Coakley Expects Fed’s Compliance with New Loan Modification Law
Attorney General Martha Coakley is picking a very public fight with federal mortgage giants, Fannie Mae and Freddie Mac, in the wake of the new Massachusetts Foreclosure Prevention Act passed earlier in August. The new law requires that lenders first explore loan modifications before starting foreclosure proceedings.Fannie and Freddie control approximately 60% of all U.S. residential mortgages.
In a letter broadcast to the press yesterday, she demands that “Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth,” Coakley said. Stefanie Johnson, a spokeswoman for the Federal Housing Finance Agency, said, “We are reviewing the letter and will respond soon.”
The fact that AG Coakley had to write the letter begs the question. Will Fannie and Freddie comply with the new Massachusetts foreclosure law? Maybe not, if past performance is any indicator of future results.
The Federal Housing Finance Agent (FHFA), the federal regulator overseeing Fannie and Freddie, has been acting like some sort of federal rogue agency of late. Last month, the agency publicly rejected the new Obama principal reduction plan, to the chagrin of Treasury Secretary Tim Geither. And in June, it came up with a method to skirt the new tough foreclosure law passed in Hawaii. It seems that the sole concern of FHFA is to get foreclosures completed and REO properties sold off as quickly as humanly possible, homeowners be damned.
If Fannie and Freddie blow off Coakley, this will seriously dilute the new Foreclosure Act. We will monitor the situation as always.
On August 3, 2012, Massachusetts Governor Deval Patrick signed into law what’s been called the new Foreclosure Prevention Law. The text of the law can be found at House Bill No. 4323. The new law makes significant changes to existing foreclosure practices, and also attempts to clean up the recent turmoil surrounding defective foreclosure titles after the U.S. Bank v. Ibanez and Eaton v. FNMA rulings, an issue for which I’ve been advocating for years. It goes into effect on Nov. 1, 2012. A quick summary is as follows with details below:
New requirement that mortgage assignments be recorded
New mandatory requirement to offer loan modifications and mediation to qualified borrowers
New Eaton foreclosure affidavit confirming ownership of note/mortgage loan
Protection for third party buyers of foreclosed properties
Mortgage Assignments Must be Recorded
Going forward, a foreclosure may not proceed unless the entire chain of mortgage assignments from the original mortgagee to the foreclosing entity is recorded. This is a statutory codification of the recommendation of the SJC in U.S. Bank v. Ibanez case, and should provide some well-needed clarity for titles. Under the new law, no foreclosure notice will be valid unless “(i) at the time such notice is mailed, an assignment, or chain of assignments, evidencing the assignment of the mortgage to the foreclosing mortgagee has been duly recorded in the registry of deeds . . . and (ii) the recording information for all recorded assignments is referenced in the notice of sale required in this section.”
Unfortunately, the new law does not address defective foreclosure titles created before the Ibanez decision, as we were hoping. Accordingly, folks who are still waiting for legislative help to cure their defective foreclosure titles may be left without a remedy.
Mandatory Loan Modification Efforts
In a provision pushed hard by housing advocates, the new law will require mortgage lenders to attempt to offer loan modifications instead of foreclosing. The qualification standards are rather complex and beyond the scope of this post. In sum, if the net present value of a modified mortgage exceeds the anticipated net recovery at foreclosure, the lender has to offer the borrower a modification.
Importantly, the new law provides immunity in favor of bona fide purchasers of foreclosed properties from claims by disgruntled borrowers that the lenders did not follow the loan modification rules.
New Eaton Affidavit
The new law also incorporates the SJC’s recent holding in Eaton v. Fannie Mae, where the SJC held that a foreclosing lender must be both the assignee of the mortgage and be either note holder or acting on behalf of the note holder. New Section 35C prohibits a creditor from publishing a foreclosure notice if the creditor “knows or should know that the mortgagee is neither the holder of the mortgage note nor the authorized agent of the note holder.” It also requires the creditor to record an affidavit swearing to its compliance with the new section. The affidavit will shield third-party buyers from title claims, but will not shield creditors from potential liability to the borrowers. Eaton suggested the use of affidavits, but now the statute requires it. Creditors cannot pass the cost of any corrective documentation upon borrowers or third parties.
Impact?
As with any major reform legislation, there will be a learning curve for foreclosing lenders and foreclosure attorneys to get documentation and systems in place to comply with the new requirements. We could potentially see additional litigation coming out of this new law brought by borrowers who feel they were not given a “fair shake” at a loan modification. From a real estate title perspective, the new law is a step in the right direction, but I was very disappointed that nothing was done to help folks who are still saddled with Ibanez title defects. This was the perfect opportunity to address that issue, and I’m afraid it won’t come up again.
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney with an expertise in foreclosure related issues. You can contact him at [email protected].
Effective Preparation and Historical Timeline Key To Trial
I just completed a four day jury waived trial in an adverse possession case in Superior Court. I wanted to share some of my experience as a Massachusetts adverse possession attorney, and what I learned during this case. (For confidentiality reasons, I will not disclose the name of the case or the county in which it was brought). We are waiting for a decision from the judge, which will take several months.
Side Property Line Dispute
The case was a fight over land between two homes in a suburban town. The dispute arose after my client, “Ms. Jones,” surveyed her property in anticipation of doing an addition project. The survey unfortunately revealed that a portion of the driveway and nearby retaining wall owned by her next door neighbor, “Mr. and Mrs. Smith,” encroached the side lot line. Efforts to resolve the encroachment dispute were unsuccessful, and the Smiths ultimately filed the adverse possession lawsuit, claiming that they had used not only the small encroached area, but a much larger 2,200 square foot area of Ms. Jones’ side yard, for more than 40 years.
Tracking Down Old Owners
Since the Smiths were claiming adverse possession going back to the 1960’s, the first and most important thing we had to do was to track down all the old owners of my client’s property and put together an accurate historical timeline of the property. Including my client, there were seven owners of the property! This was the only way my client could mount a defense against the Smith’s claim, since the Smiths owned their property all that time. One of the old owners lived in Florida, and he came up to testify about having pig roasts near the disputed area, among other stories. Other former owners testified and a few were not exactly thrilled to be dragged into court. That’s the nature of the beast.
Proving The Timeline
Next, we had to demonstrate the historical use of the disputed area over four decades. These are very factually intensive cases. The key to every adverse possession case is what and how the parties actually used the disputed area. The parties’ knowledge or lack thereof of the true boundary line is really not the important issue. Generally, the more intense the use and the more the claimant takes action to exclude the other party from using the disputed land, the better the claim for adverse possession. Conversely, the less intense the use, the less successful the claim. Still, adverse possession is a very difficult claim to win as the law does not favor taking someone’s land.
Some important questions in any Massachusetts adverse possession case are: Did the plaintiff mow the lawn? Did they maintain any landscaping? Did they install a fence or other barrier? Did they demarcate where they used the land? Did they make any permanent improvements to the disputed area? Did they plant anything or install a garden? Did they clear brush? Did they cut down trees or plant new trees? Did the defendant grant permission to use the disputed area. (Permissive use destroys an adverse possession case).
Preparation Is Key
Compared to my opposing counsel, I had a lot more work on my side with triple the number of testifying witnesses and cross examination of the claimants. I prepared for a solid two weeks before this trial, and by the trial, I knew every blade of grass and rock on the disputed area. I also had deposition testimony of the claimants which I used to impeach them when they inevitably changed their stories or failed to remember key details. I also had blowups of aerial photos of the property from Bing Maps which were very helpful. Lastly, I convinced the trial judge to take a “view” of the property, and he did visit the property with counsel the day after the trial was over.
We are filing post-trial briefs at the end of August, and then the judge will make a decision. I’ll let you know how it turns out.
