Mortgages

Foreclosure presumptively invalid when foreclosure price is for 15% of fair market value

/ Mortgages

The Alabama Supreme Court has stopped the ejection of an owner by the mortgagee who bought the property at foreclosure because there was a serious question of whether the foreclosure was valid given the fact that the foreclosure price was only $1 more than the outstanding debt and was only 15% of the market value of the property. Martin v. Scarborough, 2024 Ala. LEXIS 195, 2024 WL 4863866 (Ala. 2024). The court cited Alabama precedents suggesting that a price less than one-third of fair market value is presumptively “grossly inadequate” and “shocks the conscience.”

Bank with actual knowledge of intent to create homeowners association bound by covenants even though the mortgage was recorded before the homeowners association declaration

/ Condominiums and Homeowners Associations, Mortgages, Real Estate Transactions, Servitudes, Title Issues

An appellate court in New Jersey held that a bank that received a mortgage on a piece of property was bound by a later-recorded homeowners association covenants because it had actual knowledge that the developer planned to subject the property to the declaration. Fulton Bank of N.J. v. Casa Eleganza, 473 N.J. Super. 387, 281 A.3d 252 (N.J. App. Div. 2022). This was the case even though New Jersey had a race-notice recording act and the declaration was recorded after the mortgage was recorded. The court used the equitable doctrine of equitable subrogation to change the order of priorities to avoid injustice. Because the bank was subject to the covenants, it was obligated on foreclosure to pay past due fees to the association. This result conflicts with the approach taken by the California Supreem Court in Riley v. Bear Creek Planning Committee, 551 P.2d 123 (Cal. 1976), which freed an owner from covenants …

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Foreclosure sale cannot be set aside even though the foreclosure price was only nine percent (9%) of fair market value

/ Mortgages

In a demonstration of the broken nature of our foreclosure system, the Alaska Supreme Court held in Thomas v. Joseph P. Casteel Trust, 496 P.3d 403 (Alaska 2021), that a foreclosure was lawful even though the buyer at foreclosure paid a mere nine percent (9%) of the fair market value of the property. Only if there were procedural irregularities could the foreclosure be set aside. This type of case makes the owner’s equity vanish into thin air and is inconsistent with the historical policies that limited strict foreclosure.

Banks are both owners and landlords when they buy tenant-occupied property at a foreclosure sale

/ Leaseholds, Mortgages, Real Estate Transactions

Banks seem to have a hard time understanding that when they obtain title to property through a foreclosure sale that they not only own the property but have taken on themselves all the obligations that an owner has. If the property is occupied by tenants, the bank-owner is automatically the new landlord and the law imposes duties on landlords. The law also requires owners not to let their property become a nuisance. But this simple legal truth is repeatedly resisted by some banks. This rule extends to any entity that is the legal owner of the property and that includes the trustee of residential mortgage-backed securities that purchases the property at a foreclosure sale. The Maryland Court of Appeals ruled in Hector v. Bank of New York Mellon, 473 Md. 535, 251 A.3d 1102 (Md. 2021), that a lender that becomes a property owner by buying property at a foreclosure sale …

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Judicial foreclosure is not “debt collection” under FDCPA

/ Mortgages

The Ninth Circuit held, in Barnes v. Routh Crabtree Olsen PC, 963 F.3d 993 (9th Cir. 2020), that judicial foreclosure is not a form of “debt collection” covered by and regulated by the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692e-g. The court relied on the Supreme Court’s decision in Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019) that a law firm that brings nonjudicial foreclosure proceedings is not a debt collected under the FDCPA.

Loan modification agreements unenforceable unless in writing

/ Mortgages, Statute of Frauds, Title Issues

An appellate court in California has held that the state’s statute of frauds require loan modification agreements to be in writing to be enforceable. Reeder v. Specialized Loan Serv., LLC, 2020 WL 4345001 (Cal. Ct. App. 2020). This is an expected application of the statute of frauds but it does not mean that some courts, in other factual settings, might make exceptions if the lender engaged in fraud (made a false statement that induces reliance on the part of the borrower), or estoppel (a lender statement that the borrower reasonably relies on in changing their behavior), or that there might be a consumer protection claim for deceptive business practices if something short of fraud but nonetheless deceptive communications wind up hurting the borrower.

