Category: Real Estate Investing

Borrower Beware: The Growth of the Loan-To-Own Lender in Middle Tennessee

I have a question I ask clients when they ask me to foreclose on a property.

“Do you want the money or do you want the property?”

Some clients are baffled by the question. They are banks, they’ll tell me, and what are we going with a property? Who is going to evict the tenants, change the locks, make sure the pipes don’t burst, cut the grass and so on? The banks don’t want all that trouble. They want the money back, plain and simple.

But, in a hot real estate market like Nashville, I’ve noticed a new type of lender. I refer to them as “loan-to-own” lenders. They are making loans secured by real property, but they sometimes act like property investors.

My hunch is that, when making the decision to extend credit, the prospect of ending up owning the property is part of these lenders’ motivation in doing the deal. Hence, the “loan-to-own” nickname I give them. When their loans go bad, these lenders are happy to foreclose and take ownership of the land.

These are often lenders of last resort, for a property developer who can’t get credit (or more credit) from a traditional lender. These loans are often at far-above-market interest rates and usually on pretty short repayment terms. The typical customer is a developer who just needs a little bit more money or a bit more time, and who, out of desperation or arrogance, believes that the “big” sale is just 90-120 days away and is willing to overlook the costs and risks.

When the sale doesn’t happen or a payment is missed, these lenders pounce. In some cases, maybe the property developer can figure something out and the loan (and the hefty interest and fees) gets paid.

Or, worst case, the lender presses forward with a lender-advantageous foreclosure, i.e. one in which the lender who wants to win at the sale is the one who gets to set and enforce the sale terms.

Over the last few years, I’ve seen more lenders from Texas, Las Vegas, and California loaning money on development deals in Middle Tennessee. I’ve also noticed more of these lenders foreclosing, taking ownership, and then offering the properties for sale.

Having said all this, I don’t expect (or offer) much sympathy for the cash-strapped property prospectors. It’s simply an interesting development in the gold-rush ecosystem of the modern Nashville real estate market.

Are the Nashville Construction Defaults a Leading Indicator that the Nashville Market has finally turned?

I saw something at a Nashville foreclosure yesterday that I hadn’t seen in years.

A luxury, high end house in a great neighborhood was auctioned, and nobody showed up to bid. The Lender bought it back at a credit bid. (In the spirit of disclosure, it was a $2MM+ credit bid. They weren’t quite giving it away, but this is Nashville).

It reminded me of foreclosures in the Great Recession, when you’d stand on the courthouse steps, reading a foreclosure sale notice to nobody and, invariably, your bank would become the new owner of the property.

Back in 2008, lenders were dealing with the after-effects of an easy-money market. Builders with good credit built too many houses, too fast, and the market had a glut of inventory, with no buyers in sight.

The lack of buyer-credit meant that new sales couldn’t keep up with the builder’s debt obligations. It was sort of a ponzi scheme, as sales of today’s houses were necessary to pay for yesterday’s construction costs. When the money level dipped, lots of partially built spec homes got foreclosed, after the builder’s new money ran out and they were defaulted or simply gave up.

I thought about 2008 yesterday.

As much free-flowing money as there’s been in the Nashville retail-buyer and foreclosure market over the last 4-5 years, it was a surprise to see that sale fall flat yesterday. In the last year, I’ve done foreclosures in Nashville with 20-30 bidders present. But, on a sunny Thursday, with a Belmont-Hillsboro Village house on the block, and there are no bidders, buyers, or bankers willing to refinance?

Could this be a leading indicator of a larger problem in Middle Tennessee?

The signs are there. This exuberant builder refurbished a modest 1920s bungalow, to construct a 8,712 square foot, 2 car garage, 5 bedroom, 8 bath outlier, originally offered for $3,675,000 (estimated monthly payment of $20,012). The house isn’t entirely finished–it looks like contractor work on the new backyard pool and outdoor area has stopped.

The builder has more than a dozen projects throughout Nashville, in similar stages of “in progress” construction. The builder also has a number of pending foreclosures and twice as many pending lawsuits. The construction on a number of the sites seems to have simply stopped.

Just a few years ago, just one high-end property selling for top-dollar would have bought an over-extended builder a few months, finished another project, and lead to another sale, but it seems like the buyer market has waned as well. When both buyers and banks get cautious, risky bets come due.