Local Groups Wield Much Power Over Real Estate Permits & Projects
If you have ever had to deal with zoning or permitting in the City of Boston, you have probably come across local neighborhood “civic associations” in which the fate of your project or permit may unwittingly rest. There is the Beacon Hill Civic Association, the Allston Civic Association, and the St. Marks Area Civic Association (Dorchester), to name a few. Each neighborhood or district has them. They are constituted by various neighborhood activists, watch-dogs, and concerned residents, etc. Many board members go back decades and some groups unfortunately lack younger members representing the new generation of city dwellers.
You will rarely find mention of these groups in the Boston Zoning Code, however, their influence looms large. When you file for a Boston variance or special permit or propose a new project in Boston, the City or BRA will tell you that you must first present your application or project before whatever local civic association has “jurisdiction” over the neighborhood. These groups sit almost as a second zoning board of appeals, except without any rules, regulations or guidelines as to what they may or may not “approve” or “deny.” To their credit, the associations typically have a good sense as to what’s appropriate for the neighborhood and these folks care deeply about their areas. But some members are outwardly hostile to new development and some are even obsessed with conspiracy theories of what developers have planned for their neighborhoods.
A negative review of your project at the local civic association meeting can make your application “dead on arrival” at the Zoning Commission or other licensing board. At the board meeting, the board members will always ask whether the local association are in support or opposition to the project. Only rarely will the board approve a project without the civic association’s full support – and that only occurs if the local pols or Mayor’s Office are in support. As with most real estate issues in the City of Boston, savvy politicking plays a large role.
I’m interested to hear if our readers have had experience with any of these local civic associations, good or bad? Are they a good/bad thing? Should there be a set of rules or regulations governing how they consider projects?
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Richard D. Vetstein, Esq. is an experienced real estate attorney who has handled numerous special permit, variance and permitting applications in the City of Boston.
“My life is like a stroll on the beach…as near to the edge as I can go.”
— Henry Thoreau
No Massachusetts summer is complete without some good times spent on the beach, be it on Cape Cod, Ipswich, or Duxbury. But what happens when you are taking a nice stroll on the beach and hit one of those “No Trespassing — Private Beach” signs? Can you continue walking? Can you walk on the water’s edge or wet sand? What about swimming, fishing or boating? Most folks are unaware of Massachusetts’ archaic beach access laws, and I will try my best to explain them in this post.
Origins To Colonial Days: General Rule, No Public Access To Private Beach Areas
Massachusetts has a unique set of laws giving coastal property owners more extensive private rights to beachfront area than other states. In most coastal states, there is unlimited public access to beachfront areas and you can walk unfettered along the beach. In Massachusetts, however, that is not the case. Here private coastal property owners own the beach area adjacent to their properties down to the mean low tide area, with some limited public access exceptions. This is how the concept of “private” beach areas have been established.
The origin of this law dates back to the Mayflower days. In order to facilitate coastal development, under the Colonial Ordinances of 1641-47, the Massachusetts Bay Colony conveyed most, but not all, rights of ownership to the area between the average or mean high water mark and the low water mark (up to 100 “rods,” or 1,650 feet, from the high water mark) to all private coastal landowners. The land—but not the water—between the two tide marks is known as “private tidelands.” This typically includes all of the wet sand area on beaches.
The general rule is that with some limited exceptions explained below, beach-goers in Massachusetts cannot access any private beach area down to the low tide water mark without the permission of the beachfront property owner.
Limited Public Beach Access Between Low and High Tide Area for “Fishing, Fowling and Navigation”
The Colonial Ordinance reserved three specific and important rights of public use within the private tidelands for “fishing, fowling and navigation.” Those permissible uses have been broadly interpreted by Massachusetts courts to include: (1) the right to fish or to collect shellfish on foot or from a vessel; (2) the right to navigate, including the right to float on a raft, windsurf, or sail; and (3) the right to hunt birds for sport or sustenance, on a boat or on foot. (Though there is no court decision on point, the Attorney General maintains that this right also covers bird-watching.)
Accordingly, the public has access to any so-called “private” beach or any private tideland area as long as you are legitimately engaging in “fishing, fowling, or navigation.”
These antiquated Massachusetts beach access laws have created many disputes between public beach-goers and wealthy coastal property owners who have attempted to enforce a “private beach” regime. Under the Colonial Ordinance, no private property owner may deny access to someone who is fishing or hunting for birds or even surfing or launching a kayak. Indeed, knowledgeable beach-goers are often seen walking with beach with fishing rods in hand or shellfish equipment, so as to claim access rights under the Colonial Ordinance. What About Swimming?
Swimming rights are a bit confusing. According to the courts, swimming in the intertidal zone is included within the reserved public right of navigation, but only so long as your feet don’t touch the bottom! And you don’t have a right to walk along the wet sand area solely for the purpose of gaining access for swimming. So basically you have the right to swim into a private beach area provided you continue to swim and don’t stand or walk into the private tidelands zone. So try not to drown..
Can I Walk Below the Low Tide Line?
Yes, private property owners cannot interfere with the public’s right to walk along the submerged lands that lie seaward of the low tide line. With few exceptions, they don’t own that land; the public does. But this is tricky because the mean low tide area is seldom marked and changes historically.
I own beachfront property. I don’t mind the public walking along my wet sand area even if they are not “fishing, fowling, or navigating,” so long as by allowing this, I don’t lose any property rights in the process. Is there some way that I can be a ‘good citizen’ and still retain my property rights?”
Yes. What you appear to be worried about is the legal concept known as “prescription” or “adverse possession.” I have written a detailed post on adverse possession here. This is the idea that if someone uses your property for a sufficiently long time, they may be able to claim a property interest in it. For someone to be able to make this claim, however, their use has to be without your permission. Therefore, openly allowing the public to walk across your land (e.g., by “posting” such permission) is usually the best way of defeating someone’s ability to accrue such a right. Posting the land in this manner, of course, would not affect any access rights that anyone had already obtained before the posting.
Under existing state law, a property owner who allows the public to use his or her land for recreational purposes without charging for such use is shielded from liability for injuries sustained during that use so long as the property owner did not act with such “fault” that his or her conduct constituted “wilful, wanton or reckless conduct.”
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Well, that’s it on the rather complicated topic of Massachusetts beach access law. Enjoy your beach day and perhaps start carrying a fishing rod or line when you take a long walk!
Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous adverse possession and beach access cases in Land Court and Superior Court. Please contact me if you are dealing with a Massachusetts real estate dispute.
Insured Gets The Short End Of The Insurance Coverage Stick For Parking Lot & Building Flooding
The Massachusetts Supreme Judicial Court has not been too kind to insureds these days. For the second time in 2 months, the SJC has upheld the denial of a property owner’s claim in connection with flooding, this time in the commercial setting. In Surabian Realty Co. v. NGM Insurance Co., the Court ruled that a commercial property owner’s claim for flooding caused by a blocked parking lot catch basin was not covered under an “all risk” commercial/business insurance policy.
Blocked Drain
Surabian Realty owned an office building in Foxborough. During heavy rains in 2009, rainwater stopped flowing down the parking lot drain. The drain had become clogged with debris. Rainwater then ponded in the lot and seeped under the door of the building, flooding its lower level. The flooding caused damage to the carpeting, baseboards, and walls, totaling approximately $34,000.
Surabian made a claim under its “all risk” commercial insurance policy which had a special indorsement for this type of situation, which provided, “The most we will pay for loss or damage caused by water that backs up or overflows from a sewer, drain or sump is $25,000 for any one occurrence.” The insurance company, however, denied the claim on the grounds that the flooding was still excluded from coverage as it was caused by “surface water.”
Court Rules For Insurance Company (Again)
The SJC took an electron microscope to the policy language, parsing the language almost to a fault and unfairly (in my opinion) against the insured. The Court held:
“Construing these clauses in combination, we interpret the insurance contract, as amended by the indorsement, to exclude damage caused by flood waters that spread over the surface of the ground without having entered a drain, but to cover damage caused by water that backed up after entering a drain.”
