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).
May 29, 2014
On May 20th I attended the 32nd Annual Real Estate Practice Seminar sponsored by the Virginia Law Foundation. Attorney Jim Cox gave a presentation entitled, Affecting Real Estate at Death: the Virginia Real Property Transfer on Death Act. Jim Cox presented an overview of this new estate planning tool that went into effect July 1, 2013.
Use of Transfer on Death (“TOD”) beneficiary designations for depository and retirement accounts is widespread. This 2013 Act allows owners of real estate to make TOD designations by recording a Revocable Transfer on Death Deed in the public land records.
The introduction of TOD Deeds is of interest to anyone involved in estate planning or real estate settlements. The following are 8 key aspects of this development in Virginia law:
- Not Really a “Deed.” A normal deed conveys an interest in real property to the grantee. A TOD Deed is a will substitute that becomes effective only if properly recorded and not revoked prior to death. The Act’s description of this instrument as a “deed” will likely be a source of confusion.
- Formal Requirements. A TOD Deed must meet the formal requirements of the statute in order to effect the intent of the owner. It must contain granting language (a.k.a. words of conveyance) appropriate for a TOD Deed. It is not effective unless recorded in land records prior to the death of the transferor. The statute contains an optional TOD Deed form. Due to the formal requirements, I cannot image advising someone to do one of these without a qualified attorney.
- Beneficiary Does Not Need to be Notified. Although a TOD Deed becomes public when filed, the transferor does not need to notify the recipient. The beneficiary may not learn about the designation until after the transferor’s death. At some point, the local government will change the addressee on the property tax bills.
- Freely Revocable. The transferor can revoke the TOD designation at any time prior to death. In fact, a TOD Deed cannot be made irrevocable. A revocation instrument must be recorded in land records.
- Unintended Title Problems. The Act takes pains to avoid creating title defects on the transferor’s title prior to death.
- Can be Disclaimed. The beneficiary can disclaim the transfer after the death of the transferor.
- Subject to Liens. Recording a TOD Deed does not trigger a due-on-sale clause in a mortgage. At the date of death, the beneficiary’s interest is subject to any enforceable liens on the property.
- Creditor Claims & Administration Costs. The beneficiary’s interest in the property is subject to any general claims of the transferor’s creditors or the expenses of the estate administration. Such claims may attach up to one year after the date of the transferor’s death. For this reason, the TOD beneficiary’s interest in the property or the proceeds of its sale will be uncertain until that 12 month period expires. However, taxing authorities, insurance companies, HOA’s and banks will expect payment prior to the end of those 12 months.
Each family has unique estate planning needs. The Va. Real Property TOD Act is a new gadget in the toolbox for crafting a plan that addresses individual desires and circumstances. Combining TOD Deeds with other estate planning tools such as wills and trusts requires careful integration to avoid unintended consequences. Estate planning and real estate practitioners will overcome any initial reluctance to use of TOD Deeds as they become subject to the test of time.
If you learn that you are the beneficiary of a TOD deed and are uncertain as to your rights and responsibilities with respect to the property, contact an experienced real estate attorney.
February 5, 2014
On January 3, 2014, the U.S. Consumer Financial Protection Bureau published a request for input from the public about the home mortgage closing process. 79 F.R. 386, Docket CFPB-2013-0036. The CRPB requested information about consumers’ “pain points” associated with the real estate settlement process and possible remedies. The agency asked about what aspects of closings are confusing or overwhelming and how the process could be improved.
The settlement statement is an explanatory document received by the parties at closing. The statement lists taxes along with other charges. The settlement agent sets aside funds for payment of both (a) the county or city’s property ownership taxes and (b) transfer taxes assessed at the land recording office. The property taxes are a part of a homeowner’s “carrying costs.” The recording taxes are part of the “transaction costs.” Typically, neither the buyer nor the seller qualify for a recording tax exemption.
The federal government advances policies designed to increase consumers’ access to affordable home loans. The Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) provide a government-supported secondary market. They purchase some home mortgages from the lenders that originate them. The Federal Housing Finance Agency regulates these chartered corporations. In 2008, FHFA imposed a conservatorship over Fannie Mae & Freddie Mac.
In the years leading up to the crisis of 2008, Fannie and Freddie used their government sponsorship to purchase some of the higher-rated mortgage-backed securities. See Fannie, Freddie and the Financial Crisis: Phil Angelides, Bloomberg.com. As the secondary-market purchaser of these home loans, Fannie and Freddie have foreclosure rights against defaulting borrowers and distressed properties. These corporations participate in the home mortgage process from origination, through purchase post-closing, and, in many cases, subsequent foreclosure-related sales.
