Make My Day: States Dare Servicers to Foreclose

States are not waiting around for the federal government to bail out Main Street. Congress has enacted an ambitious agenda for both the U.S. Department of Treasury to purchase distressed mortgage loans under the Troubled Asset Relief Program and the Federal Housing Administration to refinance distressed mortgage loans with insured loans under the Hope for Homeowners Program.

To date, Treasury has not purchased a single loan under TARP, and HUD has not insured many, if any, loans under the Hope program. Yet approximately 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those expected to lose their homes. States are doing what they can to stop foreclosures in their tracks or make it so burdensome to foreclose that generous loan modifications look better and better. Of course, the Constitution sharply limits states' ability to enact laws that retroactively modify existing contracts between private parties, but that has not stopped states from getting as close to the line as possible.

Notice of Intent to Foreclose

A number of states have enacted measures to facilitate greater communication between borrowers and lenders by requiring mortgage servicers to provide certain notices to defaulted borrowers prior to commencing a foreclosure action. The measures serve a dual purpose, providing more meaningful notice to borrowers of the status of their loans and slowing down the rate of foreclosures within these states. For instance, the North Carolina Legislature enacted a pair of bills (House Bill 2463 and House Bill 2623) that require a mortgage servicer to mail a homeowner a notice of intent to foreclose at least 45 days before initiating a foreclosure action on a loan. The notice must be in writing, and must detail all amounts that are past due and any itemized charges that must be paid to bring the loan current, inform the homeowner that he or she may have options as an alternative to foreclosure, and provide contact information of the servicer, HUD-approved foreclosure counseling agencies, and the state Office of Commissioner of Banks.

The equivalent laws in some other states present an even greater compliance challenge for servicers. Under Maryland S.B. 216/H.B. 365, a secured party may not file an action to foreclose a mortgage or deed of trust on residential property until the later of 90 days after default or 45 days after sending a Notice of Intent to Foreclose to the mortgagor or grantor and to the record owner with a copy to the Commissioner of Financial Regulation.

Under New Jersey Assembly Bill 2780 (the "Save New Jersey Homes Act of 2008"), which applies to certain adjustable-rate mortgages, a creditor issuing a notice of intent to foreclose must provide the borrower with a series of written notices that include information prescribed by the statute. The creditor must send each notice in an envelope printed with a lengthy disclosure, including the statement: "The New Jersey Legislature has enacted the Save New Jersey Homes Act of 2008, which may help you save your home from foreclosure." While the intent of this requirement is to encourage borrowers to read the notice, it raises issues under the federal Fair Debt Collection Practices Act regarding loans subject to the statute.

Mandatory Settlement Conferences and Mediation

As another alternative to foreclosure, some jurisdictions are requiring lenders and troubled borrowers to participate in mandatory settlement conferences. Most recently, New Jersey Chief Justice Stuart Rabner announced a statewide program in which courts will require mediation in any case in which a homeowner contests a foreclosure action. If the homeowner does not contest the foreclosure, participation is voluntary and mediation is available until the time of the sheriff's sale. The program originated in one New Jersey county, but is expected to expand throughout the state in the next several months.

Under New York Senate Bill S. 8143-A, parties to a foreclosure action involving certain loan types must attend a settlement conference within 60 days of the lender serving the notice of intent to foreclose required under that law. New York legislators intended the conference to facilitate the parties' discussion of their respective rights and obligations under the mortgage and applicable laws, assess their potential to agree on an alternative to foreclosure, and document and finalize the details of any compromise they reach. Similarly, a recently enacted Ohio bill permits a court to order the parties to any foreclosure action to participate in mediation in person.

Tenant's Rights

Tenants have become victims of the foreclosure crisis in large numbers. A handful of states have passed measures to extend protections to tenants living in properties from which they may be evicted as a result of foreclosure proceedings. Illinois has been at the forefront of efforts to protect tenants' rights. Gov. Rod Blagojevich signed a measure expanding a tenant's right to remain in a mortgaged residential property during the foreclosure process. Under previous Illinois law, a tenant could remain in possession for the lesser of 120 days or the remainder of his or her lease. The new measure gives a tenant the right to remain in possession of a property in foreclosure if he or she has made a "good faith effort" to pay rent on the property. California enacted a similar law, under which a person or entity foreclosing on a property must provide any tenant or subtenant living in a rental unit at the property 60 days written notice prior to eviction. Previously, only 30 days notice was required. Servicers should recognize that these measures extending the eviction process will result in lower third party bids at a foreclosure sale when the property is tenant-occupied because the purchaser may either have to pay more in a "cash for keys" arrangement or see further diminution in value.

Registration and/or Maintenance of Abandoned Foreclosed Properties