So basically, the court said that the rainwater has to actually enter the drain, then backup, while a blocked drain that doesn’t allow water to fall down the pipe won’t be covered. Um, ok…. A better rationale would have been that the claim wasn’t covered because maintaining and keeping the drain free of debris was really the responsibility of the insured property owner, not a risk that the insurance company assumed. But I’m not the judge.
This is also the second instance in the last few months where the Court has relied upon the policy’s “anti-concurrent” clause which excluded coverage where the damage results from the combination of a covered peril and an excluded peril.
Lessons For Property Owners
Aside from making sure catch basins are cleaned, the tough lesson for property owners here is that your supposed “all risk” insurance policy isn’t really “all risk” as you probably perceive it. It seems that these days a lot of insurance claims are denied or insureds are scared of even making a claim lest they get cancelled by the insurance company. It’s a tough predicament.
Concise Disclosures Aimed At Reducing Borrower Confusion and Helping Comparison Shopping
As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau on Monday issued proposed rules to bolster fairness and clarity in residential lending, including requiring a new good-faith estimate of costs for homebuyers and a new closing settlement statement.
My understanding is that the new “loan estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new closing disclosure would replace the current HUD-1 Settlement Statement. The new disclosures are open to industry and public comment for 120 days, after which they will be finalized and codified as law. For more details on the new disclosures, go to the CFPB site here.
69 Year Old Woman Found Dead After Neighbor’s Handyman Cuts 30-foot Arborvitaes; Estate Recovers $150,000 Wrongful Death Settlement
In a tragic case out of Somerset, Massachusetts reported by Massachusetts Lawyers Weekly, a woman’s estate has recovered a $150,000 wrongful death settlement after she dropped dead when her neighbor cut down a row of trees which she and her husband planted 40 years ago.
According to Taunton lawyer Claudine A. Cloutier, who represented the woman’s estate, the neighbor hired a worker to remove some of the trees. When the woman discovered they had been cut down, she apparently became emotionally distraught. Her son found her dead in a chair the next day. There were no signs of trauma. Her estate brought negligence and tort claims against the neighbor, alleging wrongful death partially caused by stress arising from the destruction of the plants. The case went to mediation, and was settled before trial for $150,000.
Massachusetts Illegal Tree Cutting Law
Disputes over tree pruning and cutting are very common in Massachusetts. Indeed, Massachusetts has one of the oldest tree cutting and trimming laws on the books which provides for triple damages for any illegal cutting:
A person who without license willfully cuts down, carries away, girdles or otherwise destroys trees, timber, wood or underwood on the land of another shall be liable to the owner in tort for three times the amount of the damages assessed therefor; but if it is found that the defendant had good reason to believe that the land on which the trespass was committed was his own or that he was otherwise lawfully authorized to do the acts complained of, he shall be liable for single damages only.
Nevertheless, at common law, a neighbor may remove branches extending over a shared property line onto his or her own property. Also, the neighbor has no liability for roots growing into your yard and causing damage. Massachusetts law does not allow a person to cross or enter a neighbor’s property for these purposes without the neighbor’s consent, nor to remove any branches or other vegetation within the confines of the neighbor’s property. You can trim the branches and roots back, but you cannot kill the tree. This is the “Massachusetts Rule.”
Damages are assessed that either the market value of the timber or the replacement cost of the trees. Replacement cost typically requires the assistance of an expert arborist or landscaper. In a case out of Martha’s Vineyard, the appeals court upheld a $30,000 award for the replacement cost of 10 mature oak trees. Upon a finding of maliciousness under the tree cutting law, those damages were tripled.
Before cutting, trimming or pruning trees on or near your property line, it’s always a good idea to consult your plot plan or survey and speak to your neighbor before taking out the chain saws.
Utility Tree Cutting
I’ve been reading about many recent disputes between property owners and utility companies (Wayland v. NStar) over tree cutting within utility easements. The law provides a public utility the right to remove or trim your tree if it interferes with the necessary and reasonable operation of the utility. Furthermore, the utility is required to perform tree trimming as part of its program to maintain reliable service for its customers. The National Electric Safety Code requires utilities to trim or remove trees growing near power lines that threaten to disrupt service. Proper and regular tree trimming helps prevent the danger and inconvenience of outages.
Richard D. Vetstein, Esq. is an experience real estate attorney who has litigated numerous illegal tree cutting cases. If you are dealing with a Massachusetts unlawful tree cutting or trimming situation, please contact him at 508-620-5352 or via email at [email protected].
Feldberg v. Coxall: First Case To Apply New UETA (Uniform Electronic Transactions Act) To Real Estate Transactions
“This case involves the intersection between the seventeenth century Statute of Frauds and twenty-first century electronic mail.” –Justice Douglas Wilkins
Massachusetts courts have been grappling with the question of “when is a deal a deal” for a long time. With the vast majority of communication in real estate now done via email and other electronic means, it was just a matter of time before a court was faced with the question of whether and to what extent e-mails can constitute a binding and enforceable agreement to purchase and sell real estate. The real estate community has been waiting a few years for a case like this to come down, and now it’s here.
In Feldberg v. Coxall (May 22, 2012), Superior Court Justice Douglas Wilkins ruled that a series of e-mail exchanges between the buyer’s and seller’s attorney, the last one attaching a revised, but unsigned, offer to purchase, arguably created a binding agreement entitling the buyer to a lis pendens (notice of claim). This is also one of the first cases applying the new Massachusetts E-Sign law to preliminary negotiations in real estate deals.
This is a very interesting and important decision for anyone dealing in residential real estate in Massachusetts. The immediate take-away is that now anything sent in an e-mail can potentially create a binding deal, even if no offer or purchase and sale agreement is ultimately signed.
Vacant Lots In Sudbury
Feldberg, the buyer, was interested in purchasing 2 undeveloped lots in Sudbury owned by Coxall, the seller. The parties’ attorneys, via email, began negotiating the terms of the deal. (Apparently, brokers were not involved in the offer stage).
The buyer’s attorney e-mailed the seller’s attorney and attached a “revised offer with changes to reflect the conversations we have had today.” The revised offer appeared to be comprehensive inasmuch as it contained an agreed upon purchase price of $475,000 and a firm closing date. The email ended with the suggestion that both attorneys work “to have the final offer form finalized in time for my client [the buyer] to sign it and get deposits checks to you before the end of the day tomorrow.”
The seller’s attorney emailed back the next day, stating that “we must have a written approval letter from the bank today by 5pm and I think we are ready to go (I assume they will provide a closing date with the approval). We are almost there.” That same afternoon, the buyer’s attorney provided a commitment letter from Village Bank with standard conditions.
Apparently, before the seller signed the offer, he backed off and refused to proceed with the transaction. The buyer sued, and sought a lis pendens, which is a notice of claim filed with the registry of deeds. In most cases, a lis pendens will prevent a seller from conveying litigated property to another buyer.
Statute Of Frauds Intersects With E-Mail
As Judge Wilkins eloquently noted, this case involves the “intersection between the seventeenth century Statute of Frauds and twenty-first century electronic mail.” The Statute of Frauds is the genesis of the saying “always get it in writing.” The ancient law, originating in England, provides that all real estate contracts must be in writing signed by the party (or agent) to be charged. In the “old” days, application of the Statute was quite simple. If there wasn’t a written agreement signed in wet, ink signatures, there was no binding deal. Now with e-mail it’s much more complicated.
As the judge noted, this is uncharted territory for the courts as there has been a dearth of precedent on point. The Massachusetts Uniform Electronic Transactions Act (UETA) provides that parties to a real estate transaction may consent to conduct the transaction electronically via email or electronic signature technology if they use such technology in their dealings (which everybody does these days). They even may even switch to a traditional hard copy agreement at the end of negotiations like Feldberg and Coxall did here. The UETA requires some form of “electronic signature.” The judge ruled that an email signature block or even the “from” portion of the email may constitute a valid electronic signature. Accordingly, the judge found that the buyer had made a sufficient case that a binding deal had been reached, despite the seller refusing to sign the hard copy offer. (Update: the case was settled out of court by the parties).
