Foreclosure – Page 6 – Creditors Rights 101

Your Legislature Gets One Right: Revised Tenn. Code Ann. § 35-5-101 Allows Postponement of Foreclosure Sales

There are a number of reasons why a lender would postpone a foreclosure sale, but the most common is that the borrower and lender are trying to resolve the default and avoid the sale. This usually involves the payment of enough money to bring it current (or “current enough”). These efforts often fail, because time runs out, and the lender doesn’t want to incur the expense of cancelling and later re-publishing the sale notice.

In the past, Tennessee law has been unclear as to, first, whether a published sale can be postponed, and, second, whether the lender needs to re-run the Sale Notice publication for a postponement.

As to the first question, most lenders look at their mortgage instrument, to see whether there is express language allowing adjournment. Absent that, the lender will not postpone the sale.

As to the second, there has been no real consensus, other than a vague “it depends on how long the postpone is for.”

In this past session, the Tennessee Legislature provided an answer, in changes to Tenn. Code Ann. Sec. 35-5-101, effective July 1, 2011, which allow for postponements for up to one year after the initial sale date and require certain notices to the borrower.

This is a law that should be good for both borrowers and lenders. It provides lenders with some assurance that they can slow the process down and negotiate with their borrowers, but without the risk of introducing a defect into their sale process. For borrowers facing potential foreclosure, it provides more time to get the issues resolved.

A rare case where everybody wins.

No Surprise: Newspaper Opposes Proposed Tennessee Legislation to Reduce Newspaper Publication of Foreclosure Sale Notices

Today, Memphis’ Commercial Appeal–my favorite paper in the state–published an editorial titled “Nice Break for Banks” about proposed Tennessee legislation to reduce the number of newspaper notices that banks must publish prior to conducting foreclosure sales.

Instead of the current 3 consecutive publications required by Tennessee Code Annotated Section 35-5-101, Tennessee House Bill 1920 and Senate Bill 1299 would require only one notice and would cut out some of the legalese from the property description.

Opponents, including the editorial, complain that these proposals drastically expedite an already short and unsupervised process. The proposed changes “relieve lenders of practically all sense of responsibility in the foreclosure process adds insult to injury on Tennesseans,” the Commercial Appeal says.

From the bank’s perspective, running three publication notices in a newspaper drastically increases the cost of a foreclosure, and there’s good reason to believe that newspaper publication notices do not provide any greater assurance of actual notice to the defaulted borrowers.

Frankly, who reads those gigantic supplemental sections of the paper that are entirely devoted to pages and pages of small-print foreclosure notices? (And, frankly, who reads the newspaper anymore?)

It comes as no surprise that the newspaper industry thinks the current publication system should stay the same. I’ve seen numerous publication bills that exceed my legal fees for conducting the foreclosure. (And, yes, I’m looking right at you, Commercial Appeal.)

It’s disingenuous to suggest that borrowers will be victims of stealth foreclosures in Tennessee if publications are reduced, and the editorial entirely leaves out a discussion of Tenn. Code Ann. Sec. 35-5-117, which requires a Notice of Right to Foreclose be sent to defaulted borrowers at least 60 days in advance of foreclosure sale publication.

If you want to argue that Tennessee’s non-judicial foreclosure system favors lenders, that’s a different argument (but, let’s be sure to discuss the problems with the judicial-only process in Florida as part of that debate).

But, if your argument is that more newspaper notices are the last line of defense for the “devastation–financial and otherwise–that financially strapped families” face, well…I’d save that newspaper space for advertisements.

Borrower’s Attack on Foreclosure Process May be Barred by Detainer/Eviction Proceedings

Across the country, lenders are fighting claims from borrowers that the lender’s foreclosure on real property was defective. In response, courts will sometimes entertain an examination of the specifics of the foreclosure. Regardless of the outcome, the lender is invariably faced with delay in obtaining a deficiency judgment or the costs of litigating these issues.

On January 31, 2011, the Tennessee Court of Appeals issued a decision finding that such claims by a borrower will not be considered, where the lender has filed a post-foreclosure unlawful detainer warrant in General Sessions Court and obtained an eviction judgment. If the homeowner does not raise the defective foreclosure in the General Sessions Court, then the decision is “res judicata” on any subsequent action.

It’s a a quick and cheap way to clear title on property. Also, you serve the detainer warrant by nailing it to the door of the property — no chasing the elusive occupants around the world trying to get service.