There are a number of peculiarities here that may make a broad-takeaway unreliable. But, with that caveat, I’m seeing lots of the same issues and patterns that we saw in 2008.

Plus, by mid-morning, I’d learned that the developer filed a Bankruptcy. Just like they did in 2008.

Tennessee Court of Appeals makes it clear: When a lien is paid, the Lender must pay the release fee (limited exclusions apply)

When a mortgage or judgment gets paid off, the creditor has to release its lien. It’s not only common sense, but it’s a duty imposed by Tennessee statute (see Tenn. Code Ann. § 66-25-101).

It’s an easy process to prepare a Release of Lien and record it with the register of deeds. Also, it’s not particularly expensive. Depending on how many pages the release is, the fee can be as little as $12.00.

Not too onerous for a lender who just got paid in full, right?

Well, not so fast. Ask any of my creditor clients, and they’ll tell you that “paid in full” means “fully paid, including that release fee.” When I get a payoff request on a deed of trust or judgment lien, I generally include a line for the $12.00 release costs.

Not anymore, in light of a December 2022 Tennessee Court of Appeals opinion, Eudaley v. U.S. Bank Nat’l Ass’n, No. M202100344COAR3CV, 2022 WL 17751378 (Tenn. Ct. App. Dec. 19, 2022). In that case, the mortgage lender got paid in full, recorded the release, and sent a bill to the borrower for $12.00. In response, the borrower filed a class action lawsuit in Davidson County Circuit Court, arguing that, per Tenn. Code Ann. § 66-25-106, “[a]ll costs … for registering a formal release[ ] shall be paid by the holder of the debt secured by the … deed of trust.”

Despite the very clear statutory text, the trial court dismissed the case after finding that federal law allows such fees and preempts the state law. The Court of Appeals affirmed, but not before providing some useful guidance to other lienholders (who may not have a federal banking regulation to hide behind).

Specifically, the Court wrote that “§ 66-25-106 prohibits holders of debt from seeking reimbursement of costs associated with recording a release of a deed of trust” because “[t]he debt holder’s obligation to record a release only arises if the debt has been paid in full or satisfied, indicating that nothing further is owed to the debt holder.” In affirming the trial court’s dismissal, the opinion makes clear that the lienholder bears those costs and can’t seek reimbursement, but, nevertheless, “that prohibition is preempted by federal law when the debt holder seeking reimbursement is a national bank.”

So, what if you’re not a national bank? Tenn. Code Ann. § 66-25-106 applies, and the creditor must chalk up $12.00 as the cost of getting paid.

What about other sorts of liens, like judgment liens or mechanic’s liens? § 66-25-106 seems to apply to any lienholder, but the judgment creditor may nevertheless have an argument that the release fees are “costs of collection” or allowed court costs/discretionary costs.

Either way, this December 2022 opinion provides pretty compelling authority to support a lender’s decision to simply record the release and write off the $12.00. In a very creditor-friendly state like Tennessee, Tenn. Code Ann. § 66-25-106 is an outlier, but this case is a very good reminder that it exists.

One Weird Trick to Avoid a Paperwork Challenge to your Tennessee Foreclosure

In 95% of Tennessee foreclosures, the foreclosing lender has appointed a substitute trustee to conduct the sale but, of those, about 10% mess the process up and conduct a defective sale.

First, some background. When a borrower grants a lien pursuant to a deed of trust, the real property is conveyed to a specific trustee named in the instrument “to hold title to the property in trust” pending the repayment. If there is a default, the trustee can later sell and convey title to the property.

These trustees are generally a closing lawyer or trust officer at the bank, but they are rarely the same lawyer who does the foreclosures for the bank. (Note: There’s no reason that they can’t be same.)

Later, if the bank decides to foreclose, one of the first steps is to appoint a “foreclosure” lawyer to be the successor trustee under the deed of trust. This is done by simply preparing an Appointment of Substitute Trustee, having the lender sign and notarize it, and recording it with the register of deeds in the relevant county.

Sounds easy, right?

Here’s where the mistake happens. When the decision to foreclose is made, the bank (or the lawyers) sometimes rush it out the door and start the foreclosure either before the Appointment of Substitute Trustee is signed or before it is recorded. (Spoiler: One of those is fatal to the foreclosure.)