Take-Away: Emails May Come Back To Bite You
I think that some Realtors and even some attorneys have assumed that negotiations by email leading up to an offer are preliminary and not binding until the offer is actually signed by both parties. This ruling throws that conventional wisdom out the window.
What can you do to prevent your emails from creating binding obligations? Well, apart from not using email in the first place, one thing you can do right now is to insert a disclaimer in your email signature. Here’s one that I just came up with:
Emails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor shall create a binding contract in the absence of a fully signed written contract.
Feel free to use it. Other than that, you need to watch what you say in your emails, especially when you represent a seller who is considering multiple offers. Make it clear and in writing from the outset that there is no deal until an offer is signed by both buyer and seller.
Score One For Lenders and Mortgage Servicers In Long-Awaited Eaton v. Fannie Mae Case
The Massachusetts real estate community has been waiting 8 long months for a decision from the Massachusetts Supreme Judicial Court (SJC) in the much anticipated Eaton v. Federal National Mortgage Association(link) case. The decision came down June 22, and now that the dust has settled, I don’t think there is any question that lenders and the title community have been given a judicial Maalox. ((Some smart foreclosure defense folks disagree with me, but I’m confident in my analysis.))
The SJC held that lenders must establish they hold both the promissory note (indebtedness) and mortgage (a major problem for securitized or MERS mortgages where the note and mortgage are split between securitized trust and servicer). However, responding to pleas from the real estate bar, the Court declined to apply the new rule retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. This would have been disastrous for folks who purchased distressed and foreclosed properties.
Even better, the Court outlined new procedures, including filing a statutory affidavit, to ensure that foreclosures are fair to borrowers going forward. The ruling gave lenders and the foreclosure industry a huge pass for past errors, and will clear the way for foreclosures to accelerate and run their course in Massachusetts and possibly other states if this case is followed. Let’s break it down.
Background: Borrower Used “Produce the Note” Defense To Stop Foreclosure
As with many sub-prime mortgage borrowers, Henrietta Eaton had defaulted on her mortgage to Green Tree Mortgage. This was a MERS mortgage (Mortgage Electronic Registration System) originally granted to BankUnited then assigned to Green Tree.
Ms. Eaton was able to obtain an injunction from the lower Superior Court halting her eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This is the “produce the note” defense and has been gaining steam across the country. Superior Court Judge Francis McIntyre bought into that argument, and stopped the foreclosure. Given the importance of the case, the Supreme Judicial Court granted direct appellate review.
FHFA Files Amicus Brief and SJC Asks For More Guidance
This case garnered substantial local and national attention from the lending, title and real estate community on one side, and housing advocates on the other side. Notably, the Obama Administration’s Federal Housing Finance Agency filed a rare friend-of-the-court brief in a state court proceeding, arguing for a ruling in favor of lenders. Spirited oral arguments were held back in October which I briefed here.
In January, when a decision was expected, the Court surprisingly asked the parties for additional briefing on whether a decision requiring unity of the promissory note and mortgage would cloud real estate titles. This was the apocalyptic scenario that the real estate bar and title community urged the Court to avoid. (The Court listened, as I’ll explained below).
The Opinion: Unity Endorsed, A Foreclosing Lender Must “Hold” Both Note & Mortgage
The first issue considered by the court was the fundamental question of “unity” urged by the Eaton side: whether a foreclosing mortgagee must hold both the promissory note (underlying indebtedness) and the mortgage in order to foreclose. After reviewing Massachusetts common law going back to the 1800’s, the Court answered yes there must be unity, reasoning that a “naked” mortgagee (a holder of a mortgage without any rights to the underlying indebtedness) cannot foreclose because, essentially, there is nothing to foreclose. If the Court stopped there, lenders and MERS would have been in big trouble. But, as outlined below, the Court significantly limited the effect of this decision.
Disaster Averted: Ruling Given Prospective Effect
Swayed by the arguments from the Massachusetts Real Estate Bar Association that retroactive application of a new rule would wreak havoc with existing real estate titles in Massachusetts, the SJC took the rare step of applying its ruling prospectively only. As Professor Adam Levitin (who drafted an amicus brief) noted on his blog, this “means that past foreclosures cannot be reopened because of this case, so the financial services industry just dodged billions in liability for wrongful foreclosures and evictions, and the title insurance industry did as well.” So going forward, lenders must establish unity of both note and mortgage, but past foreclosures are immune from challenge.
MERS System Given Blessing?
Ms. Eaton’s mortgage was a MERS (Mortgage Electronic Registration System) mortgage. MERS is a private system created by the largest national lenders and title companies to track assignments and ownership of loans as they are bought and sold in the secondary mortgage market. MERS has come under fire from distressed homeowners and registrars of deeds (especially our own Essex County Registrar John O’Brien) for robo-signing and bungled foreclosures. Although the Court did not specifically rule on the validity of the MERS system, the decision cited several new MERS policies and said that lenders who follow these new policies will likely be in compliance with the court’s holding. So MERS will continue doing business in Massachusetts for the foreseeable future.
Make Way For the “Eaton” Affidavit
The most important aspects of the Eaton ruling, in my opinion, are what came after the two “headline” rulings above. First, the Court made the explicit point that lenders do not have to physically possess both note and mortgage to be deemed a “holder” able to foreclose. This is huge given the pandemic paperwork deficiencies common with securitized mortgage trusts.
Second, the court also stated in a very important footnote that it will “permit one who, although not the note holder himself, acts as the authorized agent of the note holder, to stand “in the shoes” of the “mortgagee” as the term is used in these [foreclosure statute] provisions.” This footnote opens the door wide open for servicers and MERS to establish that they are authorized to foreclose, and acting on behalf of, the securitized trusts who hold legal title to the mortgages.
Lastly, the court approved the use of a statutory affidavit filed at the county registry of deeds in which the note holder or mortgage servicer confirms that it either holds the promissory note or is acting on behalf of the note-holder. We will surely be seeing these “Eaton” affidavits being prepared and recorded in connection with foreclosures.
Potential Bad News For U.S. Bank v. Ibanez Defect Victims
The Court’s ruling may be bad news for those property owners stuck with defective title issue stemming from a botched foreclosure under the seminal U.S. Bank v. Ibanez case. Last year, the Court, in Bevilacqua v. Rodriguez, suggested that owners could attempt to put their chains of title back together and conduct new foreclosure sales in their name to clear their titles. The legal reasoning behind this remedy is rather complex, but essentially it says that the current owner would be granted the right to foreclosure by virtue of holding an “equitable assignment” of the mortgage foreclosed upon. The Eaton v. Fannie Mae ruling, however, may have killed that remedy because the current owner now needs to hold both the promissory note and the mortgage. Ibanez titles remain toxic, and I am hearing that title insurers who are on the hook for them are not even willing to try to fix them until a legislative fix.
What’s Next?
As a real estate and title attorney, what I appreciate about this decision is that the SJC took into account the disastrous effect a retroactive rule would have on past titles (now held by innocent third party purchasers) and came up with new ground rules for foreclosing lenders to follow going forward. It’s like the court said “what’s done is done, now let’s move forward doing it the ‘right’ way.” We will definitely see foreclosures that were in a holding pattern resume again. On the closing side, when I am reviewing a title with a past foreclosure, my client and I can sleep better knowing that the risk of a defective title just got a reduced substantially. This is good for the housing market and it makes more properties marketable.
However, this is not the end of foreclosure litigation in Massachusetts. As with most landmark cases pronouncing a new rule of law, subsequent litigation to clarify what the court meant is likely to follow in this case. Some remaining unanswered questions include:
Is the produce the note defense truly dead for previously completed foreclosures–even where promissory notes are lost and not produced?
