Foreclosures in 2020 and Beyond

Foreclosures in 2020 and Beyond

With the October 17, 2020 expiration of Governor Baker’s Eviction and Mortgage Foreclosure moratorium, opinions are divided as to whether banks and condominiums are back to scheduling and holding foreclosure sales in the normal course. The Governor’s moratorium stopped all non-essential evictions and all residential mortgage foreclosures, except for vacant and abandoned properties. Even with these exemptions, foreclosures were unable to proceed due to the Governor’s Order restricting the number of people who could gather in outdoor areas. While there was no moratorium on condominium or timeshare lien foreclosures, the order restricting the number of people who could gather did apply to these sales. Residential condominiums benefited as banks quickly paid the priority liens upon receipt of notice in order to protect their secured interests in the property.

Effective September 4th the Centers for Disease Control (“CDC”) implemented a nationwide emergency order expiring December 31st to stop all evictions from residential properties based on non-payment of rent directly attributable to the COVID-19 pandemic.

Effective September 4th the Centers for Disease Control (“CDC”) implemented a nationwide emergency order expiring December 31st to stop all evictions from residential properties based on non-payment of rent directly attributable to the COVID-19 pandemic. The fear was that evicted families would be forced to move into shared housing with others creating situations with even more cramped quarters and thereby continue the spread of COVID-19. The CDC Order does require tenants to provide documentation to their landlords evidencing their non-payment is in fact due to COVID related reasons. The Order provides an exemption for mortgage foreclosures; however, the order is confusing as it contains language that defines persons unauthorized to evict to include those holding a third party non-possessory interest, which is the definition of persons who successfully bid at a foreclosure sale. Therefore, the implication is that a bank may foreclose, but it needs to purchase the mortgaged property at the sale, evict the occupants itself and then sell the property. The property could sell at foreclosure to a third party, but as they are unable to evict, buyers may be disinclined to bid for a property in which they cannot remove the occupants and consequently, the CDC order acts to chill a bank’s foreclosure sale.

The Federal Housing Finance Agency, which includes Fannie Mae and Freddie Mac, the Department of Housing and Urban Development, Federal Housing Administration, Veterans Affairs and the Department of Agriculture, which guarantee or insure mortgages, have all announced that they have extended their mortgage foreclosure moratoriums and related evictions through December 31, 2020.

National banks appear to have chosen to wait and schedule foreclosures sales to after January 1, 2021 and to currently only proceed with mortgage foreclosures for properties which can be verified as vacant or abandoned and in instances where the mortgagor is deceased and the family/Estate does not wish to retain or are unable to sell on their own, or deceased with reverse mortgages.

Another obstacle facing mortgage foreclosures are the title insurance companies. At this time, title insurance companies are closely examining post-moratorium foreclosures and deciding coverage for the new owner after foreclosure (whether it be the Bank or a third party) on a case by case basis. The main concerns are:

1. Orders on public gathering restrictions are a chill on any foreclosure sale. Once the number of people allowed is reached, others will need to be turned away – thus is the auction really a “public” auction as required under MGL c. 244, if members of the public are prohibited from attending;

2. There is the possibility that the bidders turned away would have bid higher than the eventual winning bidder;

3. The pandemic itself acts as a chill on all foreclosure sales and can render them as commercially unreasonable.

There is the opinion that some potential bidder could be scared to attend a public auction for fear of being exposed to COVID and that this issue could be used as a possible defense by the mortgagor to challenge a foreclosure sale – arguing that the bank or condominium was unable to obtain the highest possible price at foreclosure as some unknown person who was fearful of attending may have bid higher than the eventual winner. The fault with this theory is that the title insurance companies carve out an exemption for vacant and abandoned residential properties and commercial mortgage foreclosures, without any explanation as to why bidders at these sales somehow feel safer to attend as opposed to occupied residential foreclosures sales. These title insurance company concerns apply to condominium lien foreclosures as well.

In order to prove a property is vacant or abandoned, an Affidavit must be acquired from a person with personal knowledge, signed under the pains and penalties or perjury, as to the occupancy status of the property – from the mortgagors that they have vacated and consent to the foreclosure; evidence of surrender and abandonment under a Bankruptcy filing; Affidavit of an Estate’s Personal Representative or family member as to the death of the mortgagor and consent to the foreclosure sale. These Affidavits are not necessarily easily or quickly obtained.

The title insurance companies have added another obstacle. The Governor’s original April Moratorium Order prohibited banks from filing any new foreclosure actions with courts, scheduling and advertising any foreclosure sales or otherwise exercising a Right of Entry or Power of Sale. The Order said nothing prohibiting the Banks from issuing the pre-foreclosure 90 or 30 day Right to Cure letters and acceleration of debt letters once the 90/30 day letters expired. No further action could be taken after the expirations dates prior to October 17, 2020, so that in effect, mortgagors were granted additional time to cure or contact their lenders regarding possible loan modifications or forbearance agreements under the Federal CARES Act. Despite the holding by the SJC in U.S. Bank, N.A. v. Schumacher, 467 Mass.421, which held that the statutorily required pre-foreclosure notices are not part of the foreclosure proceeding itself, the title insurance companies have decided that any of these notices sent between March 10, 2020 and October 17, 2020 are invalid due to the mortgage moratorium and any subsequently commenced Servicemembers complaints and eventual sales stemming from these notices would also be invalid. Therefore, any lender that sent out these letters during that time period may need to be sent again, providing the mortgagors with an additional 90/30 days to cure their arrearages. This is a position that national lenders intend to fully contest.

While the mortgage foreclosure moratorium itself did not prohibit condominium lien foreclosures, the earlier restrictions on outdoor gatherings and eviction prohibitions do affect them. The state and now federal eviction moratorium act as a definite chill on any condominium lien foreclosure in which the property is occupied. Potential bidders may be discouraged from purchasing with the knowledge that they could not evict the occupants or collect rents for months, yet would be responsible for payment on subsequent condominium fees and real estate taxes. Potential bidders are also concerned about obtaining title insurance coverage, and how this may affect their ability for resale.

Needless to say, foreclosures of all kinds remain in flux. We are fortunate here in Massachusetts that condominiums were not included in the foreclosure moratorium, as they were in several other states. Further, with one of the strongest condominium lien statutes in the country, banks will continue to pay priority liens. That being said, with the continuing rise in COVID cases nationwide and a new administration set to take power in Washington, D.C., it is possible that future moratoriums may be imposed. Any decision to conduct a foreclosure sale at this time should be thoroughly discussed with counsel to weigh the pros and cons of proceeding and to determine whether any other options to resolution of the delinquencies can be found. Having any foreclosure sale invalidated after a sale and subjected to litigation can be an expensive undertaking.

Laura Brandow Condo Law Blog

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Laura Brandow