Under Tenn. Code Ann. § 35-5-114(b)(3), if the Appointment is not recorded by the first publication date, there is specific “savings” language that must be included in the foreclosure sale notice. This text says, basically, that, even though the appointment hasn’t been recorded, the lender “has appointed the substitute trustee prior to the first notice of publication as required by Tenn. Code Ann. § 35-5-101…”

As a result, it’s still a valid sale, as long as that text is included. But, as this text also suggests, it may not be a valid sale if the actual Appointment of Substitute Trustee was not signed until after the foreclosure sale notice was published. If that’s the case, a court may find that the successor trustee was a stranger to the property at the time he or she issued the sale notice. (And strangers have no power to start a sale.)

Tennessee foreclosure statutes are non-judicial, which means it’s all just paperwork, but there’s an exact sequence of steps that must be followed.

This particular error is an easy one to avoid, but also an easy one to make. Many creditors want to foreclose quickly, which requires the lender and its counsel to satisfy strict publication deadlines to get the sale notice published and to obtain a sale date.

In doing so, they can often overlook the necessity of getting the initial paperwork executed in advance (whether it’s the rush of getting the sale notice to the local newspaper or the simple hassle of finding a notary for the appointment of substitute trustee).

As we have seen in recent cases, the failure to follow the technical requirements of Tennessee law and deeds of trust can result in a challenge to a foreclosure. It’s all paperwork, but make sure you get it right.

Don’t Mess with HOAs in Tennessee

The short version of today’s post is: Always pay your homeowner’s association assessments in Tennessee.

In general, an HOA is created by the recording of a Master Deed for the community, and this Master Deed imposes a number of duties and responsibilities on the lots, generally via declarations and by-laws.

Because the Master Deed is recorded before any properties are conveyed to owners, it pre-dates those deeds and, to be doubly certain, the deeds to the lots generally contain language that expressly state that the transfer is subject to the obligations in the Master Deeds and By-Laws.

Every Master Deed you’ll ever see allows the HOA to make monetary assessments against the lots, assert liens against the lots for any unpaid assessments, and foreclose the property as a way to enforce the lien.

In some cases, the HOA’s lien rights relate back all the way to the recording of the Master Deed.

HOA foreclosures used to be rare, but, in this awful economy, I’m starting to see more of them. As a result, I’ve been spending more time with Tenn. Code Ann. § 66-27-415, a little-known (and very confusing) statute that provides the broad outline of the foreclosure process for homeowner’s association liens.

In short, the process is similar to the standard “deed of trust” foreclosure process found at Tenn. Code Ann. § 35-5-101, et. seq., but with some notable exceptions.

Notice. Per Tenn. Code Ann. §§ 66-27-415(a)(3) and (4), the HOA must provide notice of the sale via “United States mail, postage prepaid,” with that notice “deemed received three (3) days after deposit” in the mail. The notice is to be sent to “the unit” unless the owner has provided an alternate address to the HOA. (Note: A deed of trust foreclosure requires notice to be sent via certified mail, return receipt requested.)

Priority. Per §§ 66-27-415(b)(1), the HOA lien will be ahead of “all other liens and encumbrances” except: (A) liens that pre-date the Master Deed; (B) a “first” mortgage on the unit; and (C) ad valorem taxes. To be clear, a HOA lien may be able to jump ahead of second mortgages and judgment liens, even where those liens were recorded before the assessment came due.

Limited Super-Priority. Notwithstanding the carve-out for first mortgages, under § 66-27-415(b)(2), a owner’s association may claim a super-priority of six months’ of assessments from a first mortgage’s foreclosure.

Rights of redemption are statutorily waived. Per § 415(b)(3), the HOA lien “is not subject to the statutory or other right of redemption, homestead, or any other exemption, unless specifically reserved in the declaration.”

No Notice of Lien is Required. Under § 415(d)(1), the notice to the world of the lien is in the Master Deed.

Sure, the first step is to look at what the Declarations and By-laws say about foreclosure. Most likely, you’ll find a broad and inconsistent range of requirements. That’s why Tenn. Code Ann. § 66-27-415 is so useful. It is designed to impose a level of uniformity to the process.

Lender Groups ask Tennessee Supreme Court to weigh in on conflicting authority on wrongful foreclosures

In July, I wrote about a July 2022 Court of Appeals opinion holding that even a defective foreclosure sale conveys valid title to real property. That’s because Tenn. Code Ann. §§ 35-5-106 and 35-5-107 expressly say that title is not impacted by a defective sale and, instead, the foreclosing trustee is liable for monetary damages.