If challenged, what further documentation, if any, will suffice to establish agency for MERS and mortgage servicers of mortgages held in securitized trusts.
Will borrowers be able to challenge new “Eaton” affidavits which appear to be fraudulent or robo-signed?
All things considered, I will agree with Prof. Levitin who opined: “In the immediate term, I’d score the case as a major victory for the financial services industry, which avoided liability for its failure to comply with state law foreclosure requirements. Going forward, however, things are more complicated.”
Huge Sigh of Relief For Mortgage and Foreclosure Industry
The much awaited opinion by the SJC in Eaton v. Fannie Mae has just been released, and it is a huge Maalox for the banking and real estate community. Case embedded below. I have written a more detailed analysis here but here are the highlights:
Although the Court adopted some of the Eaton side’s arguments, I believe that lenders and MERS ultimately came out as the winners, as initial reports indicate. The Court basically gave lenders a pass on prior defective foreclosures and created new “rules of the road” for foreclosures going forward. There will definitely be more litigation after this case to sort out what foreclosing lenders and servicers need to prove in order to foreclose.
Agreeing with the Eaton/homeowner side, the Court ruled that going forward, lenders will have establish that they “hold” both the mortgage and promissory note, in order to foreclose. However, the court endorsed several methods in which lenders will be able to satisfy this requirement, thereby potentially creating several exceptions which will swallow the general rule.
Agreeing with lenders and Fannie Mae, the Court took the rare step of declining to apply the the key holding retroactively. The ruling will apply prospectively and will have no impact on previously completed or in process foreclosures. Those foreclosures will likely be immune from challenge along the lines Eaton asserted. This saved the lender and title insurance industry millions of dollars in claims.
Critically for the lending and title community, the Court ruled that lenders do not need to physically hold both note and mortgage at time of foreclosure, striking a huge blow to the “produce the note” defense: The court acknowledged that the Massachusetts foreclosure statute, enacted well before the proliferation of securitization and MERS, was unclear in the modern era of securitizing mortgages.
The court essentially blesses the current MERS and current servicer system where mortgage servicers can show that they have legal authority to act on behalf of mortgage holder/lender to foreclose. The SJC overturned the injunction against the lender and the case was remanded below where the servicer, Green Tree, will have the opportunity to establish they have the legal authority and agency to foreclose on behalf of the mortgage holder.
We will see new attorney and custodian of records affidavits being filed and used to establish the chain of ownership the court said would comply with the foreclosure laws.
Real Estate Crash Has Resulted In Many More Forms and Disclosures
These days buyers are leaving closing rooms with not only their keys but a mild case of carpal tunnel syndrome! The reason for sore forearms and wrists is the voluminous stack of closing documents which are now required to be signed and notarized at every Massachusetts real estate purchase or refinance closing.
One of my opening “break the ice” lines at closings is to suggest that the buyers start massaging their writing hands. Then I show them the 2 inch stack of documents they must review and sign, and they usually say, “Are you serious? We have to sign all that?” Yep, I reply. You can thank Fannie Mae and the real estate collapse for that! All the new rules and regulations passed in the last 5 years have resulted in, you guessed it, more forms. Do you think the Feds and state ever eliminate old or out-dated forms? Nope.
Let me quickly go over some of the more important — and less important — documents signed at a typical Massachusetts real estate closing.
The Closing Documents
HUD-1 Settlement Statement. This is arguably the most important form signed at closing. It breaks down all the closing costs, lender fees, taxes, insurance, escrows and more. We did a full post on the HUD-1 and all the closing costs you can expect to pay here. Under the newer RESPA rules, most closing costs must be within 10% tolerance of the Good Faith Estimate provided by the lender (which you will also re-sign at closing).
Promissory Note & Mortgage. These two documents form what I like to call the “mortgage contract.” The promissory note is the lending contract between borrower and lender and sets the interest rate and payment terms of the loan. It is not recorded at the registry of deeds. The Mortgage or Security Instrument is a long (20+ page) document and provides the legal collateral (your house) securing the loan from the lender. The Mortgage gets recorded in the county registry of deeds and is available to public view. Read a full explanation of the Note and Mortgage in this post.
Truth in Lending Disclosure (TIL). The Truth in Lending should really be called “Confusion In Lending,” as the federal government has come up with a confusing way to “explain” how your interest rate works. This is a complex form and we’ve written about it extensively in this post. Your closing lawyer will fully explain the TIL form to you at closing.
Loan Underwriting Documents. With increased audit risk on loan files, lenders today are requiring that borrowers sign “fresh” copies of almost all the documents they signed when they originally applied for the loan. This includes the loan application, IRS forms W-9 and 4506’s.
Fraud Prevention Documents. Again, with the massive mortgage fraud of the last decade, lenders are requiring many more forms to prevent fraud, forgeries, and straw-buyers. The closing attorney will also make a copy of borrowers’ driver’s licenses and other photo i.d. and submit the borrower’s names through the Patriot Act database. They include Occupancy Affidavit (confirming that borrowers will not rent out the mortgaged property), and the Signature Affidavit (confirming buyers are who they say they are or previously used a maiden name or nickname).
Escrow Documents. Unless lenders waive the requirement, borrowers must fund an escrow account at closing representing several months of real estate taxes and homeowner’s insurance. This provides a cushion in case borrowers default and the taxes and insurance are not paid.
Title Documents. For purchase transactions, Massachusetts requires that the closing attorney certify that a 50 year title examination has been performed. Buyers will counter-sign this certification of title, as well as several title insurance affidavits and documents which the seller is required to sign, to ensure that all known title problems have been disclosed and discovered. Of course, we always recommend that buyers obtain their own owner’s title insurance which will provide coverage for unknown title defects such as forgeries, boundary line issues, missing mortgage discharges, etc.
Property Safety Disclosures. In Massachusetts, buyers and sellers will sign a smoke/carbon monoxide detector compliance agreement, lead paint disclosure, and UFFI (urea formaldehyde foam insulation) agreement. These ensure that the property has received proper certifications and will absolve the lender from liability for these safety issues.
Servicing, EOCA and Affiliated Business Disclosures. Chances are that your lender will assign the servicing rights to your mortgage to a larger servicer, like JP Morgan Chase or CitiMortgage. You will sign forms acknowledging this. You will be notified of the new mortgage holder usually within 30-60 days after closing. In the meantime, the closing attorney will give you a “first payment letter” instructing you where to send your first payment if you don’t hear from the new servicer. You will also sign forms under the federal and state discrimination in lenders laws and forms disclosing who the lender uses for closing services.
Well, those are most of the documents that buyers will sign at the closing. Sellers have a slew of their own documents to be signed at closing, and I’ll cover that in a future post. As I said, at your closing, massage your signature hand, grab a comfy pen, and sign your life away!
Retailers Regrettably Opposed to Law For Restroom Access To Crohn’s, Colitis Sufferers
I heard about this bill on the radio yesterday, and at first I was caught up in the bathroom-humor word play by the DJ. But when I did some more research on Crohn’s Disease and asked my Facebook friends about it, this became serious, as it should.
Millions of Americans (including just retired Pats lineman Matt Light: read great ESPN piece) suffer from debilitating Crohn’s disease, ulcerative colitis and other inflammatory bowel diseases. Victims suffer from frequent and sudden bowel movements, diarrhea and excessive urination. For these folks, a walk around Boston can turn literally soiled when shopkeepers close the door on restroom access. This is an all too common reaction by insensitive shopkeepers, and State Rep. Louis Kafka wants to change that.
Rep. Kafka (D-Stoughton) filed the “Restroom Access” bill, which the House initially approved this week, on behalf of a Sharon girl with an intestinal disorder who found herself in uncomfortable situations on shopping trips with her mom. “When the problem arises, they need to get to a bathroom quickly and, in some cases, there are no public restrooms,” he said. ((Note: this bill is completely different from the controversial “Bathroom Bill” giving transgendered persons restroom access.))
