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.
I recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis: a new Chapter M for Mortgage bankruptcy. As described on FireDogLake:
“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity.
We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”
Any solution which can simultaneously address banks’ unwillingness to offer loan modifications to otherwise qualified distressed homeowners and the litany of title problems created in the wake of cases like U.S. Bank v. Ibanez should be seriously considered. The recent foreclosure legislation proposed by Secretary of State Bill Galvin and Attorney General Martha Coakley contains mandates following these ideas. Galvin’s would create a special court to deal with Ibanez issues, and Coakley’s requires loan modifications for certain sub-prime loans before foreclosure.
We certainly need out of the box thinking to deal with these problems. What are your thoughts?
You knew this was coming. The politicians smell a big political opportunity with the foreclosure mess in Massachusetts, and are filing legislation left and right.
The latest is legislation filed by State Senator Karen Spilka and Attorney General Martha Coakley mandating loan modifications in certain circumstances.Specifically, the loan modification legislation requires creditors to take “commercially reasonable efforts” to avoid foreclosure upon certain sub-prime loans. The legislation also provides a safe harbor for creditors to comply with this requirement of commercial reasonableness.
The legislation also addresses problems with foreclosures highlighted in the recent decision by the Massachusetts SJC, U.S. Bank v. Ibanez by prohibiting foreclosures where creditors lack the documents supporting their purported right to foreclose, and prohibits passing on certain fees and costs to homeowners. Specifically, this legislation:
Codifies the recent SJC decision in Ibanez by requiring a creditor commencing foreclosure to show it is the current legal holder of record of the mortgage. The bill also forbids misrepresentations to courts concerning holder status;
Prohibits passing on to third parties the costs of remedying prior improper foreclosures or absence of recorded assignments;
Prohibits “junk fees” (for goods or services not performed) tacked on during foreclosure and prohibits bribes, referral and similar fees for foreclosure business; and
Requires recording of assignment establishing the creditor as present holder of the mortgage before it can foreclose on the property.
A violation of this legislation would constitute a violation of the Massachusetts Consumer Protection Act, Chapter 93A which carries triple damages and attorneys fees.
Massachusetts Secretary of State William Galvin filed legislation last Friday to give the Land Court authority to create a special master to deal with foreclosures that may have occurred improperly. Anyone seeking to challenge the legitimacy of a foreclosure would have one year to file a lawsuit in the court.
Galvin’s bill follows a Supreme Judicial Court decision in U.S. Bank v. Ibanez, upholding a 2009 Land Court ruling that a bank or lender must have proper documentation proving it holds a title before foreclosing on a home.
“It’s opened the door to anyone that wants to question a foreclosure that’s already moved forward,” Galvin said of the decision. As the secretary of state, Galvin is the state’s register of deeds. Galvin’s bill will go to the Legislature for debate.
The special court could play host to homeowners who purchased a foreclosed home staking claim against a former homeowner who may have faced an improper foreclosure. Galvin pointed out that about 40,000 foreclosures have taken place in Massachusetts since 2006.
“I doubt that half of them are going to be involved in this,” Galvin said. “I don’t know if it’s 5 percent. But if it’s 5 percent, that’s 2,000 properties.”
Depending on the numbers of foreclosure affected, this may be a step in the right direction–as long as homeowners are able to obtain clear title and get reimbursement of any out of pocket expenses dealing with a problem they didn’t create. As with any special court or master, there’s always a short statute of limitations imposed. So we’ll keep an eye out on that.
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.
More Help On The Way For Struggling Homeowners