Congress exempts Fannie Mae and Freddie Mac from state and local taxes, “except that any real property of [either Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” 12 U.S.C. sections 1723a(c)(2) & 1452(e). Which local real estate taxes does this exception apply to? The ownership tax, transfer tax, or both? The statute does not specifically distinguish between the two. Fannie and Freddie concede that they are not exempt from the tax on property. However, they decline to pay the transfer taxes assessed for recording deeds and mortgage instruments in land records. This is one advantage they have over non-subsidized mortgage investors. Local governmental entities and officials from all over the U.S. challenge Fannie & Freddie’s interpretation of the exemption statute since it represents a substantial loss of tax revenue. This blog post focuses on two recent opinions of appellate courts having jurisdiction over trial courts sitting within the Commonwealth of Virginia.
Jeffrey Small, Clerk of Fredericksburg Circuit Court, attempted to file a class action against Fannie & Freddie in federal court on behalf of all Virginia Clerks of Court. Small v. Federal Nat. Mortg. Ass’n, 286 Va. 119 (2013). Mr. Small challenged their failure to pay the real estate transfer taxes. The Defendants argued that the Clerk lacked standing to bring the suit for collection of the tax. A Virginia Clerk of Court’s authority is limited by the state constitution as defined by statute. In the ordinary course of recording land instruments, the Clerk’s office collects the transfer tax at the time the document is filed. One half of the transfer taxes go to the state, and the other half goes to the local government.
To resolve the issue, the Supreme Court of Virginia found that if the taxes are not collected at the time of recordation, then the state government has the authority to bring suit for its half, and the local government to pursue the other half. The Virginia clerks do not have the statutory authority to bring a collection suit for unpaid transfer tax liability. Because they lack standing, the court dismissed the clerk’s attempted class action against Fannie and Freddie for the transfer taxes.
Maryland & South Carolina:
Montgomery County, Maryland and Registers of Deeds in South Carolina brought similar federal lawsuits challenging Fannie and Freddie’s non-payment of recording taxes. See Montgomery Co., Md. v. Federal Nat. Mortg. Ass’n, Nos. 13-1691 & 13-1752 (4th Cir. Jan. 27, 2014). The Fourth Circuit also hears appeals from federal Courts in Virginia. This case proceeded further than Mr. Small’s. The Appeals Court found that:
- Property taxes levy against the real estate itself. Recording taxes are imposed on the sale activity. The federal statute allows states to tax Fannie and Freddie’s ownership of real property. The statute exempts Fannie and Freddie from the transfer taxes.
- Congress acted within its constitutional powers when it exempted Fannie and Freddie from the transfer taxes, because this may help these mortgage giants to stabilize the interstate secondary mortgage market.
- The exemption does not “commandeer” state officials to record deeds “free of charge,” because the states are free to abandon their title recording systems. By this analysis, the exemption is not a federal unfunded mandate on state governments because the decision to include a land recording system as a feature of property law is not federally mandated.
Some federal courts in other parts of the country have reached analogous conclusions. e.g., Dekalb Co., IL v. FHFA (7th Cir. Dec. 23, 2013)(Posner, J.). This legal battle wages on in the federal court system, but the results so far favor Fannie and Freddie.
Is abandoning the land recording system a realistic option? In Greece and other countries lacking an effective land recording system, property rights are uncertain and frequently brought before the courts for hearing. See Suzanne Daily, Who Owns This Land? In Greece, Who Knows?, New York Times. Like Fannie & Freddie, land recording systems advance the policy interests of stabilizing private home ownership.
Fannie and Freddie aren’t required to pay locally collected recording taxes. Their “share” of the overhead for maintaining the land recording system come from other sources. This includes the recording fees paid by ordinary parties in real estate closings across the country. Does this give the mortgage giants an unfair competitive advantage over other institutional investors in the re-sale of foreclosed homes?
Are these differing tax treatments properly considered in the CFPB’s discussion about the “pain points” in closings? Settlement statements provide clarity regarding the charges listed. The transfer and property taxes assessed in real estate closings are confusing and overwhelming, in part because they represent hidden costs. These hidden costs include the exemptions afforded Fannie Mae and Freddie Mac. The purpose of these institutions is to help mortgage consumers. Should the tax loophole should be closed or the hidden costs be disclosed to consumers? Perhaps one of these change would advance the CFPB’s “Know Before You Owe” initiative.