The new legislation, if passed, will require Massachusetts retailers and restaurants to open their private bathrooms to sufferers of inflammatory bowel diseases — and fine them $100 if they don’t. The law would apply only to people with Crohn’s disease, ulcerative colitis or any other medical condition requiring immediate access to a bathroom, as well as those who wear ostomy bags.
Retailers Opposed, But Why The Big Stink?
The Restroom Bill is unfortunately causing a major stink with retailers. “Why single out only retailers?” Retailers Association of Massachusetts President Jon Hurst told the Boston Herald, “Why not banks, why not office buildings, why not government buildings? I walk into the State House and see a lot of locked bathrooms.” Donna DePrisco, vice president of Boston’s DePrisco Diamond Jewelers, said legislative action just isn’t necessary.
The bill has been tweaked to address retailers’ concerns. It applies only to stores with at least two people working, so cash registers aren’t left unmanned; it absolves retailers from liability; and the restrooms must be in accessible areas that don’t pose health or safety risks to customers.
Well-known Condominium Attorney Stephen M. Marcus, who suffers himself from Crohn’s Disease and created the charitable foundation, IntestinalFortitude.com, supports the bill and says that
“Access to restrooms issue is a serious one for the 1.4 million Americans with Crohn’s and colitis, mainly teenagers. I’m sure retailers will adjust to this law in the same way condominium and apartment owners adjusted to the rights of persons with disabilities to make reasonable modifications to their property for persons with disabilities.”
Support the Restroom Access Bill!
My personal opinion is that I strongly support this bill. I think retailers’ concerns are way overblown. Retailers are worried about lawsuits, but the bill provides immunity from liability for slip & falls and injuries. More importantly, allowing restroom access for people who medically need it is basic human decency and common courtesy.
If retailers were really savvy on public relations, they would turn this into a positive by putting a sign or sticker with “Restroom Open” with the familiar purple Crohn’s Disease ribbon. How’s that for a win-win!
For more information about Crohn’s and Colitis Disease, check out www.ccfa.org. To support the Restroom Access Bill, please email or write to Rep. Louis Kafka and reference House Bill 2366.
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Richard D. Vetstein, Esq. is a Massachusetts real estate and land use attorney. Mr. Vetstein frequently advises Massachusetts property owners concerning their legal obligations under various public accommodations laws.
The old Robert Frost poem Mending Wall goes “Good fences make good neighbors.” But a neighbor can quickly turn from good to bad when a they maliciously construct a “spite fence” on the property line. And that includes Sarah Palin who installed this 14 feet monstrous fence at her Wasilla, Alaska home.
What Is An Illegal Spite Fence?
Spite fences are those which neighbors put up extremely close to the other neighbor’s property for the purpose of annoying or inconveniencing the neighbor, and not for any legitimate other reason. In certain circumstances in Massachusetts, courts can rule that certain types of fences are illegal “spite fences,” and order that they be taken down, decreased in height or award damages to the complaining neighbor.
Under the Massachusetts Spite Fence Law (Gen. Laws ch. 49, § 21) ((Interestingly, Massachusetts was one of the first states to enact a spite fence law in 1887)) a fence is an illegal “spite fence” if:
A fence or other structure in the nature of a fence which unnecessarily exceeds six feet in height and is maliciously erected or maintained for the purpose of annoying the owners or occupants of adjoining property….
Whether a fence is an illegal spite fence depends on the circumstances. Usually spite fences are erected where neighbors have been fighting or in a legal dispute of some kind, and the fence is installed as a form of revenge or pay-back. In the vast majority of towns and cities, fences are allowed to be up to 6 feet tall. If the fence in question is over 6 feet tall, and there is evidence that it was installed maliciously, it may be an illegal spite fence.
In a recent dispute on Concord Street in Wilmington (see photo right), a neighbor has installed a very ugly make-shift plywood spite fence with a blue tarp attached. This precipitated a proposal to pass a new fence by-law in Wilmington. I’m not sure of the circumstances surrounding this particular fence, but it is certainly borders on a classic spite fence. In another reported case, the Land Court ordered a neighbor to take down a makeshift fence with spray painted signs and no trespass warnings.
Most folks who erect spite fences will claim the fence is for privacy, but if the home faces an entirely different direction, you can debunk that as a cover for maliciousness. Neighbors may also try to get around the Spite Fence Law by installing a row of trees over 6 feet tall behind the fence. These, too, may be considered illegal.
What Can I Do If My Neighbor Puts Up A Spite Fence?
Under the Spite Fence Law cited above, you can sue your neighbor and ask the court to take down the fence and also seek damages. Under this law and upon a showing of “irreparable harm” the court has the power to impose an injunction ordering that the fence be taken down or reduced to 6 feet tall. Alternatively, the court can award damages.
The difficulty with these cases is that you need to prove you neighbor acted “maliciously” in installing the fence. You will need to marshal evidence to prove that, and that’s where an experienced Massachusetts real estate litigation attorney would add tremendous value. These cases are complex and judges will often require evidentiary hearings before imposing an order taking down a fence. It’s not a “do it yourself” type of situation!
If you are struggling with a boundary line issue or a potential “spite fence,” don’t hesitate to contact me at [email protected]. I have successfully litigated quite a lot of these cases.
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate litigation attorney. Mr. Vetstein frequently represents Massachusetts residents in contentious boundary line, fence, and adverse possession cases.
Consistent with his reputation as the “urban mechanic,” Mayor Thomas M. Menino, along with the City Council, want to pass a new ordinance to clean satellite dish clutter on residential properties in Boston. As reported by the Boston Globe, the proposal would require the removal of all obsolete satellite dishes and ban new installations from facades and other walls facing the street, unless an installer can prove there is no other place to get a signal. Dishes would have to be placed on roofs, in the rear, or on the sides of buildings. East Boston Councilor Salvatore LaMattina, who has spearheaded the effort, says that this ordinance will help “save the character of our neighborhoods.’’
Ordinance May Run Afoul of FCC Rules
The proposed ordinance, however, may face legal challenge by the satellite dish industry and affected satellite subscribers. The Federal Communications Commission (FCC) has ruled that state or local laws are invalid if they unduly impair the right of a subscriber to receive satellite programming on a one meter dish installed on property within owner or renter’s exclusive use or control. For a person living in a multi-dwelling unit, an area such as a balcony, patio or garden not shared with other tenants would be considered property within the individual’s exclusive control. Under the FCC rule, the only two situations where restrictions are permissible is if (1) the restriction is necessary for a clearly defined, legitimate safety objective; or (2) it is necessary to preserve a historic building.
A Solution: Building Wide Equipment
Granted, the satellite dishes covering buildings in many neighborhoods isn’t the nicest thing to see. See Cambridge Street in Allston, for example. However, since the proposed ordinance is concerned predominantly with aesthetics and not any legitimate safety concerns, it may not survive judicial review.
The FCC rules do, however, permit and encourage building-wide community satellite facilities so all residents can get a strong signal without cluttering up the facade of a building with a myriad of dishes. Perhaps the Mayor and the City Council can work with the satellite providers on getting funding for this equipment rather than waste taxpayer money defending a questionable ordinance.
Richard D. Vetstein, Esq. is a Massachusetts real estate and zoning attorney. Mr. Vetstein frequently represents Boston residents and companies in zoning matters before City of Boston zoning and licensing boards.
Water Damage Originating From Exterior Of Home = Claim Denied
In one of the more important homeowner’s insurance cases decided in recent memory, the Massachusetts Supreme Judicial Court (SJC) considered what is covered under a standard Massachusetts homeowner’s insurance policy when rain, snow melt and runoff create water damage and dry rot to the inside of a home. The case is Boazova v. Safety Insurance Co., SJC-10908 (May 29, 2012).
