosure, contact a qualified attorney without delay.
(I would like to thank the generous staff member who brought in the cupcakes depicted on the featured image. They were delicious and great to photograph!)
March 4, 2015
Recently a friend shared with me her interest in purchasing a home at a foreclosure auction. Many buyers look to foreclosures in the hope of finding a bargain. Foreclosure sales occur year-round. On the other hand, “conventional” sales through realtors follow a seasonal pattern. When the ice and snow melt and winter winds retreat northward, sellers start to put their homes on the market. In March, potential buyers call real estate agents and loan officers. The first crop of “For Sale” signs is a harbinger of spring. Experienced real estate professionals and investors know that finding the right foreclosure purchase is not as simple as reading an advertisement, showing up at the sale and making a bid. But is this option right at all for families seeking a place to live? Sometimes foreclosure investments do not work out well even for seasoned investors. Today’s blog post compares buying a home through realtors versus foreclosure sales in Virginia.
- Salespersons vs. Debt Collectors: Personal interaction defines shopping experiences. Real estate agents advertise the property through internet listings, brochures, signage and open houses. With the help of their own agent, potential buyers bid against each other. In a “conventional” property sale, the buyer’s interface is through these sales and marketing professionals. By contrast, debt collection attorneys lead foreclosures in Virginia. The lender retains the attorney to collect on the current owner’s home loan debt. Interested investors go to the front of the courthouse to bid on the property at the sale. In the sale, the debt collection attorney also acts as a trustee. In a previous blog post, wrote about a foreclosure trustee’s duty of impartiality. Buyers must consider the significant difference between doing business through salespersons vs. debt collectors.
- Motives of Current Owner: Real estate transfers through realtors are voluntary. Agents list properties because the sellers want them on the market. If a buyer thought that the seller might sue them after the closing, or refuse to move out, they would never make an offer in the first place. In foreclosure, the previous owners often refuse to leave willingly. The lender or buyer may need to evict them through court in order to get physical possession of the property. Frequently a borrower suffering a foreclosure files a lawsuit against the new owner, the bank or the foreclosure trustee to test the legal validity of the sale. Foreclosure sales have a substantially higher risk of litigation than “conventional” transactions through real estate agents. Investors can’t count on being handed the prior owner’s keys.
- The Condition of the Property: Real estate agents know that sales require exposing the property to the market through internet listings, disclosures, brochures, open houses, signs and home inspections. However, investigating the features and condition of a foreclosure property is a struggle. The trustee usually provides little more than the minimum amount of advertising and disclosures. There is not much of a budget for marketing. The foreclosure property likely needs repair. When homeowners struggle to pay their bills, they often stop making repairs before defaulting on mortgage payments. Most foreclosure properties require substantial renovation before they can be occupied again.
When people shop for a home to live in, usually they want a “turn-key” proposition. They don’t want to invest time and resources before moving in or renting it out. With so many challenges and uncertainties, who would seek to buy a home at a foreclosure sale in Virginia? Well, it’s all about one’s ability to manage risks. This is why often only the bank bids at the foreclosure sale. The only other bidders may be investors who specialize in distressed real estate. If you are one of these investors, or are interested in becoming one, add a qualified attorney to your “team” to assist with the real estate, litigation and construction aspects of managing these risks.