Cite: Robert E. Davis, et. al, v. Crawford L. Williams, et. al, No. E2010-01139-COA-R3-CV (Tenn. Ct. Apps. Jan. 31, 2011).

Bankruptcy Court Denies Discharge for Damages to Property from “Foreclosure Rage”

“Foreclosure rage” describes the situation when an angry homeowner, faced with a foreclosure, destroys the house or strips it of anything valuable. While not all involve complete demolition of the house, it’s common for an owner to take valuable fixtures out of a house or, worse, cause intentional damage.

A Bankruptcy Court has recently provided a remedy to a lender whose collateral was intentionally damaged: the lender was awarded a non-dischargeable debt for the amount of the damages. (See In re Zahniser, 09-B-71797, 2010 WL 5140779 (Bankr. N.D. Ill. Dec. 13, 2010)).

Under 11 U .S.C. 523(a)(6), a Bankruptcy Court can deny a discharge for debt resulting from “willful or malicious injury by the debtor to another entity or to the property of another entity.” Here, the lender argued that the damage to the house fell within this section, and the Court agreed, awarding damages for the cost of restoring the house and attorney fees.

This is a fair result, and I suspect other jurisdictions will follow this Court’s lead. It will be interesting to see how far Courts will protect lenders in this situation? What if the debtor simply removes the appliances from the house?

In this case, the Court tried to give the Debtor the benefit of the doubt, wondering if the Debtor believed that the large appliances were his to take (and not the bank’s collateral). But, the Court refused to overlook holes in walls and the removal of other items that were inextricably affixed to the house (tiles, light fixtures, cabinets, and the fireplace).

As with most arguments, it comes down to the facts of each situation. But, given the frequency that borrowers are gutting their homes before leaving, this decision is an interesting argument for lenders, if not an antidote for foreclosure rage.

To Solve Foreclosure Issues, Some Courts May Require Attorneys to be the First Line of Defense

This article in the New York Times suggests that courts may no longer allow lawyers to blame paperwork issues and inaccuracies on their clients. Now, some New York state court judges are requiring lawyers representing lenders to vouch for the accuracy of the client’s representations.

This is a judicial reaction to the frequent reports mortgage lenders relying on incorrect, incomplete, and unverified documents to take action against borrowers. This is an attempt to place some responsibility on the creditor’s attorney to vet the accuracy of his or her client’s documents, instead of leaving it all up to the court system.

As you’d expect, the article quotes foreclosure attorneys who dislike this practice, especially in the face of potential fines in the event the documents are erroneous.

The Rules of Professional Conduct already require an attorney to do a due diligence review of any client’s claims, and this practice could restore some level of faith in the foreclosure process. As it stands now, most borrowers believe that the “robo-signing” issues are indicative of the entire industry, not just a few sloppy lenders.

Any system that introduces only a few basic safe-guards into the process should be welcomed by counsel for foreclosure lenders.

Foreclosure as a Financial Planning Option for Borrowers?

This Forbes blog post asks an interesting question: Is letting your house go to foreclosure a sound financial planning option?

The article notes the increasing foreclosure rates and attributes the continued rise in unemployment, the recent lender processing errors, and decreasing stigma associated with foreclosure.

To the extent that the homeowners are over-extended in a house that they can never afford, foreclosure may very well be an unavoidable option. But, I’d stop short of calling it a “sound strategic” choice.

Walking away from a house can lead to harsh consequences. A foreclosure may leave a deficiency balance on the homeowner’s loan, which the lender can later sue for. An abandoned house can incur accruing taxes, homeowner’s association expenses, or other third party claims that the owner would be liable for while the foreclosure is pending.

From a creditor’s perspective, the realization by an owner that she can’t afford the mortgage and must surrender the property may, indeed, be the first step in straightening out her financial health. But, simply walking away from the real property shouldn’t be viewed as a smart “strategic” option, because of the harsh consequences that will probably follow.

Foreclosure Freeze from the Banks’ Perspective: Don’t Forget that the Borrowers Aren’t Paying

Disclaimer: I represent the banks. So, I read this piece in the Washington Post with biased eyes, but the central theme is spot-on: sure, the big banks screwed up their paperwork and their shoddy records are being exposed, but, at the end of the day, the borrowers still borrowed the money and aren’t paying it back.

The article goes on to make points that everybody should agree with: The paperwork issues raised are valid, and a bank that can’t answer these simple questions (such as, do you really own the debt?) shouldn’t be foreclosing. Also, this situation puts pressure on banks to finally take aggressive and sincere efforts to implement troubled loan restructuring programs.