The Court ruled there was no coverage under the homeowner’s insurance policy where significant hidden water seepage through foundation cracks caused a kitchen floor to turn into a “spongy and mushy” mess. Under the exclusion for damage caused by “surface water,” the court held, there is no coverage for loss covered by rain, flood waters or runoff originating from outside the home, rather than inside the home, like a burst pipe. This interpretation of the Mass. standard homeowner’s policy is not what most insured expect from their insurance coverage, but unfortunately it puts to rest what most homeowners who have suffered a water damage claim know already: a water damage claim will likely be denied if the source of water is from the natural accumulation of rain, snow melt or ice seeping into the ground, through a roof, or through the foundation.
Severe Wood Rot Discovered
While undertaking a kitchen renovation project, Ms. Boazova, an Arlington homeowner, discovered severe deterioration of the wooden sill plate that rested on top of the concrete foundation at the base of the home’s rear wall, as well as of the adjoining floor joists and wall studs. The kitchen floor and sub-floor was moist, spongy and falling apart. The homeowner’s expert engineer opined that because the concrete patio was poured directly against the house, water and moisture migrated down from the sill plate, below grade to the foundation, causing the water damage. There was no dispute that the origin of the water infiltration and seepage was from outside elements such as rain, sleet and snow melt. The insurance company denied coverage based on the policy’s exclusion for damage caused by “surface water,” and the homeowner sued.
No Coverage For Damage Caused By “Surface Water”
This case is the first in recent memory where the SJC has considered the interplay between the new Limited Fungi, Wet or Dry Rot, or Bacteria Coverage indorsement, the “hidden seepage” provision and the “anti-concurrent cause” exclusion for “surface water damage” in the standard Massachusetts homeowner’s insurance policy. Making sense of the Massachusetts standard homeowner’s policy coverages and exclusions is a bit like reading Egyptian hieroglyphics. Even the SJC justices had some difficulty, albeit they ultimately sided with the insurance company:
“Although the language of the policy and the indorsement is challenging to even the most careful reader because of the way it connects various coverages, exclusions and exceptions, we conclude that Boazova’s claimed loss — the deterioration and rotting of the wooden sill plat, adjoining floor joists, and wall studs — is excluded from coverage by unambiguous provisions in the policy.”
Take-Away: Exterior Surface Water Cause = Claim Denied
The key point is the Court’s conclusion that the surface water exclusion carried the day. Describing “surface water” as “waters from rain, melting snow, springs or seepage, or floods that lie or flow on the surface of the earth and naturally spread over the ground but to not form a part of a natural watercourse or lake,” the judges ruled that there was no coverage because the property damage was a direct result of rain and snow melt migrating down the foundation into the bellow grade kitchen floor. This covers just about every conceivable flooding scenario.
As far as what homeowner’s can take-away from this decision, well unfortunately they should keep an emergency capital reserve fund ready because any claims made for water damage arising out of exterior conditions will likely be denied. The only type of “flooding” claims which will be covered would be burst pipes and possibly overrun interior sump pumps or perimeter drain systems which cause flooding — and even those will likely involve a battle with the insurance company.
Additional foreclosure relief is one step closer to becoming law as the Massachusetts House of Representatives recently passed House Bill 4087, “An Act to Prevent Unlawful and Unnecessary Foreclosures.” The bill, sponsored by AG Martha Coakley, mandates that banks and foreclosing lenders enter into mandatory loan modification discussions with borrowers before they can start foreclosure proceedings on residential homeowners.
Lenders May Have To Consider Loan Modifications
The key provision of the bill is the requirement that lenders give borrowers a fair shot at a loan modification. Among the factors that banks must consider before foreclosing is the “borrower’s ability to pay,” a provision that will likely be addressed in future drafts of the legislation, or through regulations developed by the Massachusetts Division of Banks. Under the proposed law, if a modified loan is worth more than the amount the bank expects to recover through foreclosure, the lender must offer that modified loan to the borrower. If it doesn’t, then the lender can continue the foreclosure process.
This bill builds on previous legislation, “An Act Relative to Mortgage Foreclosures,” signed into law in August 2010, which made sweeping changes to Massachusetts foreclosure law. That Act extended the 90-day right-to -cure on foreclosures to 150 days, created new requirements for lenders offering reverse mortgages, established mortgage fraud as a crime, and provided additional protections for tenants living in foreclosed properties.
The bill now moves to the Senate, where it is expected that it will be finalized by the completion of the formal legislative session on July 31, 2012. As always, we’ll keep tabs on these developments.
Why Would Anyone Want To Be A Landlord In Massachusetts?
I just settled a very troubling landlord-tenant case which demonstrates everything which is wrong and unfair with Massachusetts landlord-tenant and eviction law from the landlord perspective. This horror story is played out every Thursday in the summary process sessions of District and Housing Courts across the state. The laws which favor tenants so dramatically were passed decades ago in the 1970’s when tenements and slumlords still existed. Those days are long gone, but the outdated laws remain on the books, giving Massachusetts the well-deserved reputation of being one of the most unfriendly places to own investment property. The time has come to restore some semblance of legal balance between small property owners and tenants.
A Familiar Horror Story
The landlord is a 70 year old woman who rented out her family’s old farm house. The tenants lived there under a month-to-month tenancy at will agreement for 6 years without incident. The owner wanted to move back into the home for financial reasons, so she informed the tenants who immediately started threatening to call the board of health. Mind you, the owner had the right to ask the tenants to leave for any reason at all under a 30 day tenancy at will. The owner was forced to serve a 30 day notice to quit which resulted in the tenants’ immediate report to the local board of health and withholding of rent. The owners were cited for several minor code violations which they addressed promptly, but every time the health inspector came out, the tenant “reported” new alleged problems (likely caused intentionally by the tenants), and often did not allow the inspector to gain access. When the owner started an eviction action, and the tenants predictably shot back with a slew of counterclaims. Because the law is so favorable to the tenants, as I will discuss below, the owner was forced to pay the tenants money to get them to move out. Even though the owner felt she addressed all the issues promptly and competently, the existence of any code violation, however minor, rendered her case “dead on arrival” in Housing Court. To get rid of the headaches and potential liability, the landlord had to pay ransom money and waive the unpaid rent.
Unfortunately, this story is all too common in Massachusetts eviction courts, and something has to be done.
A Legal Minefield For Landlords
For landlords, navigating Massachusetts landlord-tenant law is like walking barefoot through a IED-filled field in Afghanistan. At some point, you’ll likely blow off a leg. Allow me to outline just a sampling of these laws and the penalties for landlords’ non-compliance:
Breach of implied warranty of habitability: The first thing a savvy tenant will do after receiving an eviction notice is call the board of health to get the owner cited for code violations. Any violation, however minor, effectively enables the tenant to live rent-free during the case by withholding rent, and the owner will be compelled to make the necessary repairs while the eviction is pending. There have been many instances where tenants have intentionally inflicted property damage to claim code violations. Other penalties: reduction or elimination of rent owed; tenant cannot be evicted; triple damages; payment of tenant’s attorneys’ fees.
Breach of quiet enjoyment: This is another tenant favorite claim. It used to be for when slumlords would shut off utilities to tenants, but that rarely happens anymore. I’ve seen this used when tenants are “inconvenienced” by landlords’ repeated attempts to access the premises to make repairs. Penalties: tenant gets to stay in possession; up to 3 months’ rent or actual damages, whichever is more; payment of tenant attorneys’ fees.
Retaliation: Even if the landlord can evict a tenant at will for any reason, the landlord cannot “retaliate” against them if they make any complaints about property conditions. This is why tenants will immediately start squawking about property issues when faced with eviction, because the retaliation law will protect them even though they are not entitled to lifetime occupancy. Penalties: tenant gets possession; up to 3 month’s rent in damages; payment of tenants’ attorneys’ fees.