Within a few minutes, a local banker commented on the post and asked: Yeah, but did you see this one from last month?

He was talking about Terry Case v. Wilmington Tr., N.A. as Tr. for Tr. MFRA 2014-2, No. E202100378COAR3CV, 2022 WL 2313548 (Tenn. Ct. App. June 28, 2022)– issued less than a month earlier–which held (sort of) exactly the opposite: “[A] trustee’s mere failure to comply with the terms of a deed of trust will render the foreclosure sale invalid.” Id. at *8.

How does the law reconcile these drastically different outcomes, based on the same wrongful foreclosure allegations?

Tennessee is a non-judicial foreclosure state, but don’t be lulled into a sense that foreclosures are simple (i.e. just “paperwork”). Instead, a foreclosing lender must simultaneously adhere to two separate processes, one of which is found in Tennessee statutes and the other in the underlying deed of trust.

Sometimes, they match; sometimes, they don’t.

If the lender doesn’t comply with any of the requirements of both tracks in full, though, this developing caselaw imposes drastically different remedies for non-compliance. Fail to satisfy the statutes? No big deal. Fail to satisfy the deed of trust? Here’s a nuclear bomb to your title.

Needless to say, this is confusing to creditors, borrowers, and buyers at foreclosure sales.

The plaintiff in the June 2022 case has filed an Application for Permission to Appeal to the Supreme Court (a full copy is attached below), seeking clarification on the splintered issues of law surrounding wrongful foreclosure claims. The Application opens with a direct message: “Tennessee wrongful foreclosure law is in a state of disarray.”

On behalf of the Tennessee Bankers Association and the Tennessee Mortgage Bankers Association, my office filed an Amicus Brief in support of the request to have the Supreme Court step in (also below).

This is a big deal. If this caselaw stands, title to foreclosed real properties will remain clouded until the wrongful foreclosure claims expire (6 years from the sale date). And, sure, a title company can vet the sale process, but title companies don’t like any risk, no matter how small.

This will render post-foreclosure title completely uninsurable. This isn’t good for anybody. Borrowers, lenders, buyers–everybody loses here.

application-for-permission-to-appeal-4878-4945-6182-v.1Download
filed-amicus-brief-in-wilmington-v-case-4884-8705-5926-v.1Download

Per the Numbers: Tennessee foreclosures are historically low, but storm clouds are forming

My banker clients are a pessimistic bunch.

That’s partially because the bankers that I deal with are in “special assets” or are the bank’s general counsel.

Long story short, they aren’t the ones at the ribbon-cutting ceremony for the expensive new restaurant; nope, my clients are the ones who get called in at the end, when the loan has gone bad and we’re figuring out what to do with used restaurant equipment. My clients always notice the storm clouds on the horizon.

With that in mind, for more than a year, they’ve been predicting a tidal wave of commercial and consumer loan defaults, followed by a spike in foreclosures.

And, generally, they’ve been wrong.

In Tennessee, one recent study showed that–to date–there have only been 3,316 foreclosure sale notices published (state-wide) in 2022. That sounds like a lot, but it’s less than a third of what we had in 2017 (10,810) and 2018 (11,711).

In 2022, the most sale notices have been published in Shelby County (496), followed by Hamilton County (304), Davidson County (271), and Knox County (223). Honorable mention to Williamson County (153) and Montgomery County (132).

The 3,316 figure for 2022 is an increase from 2021 (2,169). These drop aren’t entirely COVID driven, as Tennessee had just 5,982 sale notices published in the pre-pandemic glory days of 2019.

That low volume in 2019-2020 was the result of a number of factors, including COVID-related forbearances, sky-rocketing property values, and low interest rates. And, as you know, all of those factors are disappearing.

(Side-note: We can’t be sure about COVID, of course, but I’m pretty sure we won’t see mortgage rates in the 2’s and 3’s for a very long time.)

In the end, here’s where the bankers are probably right: There’s a backlog of foreclosures, and the crush is coming soon. The bankers are correct that the sky is falling; their timing was just off by a year.

Commercial Foreclosure Opportunity in Dickson!

Despite all the doom and gloom predictions, foreclosures haven’t skyrocketed in 2022.