The Calculated Risk blog first pointed to this article, and their comments section is wild with discussion.

Bank of America Foreclosure Freeze Unlikely to Help Homeowners

The Tennessean ran a story on the decision by Bank of America to freeze all pending foreclosures so BOA can review its documents and records for accuracy.

The root of all this mess is the wholesale practice of buying, assuming, and assigning mortgage debt. Unlike your local bank that keeps its own payment records and the original loan documents in-house, Bank of America may only have a computer printout with a (partial) copy of the relevant loan documents and a third party’s payment history, and there is probably nobody at BOA who can affirm and swear to the amount of the debt, the default, or the existence of the original loan documents.

So, when it came to light that one person was signing 100s of foreclosure authorizations a day without any actual review or knowledge of the status of the loans, BOA had no choice but to stop all foreclosures, lest it risk certain legal attacks on any of its foreclosures pending now or in the near future. Now that the cat is out of the bag, BOA has to deal with this issue head on and, frankly, I think we’ll be surprised at how difficult this problem ends up being for BOA.

Keep in mind, however, that this “freeze” only applies to Bank of America mortgages, and so other lenders have no reason to cease foreclosure activity–on the contrary, they’d have every incentive to foreclose in order to get their inventory off the books (while the BOA foreclosures aren’t flooding the market).

The next few months will most likely not offer any guidance or resolution for borrowers. The foreclosure process will resume at some point, probably in early 2011, without any further issues. Those who don’t take any action, either by seeking modification or default forgiveness, will end up exactly where they are today.

Homeowners Remain Frustrated with Short Sale Process, and New Legislation Unlikely to Correct Issues

The Washington Post ran a story on the rise of short sale home transactions, along with the disappointment and frustrations home owners have with the process.

Generally, a “short sale” of a house is a sale for a purchase price that is less than the amount of the debt owed to the bank on the property. In order to do this, the home owners must obtain an agreement from their bank or lien-holders that the liens on the property will be released in exchange for the proceeds generated by the sale. Since the proceeds will not pay off the lender in full, the seller cannot force the bank to accept the deal–it can only be done with approval by all lien-holders.

And there’s the difficulty. In this foreclosure crisis, banks are overwhelmed with short sale proposals, all of which must be reviewed to determine if the “short sale” price is reasonable and better than the bank can do at foreclosure. In almost all cases, the prices will be better. But, still, the approval process requires that a bank officer agree to release the lien rights for something less than the bank is entitled to under its lien, which isn’t a decision that a bank can quickly make.

The most common complaint from sellers is that this process takes far too long, especially when there’s a buyer waiting who can simply move on to another house. In response, some law makers have filed legislation, HR 6133, that would require expedited processing and responses to short sale proposals.

This new legislation is unlikely to solve these issues, because who is to determine what is the proper timing to process short sales? Ten days? A month? And what’s the proper penalty? A forced sale? Release of the lien or deficiency rights?

I doubt that the legislators want to force their own terms onto what should be a typical “business decision” by the banks, and, if they do, there’s the risk that the lenders will simply respond immediately…with a “No” to all requests.

Real Property Taxes Always Get Paid First

In this economy, the best way to get paid on outstanding debt is to claim a lien on real property. Whether you’re a judgment lien creditor or a homeowner’s association, a lien can give you some sort of collateral for an otherwise unsecured debt. In order to actually get paid, there must be equity in the property (otherwise, your lien has no value); where there’s no equity, the creditor’s lien must be recorded in advance of other creditors to get paid.

Unless, of course, that creditor is the county tax assessor, who gets to move to the front of the line for repayment. Tenn. Code Ann. § 67-5-2101(a) provides that:

The taxes assessed by the state of Tennessee, a county, or municipality, taxing district, or other local governmental entity, upon any property of whatever kind, and all penalties, interest, and costs accruing thereon, shall become and remain a first lien upon such property from January 1 of the year for which such taxes are assessed.

So, even though the bank’s deed of trust may have been recorded way back in 2002, the unpaid ad valorem county taxes for 2010 still trump that deed of trust. It’s no wonder that banks routinely require payment of the property taxes as part of the monthly loan payments.

This is one of the few exceptions to the “first to record” rule in Tennessee, and, if you’re a lien creditor, the rule of thumb is: you’ll always lose to the county property taxes.