Security deposit/last month’s rent violations: Oh, where do I start on this one. As I’ve written about extensively here, Massachusetts landlords need a Master’s degree in Accounting to comply with the Security Deposit law and all of its procedural traps. From giving a special receipt and statement of condition, to putting the money in a special separate account, to paying interest every year, even one minor slip up will subject the landlord to mandatory triple damages and payment of tenants’ attorneys’ fees. This can torpedo an eviction case from the get-go.
Consumer Protection/Chapter 93A: If all these minefields weren’t bad enough, at the end of the day, tenants are allowed to claim that any of the above warrants an award of triple damages and attorneys’ fees under the Mass. Consumer Protection Act.
Time for Meaningful Legal Reform
As I mentioned earlier, the vast majority of the laws protecting tenants were passed in the 1970’s when rental housing was far more problematic than it is now in 2012. Due to political pressure from tenant activists and liberal groups, lawmakers have been reluctant to level the playing field. Unfortunately, these draconian laws disproportionately hurt the small property owners who own 80% of the rental stock in Massachusetts. Laws which make investing and managing rental property hurt the economy and result in higher rents. There are several bills pending at the State House which will provide landlords with more incentive to own rental property in Massachusetts. The most sensible proposal is the much-awaited rent escrow law.
A. Rent Escrow
Massachusetts is one of the minority of states which does not have some form of rent escrow law. The need for one is absolutely critical because without it landlords incur large losses when the tenant’s defensive claims of “bad conditions” turn out to be minor, nonexistent or, worse yet, the result of intentionally inflicted damage to the property by the tenant in order to live rent-free.
A mandatory rent escrow law would require any tenant who is claiming rent withholding to pay the withheld rent to a local court month by month until code violations are repaired. After repairs are done, either the landlord and tenant agree on how the escrowed rent should be divided, or a judge orders a fair settlement. In most cases, the owner will get back most of the withheld escrowed rent. But the most important impact of a mandatory rent escrow law is that those nonpaying tenants who do not escrow can be promptly evicted for nonpayment of rent. Although nonpayment evictions will still take about three months, and owners will lose about three months of rent, much-longer-delayed evictions and the free rent trick will be stopped.
B. Security Deposit Reform
Presently, the security deposit law provides mandatory triple damages and payment of tenants’ attorneys’ fees for a violation however minor. The law should be reformed to provide a safe-harbor and discretionary penalties for when landlords make a good faith effort to comply but get caught up in the procedural mess, like for example if they put the deposit in a savings account instead of a special deposit account.
C. Remove Automatic Possession For Tenants
Presently, the law is drafted so that if a tenant prevails on any number of claims for property conditions, etc., they most likely cannot be evicted. This is especially unfair in the tenancy at will context where the landlord does not need any reason to evict a tenant. The result is that tenants get free passes and occupancy for life as long as they can dig up a counterclaim or two. This needs to be changed.
What Property Owners Can Do: Lobby and Speak Out
The tenant community, backed by well-funded public interest legal services groups, have a strong lobby at the Legislature and love to portray these issues as a form of “class warfare.” In the end, however, everyone gets hurt, because if it’s more expensive to own rental property in Massachusetts, those costs will be passed on to tenants.
Visit your local legislator’s office during office hours and speak to them (or their aids) about your concerns on the issues. In many cases, they won’t know about the bills and you will have to educate them. Send letters and emails to your legislators identifying the bill numbers and explaining why you support or do not support these bills. Go to fund raisers for your Representatives and Senators. Let them know that you vote and that you want your vote to count!
Bar Assn. Lawsuit Targets Kentucky Based Settlement Service Company Employing Local Contract Attorneys
As first reported today by Massachusetts Lawyers Weekly, the bar association for Massachusetts real estate attorneys (REBA) has filed a lawsuit against National Loan Closers, Inc., a Kentucky closing services company, and a Holyoke attorney for allegedly conducting illegal “witness-only” real estate closings. REBA was behind last year’s landmark Supreme Judicial Court ruling in REBA v. National Real Estate Information Services, which held that Massachusetts attorneys are legally required to oversee all residential real estate closings in Massachusetts.
REBA’s suit against National Loan Closers is notable because NLC is alleged to have side-swiped the REBA v. NREIS court ruling by contracting with local attorneys to attend real estate closings. According to the suit, NLC’s model is for these contract attorneys to act similarly to the robo-signers who sign foreclosure documents, as they are simply there to witness and notarize documents and are contractually prohibited from giving legal advice to the parties at closing. Thus, this model runs afoul of the REBA ruling’s mandate that attorneys “substantially participate” in the closing process by reviewing the title and ensuring that title passes legally.
REBA argues, and I agree, that such closings put home buyers and mortgage lenders at risk, erode the public’s confidence in the state’s recording and registration system, and deprive the Massachusetts Interest on Lawyer Trust Accounts program — IOLTA — of thousands of dollars of revenue.
No home buyer wants to close on the single biggest purchase of their life with a contract attorney who knows nothing about the transaction and cannot answer the most basic of legal questions. In the standard model, a supervisory Massachusetts attorney will examine the title and certify under state law that the title is good, clear and marketable, and often that same attorney (or a junior associate with full familiarity with the file and title) will be the closing attorney.
The complaint filed in The Real Estate Bar Association for Massachusetts, Inc. v. National Loan Closers Inc., et al.can be found by clicking here.
First Reported Case Considering Scope Of New Massachusetts Homestead Law
Advice To Homeowners: Get Your Homestead Declaration Recorded ASAP
One of the benefits of the new Homestead Protection Act signed into law last year is that homeowners can use homestead protections against many more creditors. Under the old homestead law, debts which arose prior to the recording of a homestead declaration were not affected at all by the homestead protection. For example, if a homeowner recorded a homestead declaration on January 1, 2005, but owed a debt to a contractor which arose on December 31, 2004, the contractor could still pursue the full amount.
Under the new homestead law, however, a homeowner is protected from a pre-existing debt (except mortgages) unless a creditor files an attachment or lien prior to the recording of the homestead declaration or if the contractor obtains a court execution “based upon fraud, mistake, duress, undue influence or lack of capacity.” The new Homestead Act is simply much more favorable to homeowners because most creditors do not file liens fast enough and most consumer debts are not the product of fraud, mistake, duress, etc.
Bad Facts Make Bad Law
A recent Superior Court decision in the case of Tewhey v. Bodkins (embedded below) is one of the first reported decisions interpreting the scope of pre-existing debt protection under the new Homestead Act, and illustrates that some confusion remains as to what it does and doesn’t cover. Unfortunately, this case is a classic example of the saying that “bad facts make bad law.”
In Tewhey, the parties were attorney and his former client who obtained a default judgment against the attorney for professional malpractice in her divorce. (It appears that the attorney did not bother to defend the case at all). In 2010, the client recorded on the title to the attorney’s residence a court execution for just short of $50,000. However, 9 months earlier, the attorney’s wife, who owned the property jointly, recorded a homestead declaration.
Under the new Homestead Act, since the wife recorded the homestead before the client recorded the court execution, the client was seemingly out of luck. Well, not so fast said Superior Court Judge Edward P. Leibensperger. No doubt recognizing that the client would get the short end of the homestead stick, the judge ultimately ruled that the client’s claim fell under the exception of a claim based upon “fraud, mistake, duress, undue influence or lack of capacity,” and thus, the client could proceed against the attorney’s property.
In my opinion, the judge misread the statutory language because legal malpractice is a tort and is not covered under the exclusion. We will see what the Appeals Court says as the case is now on appeal.
Take-Aways
As for take-aways, the case illustrates two important things. First, homeowners should get their homestead declarations recorded ASAP, before creditors take legal action. For most consumer debt such as credit cards, this will give you the maximum $500,000 protection. Second and likewise, for creditors, you need to get liens filed on debtor’s property ASAP before they record homestead protection, otherwise you’ll likely get the short end of the homestead stick.
If you need a homestead declaration prepared and recorded, my office will do it for a nominal fee. Please contact us at [email protected].
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney with an expertise in foreclosure related issues. You can contact him at [email protected].
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