Publication

In turbulent economic times, legislators, regulators and courts are called upon to redress heightened grievances, and businesses and individuals become aware, sometimes painfully, of new and previously existing laws of which they were blissfully uninformed.  In the downturns of the late 1980’s and early 1990’s, lenders learned that they can be liable for environmental contamination, may not take possession of mortgaged property without a separate assignment of leases and rents, and, for a brief period, could be liable for failing to sell real estate at foreclosure for less than a set percentage of fair market value.  Recently, in the wake of skyrocketing foreclosure rates (in Massachusetts, increasing by 397% in 2007 and 62% in 2008), there have been a number of federal and state initiatives and responses and, as Yogi Berra once prognosticated, “it’s déjà vu all over again”.  

Mortgagee Must Determine Whether Borrower Can Repay Loan

As the result of regulations recently promulgated by the Massachusetts Attorney General, it is now an unfair and deceptive practice (and, therefore, a per se violation of M.G.L. c. 93A) for “a mortgage broker to arrange or mortgage lender to make a mortgage loan unless the mortgage broker or lender, based on information known at the time the loan is made, reasonably believes at the time the loan is expected to be made that the borrower will be able to repay the loan”, 940 CMR 8.06(15), effective January 1, 2008.  This determination is made based on an evaluation of the borrower’s existing assets, income and liabilities and the proposed loan terms (calculated based on the fully indexed interest rate, including any adjustments following an initial introductory rate), together with real estate taxes and insurance costs, regardless of whether a lender escrows for such costs. 

In December, 2008, in a unanimous decision, the SJC significantly expanded the application of these regulations by deciding that a mortgagee cannot foreclose a mortgage with the following four (4) characteristics: (1) the loan is an ARM loan with an introductory rate period of three years or less; (2) the loan featured an introductory rate for the initial period that was at least three per cent below the fully indexed rate; (3) the loan was made to a borrower for whom the debt-to-income ratio would have exceeded fifty per cent had the mortgagee measured the borrower's debt by the monthly payments that would be due at the fully indexed rate rather than under the introductory rate; and (4) the loan-to-value ratio was one hundred per cent, or the loan featured a substantial prepayment penalty (construed to be greater than the "conventional prepayment penalty" defined in G. L. c. 183C, § 2) or a prepayment penalty that extended beyond the introductory rate period, Commonwealth v. Fremont Investment & Loan, et al, 452 Mass. 733 (2008).  Importantly, the court found that, although no individual feature of Fremont’s loans violated the express provisions of any then existing statute or regulations, this did necessarily lead to the conclusion that Fremont’s actions were ‘permitted’ and “a practice may be deemed unfair if it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness."

Mortgagee Must Hold Mortgage to Foreclose

In a number of recent Massachusetts decisions, courts have ruled that a mortgagee must not simply demonstrate that it owns the loan which is the subject of a foreclosure but must establish that it actually holds title to the mortgage, by assignment or otherwise, In re Robin Hayes, Case No. 07-13967-JNF (Bankr. D. Mass. 2008); In re Nosek, 386 B.R. 374 (Bankr. D. Mass. 2008).  Moreover, in the Nosek case, the court held that a foreclosing entity is subject to sanctions for failing to disclose its role as a servicer and lack of title to the mortgage.  An additional pending case which bears monitoring is Manson et al. v. GMAC Mortgage, LLC, et al, Suffolk C.A. No. 08-5164, in which the plaintiffs filed a class action complaint seeking injunctions to prevent lenders from foreclosing mortgages or, following foreclosures, evicting homeowners, without evidence that they hold the applicable mortgages.   

Borrower Right to Cure

As a result of the enactment of Chapter 206 of the Massachusetts Acts of 2007, “An Act Protecting and Preserving Homeownership”, a borrower has a ninety (90) day right to cure a loan default, during which time the lender may not accelerate the loan or add fees (with the exception of late fees not exceeding 3 per cent of the amount of principal and interest overdue) to the overdue balance.  If passed, proposed legislation filed in 2009 entitled “An Act Relative to Stabilizing Communities Impacted by Foreclosure” would increase the “cooling off” period from ninety (90) days to one hundred twenty (120) days.

Tenant Rights Following Foreclosure

Chapter 206 of the Massachusetts Acts of 2007 also substantially enlarged the rights of tenants following a foreclosure by providing that a tenancy at will in a dwelling unit is no longer terminated by foreclosure, a tenancy under a lease in a dwelling unit is now converted to a tenancy at will by foreclosure, and a tenant renting pursuant to a state or federal subsidized rental program is no longer affected by a foreclosure.  If passed, “An Act Relative to Stabilizing Communities Impacted by Foreclosure” would also prohibit eviction of tenants in foreclosed properties until there is a contract to sell the property, provided that the tenant remains current with rent payments and continues in good standing.

“High Cost” Loans

Pursuant to M.G.L. c. 183C, the Predatory Home Loan Practices Statute, certain “high cost” home mortgage loans (e.g., loans with points and fees which exceed 5% of the total loan, excluding up to 2 points and up to a 2% prepayment penalty): (1) require a certification that the borrower received credit counseling; (2)  require that a mortgagee reasonably believe at the time that the loan is consummated that at least one obligor has the ability to repay the loan; (3) cannot contain provisions for prepayment fees or penalties; and (4) can only contain limited increases in interest rates following default.

Remedies of Condominium Associations Following Foreclosure

Pursuant to Section 6 of M.G.L. c. 183A, the Massachusetts Condominium Statute, a condominium association has a priority lien for unpaid budgeted common expenses over a period of  six (6) months preceding notice of delinquency, together with a right to foreclose the lien and extinguish subordinate mortgages.

Right to Mortgage Modification

Several proposed laws which would affect mortgagees’ rights to foreclose are also worth tracking.  The first, “Helping Families Save Their Homes Act of 2009”, passed by the U.S. House of Representatives in March, 2009 and presently pending before the U.S. Senate, would revise the U.S. Bankruptcy Code by allowing bankruptcy courts to “cram-down” first mortgages to reduce principal amounts, reduce interest rates and/or extend terms of loans, provided that the debtor requested a loan modification and the mortgagee failed to negotiate loan modifications in good faith.  The second, “An Act to Require Commercially Reasonable Efforts to Avoid Foreclosure”, filed by the Massachusetts Attorney General in January, 2009, would prevent a mortgagee from foreclosing certain loans unless it could demonstrate that it has “taken reasonable steps and good faith efforts to avoid foreclosure”.  In effect, in order to satisfy this requirement, the lender would be required to undertake a cost benefit analysis and demonstrate that the present value of payments received under a proposed loan modification would not exceed the amounts which it would receive from a foreclosure.  This legislation would apply to certain “high risk” loans, including interest only loans, loans with short term introductory rates and loans with high loan to value or debt to income ratios.

Foreclosure practice in Massachusetts has changed dramatically in recent years and is likely to evolve significantly in 2009.  Again, following Mr. Berra’s insightful admonitions, “when you come to the fork in the road, take it” and, moreover, “if you don’t know where you are going, you might wind up someplace else”.   Lenders, beware of the fork in the road, you might end up someplace you did not intend.