Having said that, in the Middle Tennessee area, there remains a surprising amount of interest (and money) in the foreclosures that do happen. In June, I wrote about four foreclosure sales that were pending and, for every single one, at least 10 people showed up and, in the end, I had excess proceeds (meaning my lender client got paid and had money left over).

Long story short, the days of reading a foreclosure sale notice to nobody on the courthouse steps are, at least temporarily, over.

I’ve got a sale set tomorrow, September 8, 2022, for a commercial property at 110 Livestock Road, Dickson, Tennessee 37055.

Based on the photos pulled from an old Loopnet listing, it’s right in the “off-interstate” commercial district, behind Bojangles Chicken (please note: my legal description, not these photos, controls what the buyer is buying).

At one point, the owner planned to build and operate a Taco John’s restaurant on the site. A complicated Chapter 11 later, however, and this commercial property is back on selling block.

Let me know if you would like additional information on this. I am the attorney for a creditor involved, and, as a result, I will be limited in what information and guidance that I can provide.

As with all distressed real estate sales, buyer beware, and hire a lawyer.

New TN Court of Appeals Opinion: Even a defective foreclosure conveys good title

Tennessee is a non-judicial foreclosure state. In order to foreclose on somebody’s house or commercial property, all a lender must do is mail the proper paperwork to the proper parties. A lawsuit or other court involvement is not necessary.

That’s a drastic over-simplification, but, basically, it’s true.

In fact, when I did my first-ever foreclosure 20 years ago, I was so nervous about not having a court involved in such a complex and significant process that I filed a judicial foreclosure action. That way, at the end, I’d have a Judge’s blessing that “This was done correctly.”

What happens to a sale if the foreclosure attorney doesn’t do the paperwork correctly? Is it a valid sale? Can it be challenged?

Yesterday, the Tennessee Court of Appeals reminded us all that even a defective sale can convey good title, at Brady L. Daniels Et Al. v. Vince Trotter, E2020-01452-COA-R3-CV (Tenn. Ct. App. July 20, 2022).

In the case, it was alleged that the creditor did not provide proper notice of the sale, per Tenn. Code Ann. § 35-5-101(e). In the opinion, the Court discussed what, if any, impact of a failure to get the paperwork correct would have on the sale and cited two statutes.

The first, Tenn. Code Ann. § 35-5-106, provides that “[s]hould the officer, or other person making the sale, proceed to sell without pursuing the provisions of this chapter, the sale shall not, on that account, be either void or voidable.”

The second, Tenn. Code Ann. § 35-5-107, provides that the officer or other individual making the sale who fails to comply with the requirements in this chapter of conducting a private foreclosure sale is guilty of a class C misdemeanor and is liable for all damages incurred by the party injured due to his or her noncompliance.

These two statutes, the Court noted, are “intended to eliminate the uncertainty with land titles resulting from foreclosure sales.” Citing the Tennessee Supreme Court, the Court later wrote that a defect in a foreclosure process would not result in the sale being set aside but, instead, the damaged party would simply be entitled to compensatory damages.

Are Foreclosures Coming Back? Here are some notable Middle Tennessee Foreclosures set this Week

I’m involved in a number of Nashville foreclosures right now, and here are some details for some pending sales for anyone looking to buy. (As always, the typical disclaimer: Nothing in this post, of course, is designed to give you legal or factual advice about these sales.)

(1) 1018 Riverwood Boulevard, Hermitage TN: June 21, 2022 at 10 am (this Tuesday). Sale to be conducted by Republic Bank, from an alleged second lien position, subject to a first from 2011 in the original amount of $178,837. Zillow Value: $490,600.

(2) 810 Bellevue Road, Unit 214, Nashville, TN 37221: June 22, 2022 at 10 am (this Wednesday). Sale to be conducted by HOA, from an alleged second lien position, subject to a first from 2003 in the original amount of $76,500. Zillow Value: $222,400.

(3) 1011 Murfreesboro Road, #A-4, Franklin, Tennessee 37064: June 22, 2022 at 1 pm (this Wednesday). Sale to be conducted by HOA, from an alleged second lien position, subject to a first from 2012 in the original amount of $56,500. Zillow Value:$359,500.

Please let me know if you would like additional information on any of these. I am the attorney for a creditor involved, and, as a result, I will be limited in what information and guidance that I can provide.

As with all distressed real estate sales, buyer beware, and hire a lawyer.