Bank has standing to foreclose despite inability to produce the note on which the mortgage was based

/ Mortgages, Real Estate Transactions

The New Jersey Supreme Court allowed a bank to foreclose on property without direct evidence that it had the right to foreclose. Ordinarily, the foreclosing entity must produce the note that memorializes the underlying debt. The UCC allows foreclosure when notes have been lost, UCC 3-309, if a “lost note affidavit” is filed with the court. In Investors Bank v. Torres, 2020 WL 3550701 (N.J. July 1, 2020), the homeowner borrowed money from one lender who filed a foreclosure action but subsequently dismissed that action and later executed a lost note affidavit. It then assigned the note and the mortgage to a second lender who brought foreclosure proceedings based on the lost note affidavit of the prior lender. Some courts have held that a lost note affidavit must state that the party attempting to enforce the note is the party that lost the note. See Dennis Joslin Co., LLC v. Robinson Broadcasting …

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Hawaii Supreme Court measures deficiency judgment by reference to fair market value rather than foreclosure price

/ Mortgages, Real Estate Transactions

The Hawai’i Supreme Court held that deficiency judgments should be measured by the difference between the unpaid debt and the property’s fair market value rather than by reference to the difference between the unpaid debt and the foreclosure price. HawaiiUSA Federal Credit Union v. Monalim, 2020 WL 2079890 (Haw. 2020). The court cited the Restatement (Third) of Property, Mortgages §8.4 (Am. Law Inst. 1997), and found no language in the state mortgage foreclosure act that might have required a different result. This is the modern approach and has been adopted by statute or judicial decision in the majority of states. The reasoning behind this modern approach is the mortgage statutes have an underlying policy designed to define and protect the legitimate interests of both the borrower and the lender. The lender is entitled to get back the loan with interest, as specified in the note, and the mortgage lien on the property …

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Loan servicer liable for negligent handling of loan modification negotiations

/ Mortgages, Real Estate Transactions

A California court has found a mortgage loan servicer to be liable for negligence in its handling of an application for a loan modification. Weimer v. Nationstar Mortgage, LLC, 260 Cal. Rptr.3d 712 (Ct. App. 2020. The court found loan servicers to be in a “special relationship” with the borrower and thus within an exception to the general rule of no tort duty for economic losses. After defaulting on a mortgage, the mortgagor entered into a loan modification process with Bank of America, and was told that he had been approved for a loan modification. Because of that approval, he made a downpayment of $50,000 to obtain the loan modification. The bank had promised him that once it received the downpayment, it would halt foreclosure proceedings. The bank transferred the loan servicing rights and obligations to Specialized Loan Servicing (SLS) which initially refused to honor the terms of the loan modification …

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Eighth Circuit issues confused ruling turning recourse mortgages into non-recourse mortgages

/ Mortgages, Real Estate Transactions

In a surprising development, the Eighth Circuit has held that mortgage debts are extinguished by foreclosure. CitiMortgage, Inc. v. Equity Bank, 2019 WL 5778343 (8th Cir. 2019). While some states, like California, generally prohibit deficiency judgments (claims against borrowers when the foreclosure sale does not garner enough to pay off the debt), most states allow lawsuits against the borrower to get an order to pay the rest of the debt agreed to by the original note. The promise to repay the loan is embodied in the “note” and the right to foreclose is embodied in a separate agreement (the “mortgage” or “deed of trust”) and the contractual obligation usually persists after foreclosure unless either state law or the contract language provide otherwise. The Eight Circuit ignored these traditional distinctions in CitiMortgage, and decided that the foreclosure ended both the contractual obligation and the lien on the property. The case involve the sale of 500 …

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