Published on: January 24, 2012
The law of unintended consequences is playing out big time for Massachusetts condominiums.
Much has been written here and elsewhere about the unintended — and certainly unanticipated ― consequences of the Federal Housing Administration’s new underwriting requirements for condominium loans, which have made it considerably more difficult to buy, sell or refinance condominiums. Less widely recognized, but equally dramatic in their impact, is a trio of Massachusetts court decisions that have tied an already badly gnarled foreclosure process into tighter and more complicated knots.
On a macro level, foreclosure delays affect the housing market as a whole, depressing prices, discouraging purchases, and impeding the recovery of both the housing market and the economy as a whole. But on a micro level, foreclosure delays are particularly problematic for community associations because of their common interest ownership structure.
Unit owners facing foreclosure almost always stop paying their common area fees ― if they haven’t stopped already ― reducing the revenues that finance the maintenance, operation and governance of the community. The resulting financial strains on the association can impair the marketability of other units and, in extreme cases, threaten the viability of the community as a whole.
The court cases at issue spring from the legal morass surrounding allegations of widespread “irregularities” in the foreclosure process. The short summary of this very complicated legal and financial mess is that in the wake of the financial meltdown, many mortgage lenders and loan servicers did not dot all the legal ‘I’s’ and cross all the ‘T’s’ in their foreclosure actions.
In the first Massachusetts case (U.S. Bank v. Ibanez), which has gotten national attention, the Supreme Judicial Court (SJC) invalidated two foreclosures because the lenders involved could not produce documents proving that they held the mortgages when they initiated their foreclosure actions.
At the height of the housing boom, when mortgages were being sliced, diced, syndicated and sold at the speed of light, mortgage assignments were not always completed and recorded in a timely fashion. In many cases, the recording did not occur until after the foreclosure auction. But in this case, the SJC held that the assignment must be either recorded with the appropriate registry of deeds before the lender publishes the first of the required three consecutive weekly legal notices advertising the public mortgage auction, or be signed and dated prior to the first legal ad being published. The court also refused to make its decision prospective, creating two decades or more of foreclosures with potential “Ibanez problems.”
Lenders who had hoped the court would recognize that problem and correct it in a subsequent decision were disappointed. The next decision (Bevilacqua v. Rodriguez) arguably made things worse. Here, the plaintiff (Bevilacqua) raised the obvious question resulting from Ibanez: Does a buyer who purchased a home on which the lender foreclosed improperly have legal title to that property? Bevilacqua had purchased one of the properties in the Ibanez case – a four-unit residence that he had converted to condominiums. Bevilacqua sought to clear the title flaw resulting from the Ibanez decision by bringing a “try title” action in the Land Court. But the Land Court found that Bevilacqua lacked standing to initiate that action because he did not own the property — a conclusion with which the SJC agreed. The decision invalidated the creation of the condominium, leaving Bevilacqua and the three buyers who had purchased units from him without valid claims to those properties.
Now a third case pending before the SJC (Eaton v. Fannie Mae) threatens to further muddy these already murky legal waters. The story is a familiar one: Eaton obtained a subprime home mortgage loan and defaulted on it. Green Tree, which had purchased the loan from the originating lender, foreclosed, purchased the property at the foreclosure auction and assigned its interest to Fannie Mae, which moved to evict Eaton. Eaton sought an injunction to block the eviction, arguing that Green Tree did not have the promissory note underlying the mortgage and so lacked standing to foreclose.
The Superior Court sided with her, holding that “the mortgage has a parasitic quality, in that its vitality depends on the promissory note.” Although the note and mortgage don’t have to reside together throughout the life of the loan, the court agreed, the two documents must be “reunited” before a lender or servicer can foreclose.
Analyzing the case in his blog, Massachusetts attorney Richard Vetstein said its impact could be “potentially bigger than Ibanez.” If the SJC upholds the lower court decision, he noted, “it could render the vast majority of securitized mortgage foreclosures invalid, thereby creating mass chaos in the Massachusetts land recording and title community.”
The SJC, which accepted the case on direct appeal from the lower court, apparently recognizes that concern. After hearing oral arguments, the court issued an unusual order seeking “supplemental briefing” on three points:
- Whether a decision against the lenders in this case “would cloud any title that has a foreclosure in the chain of title, regardless of how long ago the foreclosure occurred,” as some have argued; if so
- “What legal or practical remedies” might mitigate that negative impact; and
- If the court holds that the law requires “unity” of the mortgage and the note, what legal arguments would support or not support a decision to make that ruling prospective only.
The court is expected to issue its decision within the next three or four months. Many bank attorneys agree with Vetstein that a decision against the lenders will create “chaos” for lenders and for title insurers, who will be inundated with lender demands to clear muddied titles. In truth, the current situation is pretty chaotic already as lenders and their foreclosure actions are being challenged on multiple fronts. In addition to the Ibanez decision and its progeny:
- Attorneys General representing most of the states have been investigating allegations of foreclosure abuses and are trying to negotiate a settlement with the nation’s largest loan servicers that would mandate financial penalties and changes in foreclosure procedures.
- Some AGs (including Martha Coakley in Massachusetts) have withdrawn from the national coalition and are either pursuing or contemplating separate actions against targeted lenders. Coakley’s complaint, filed recently against five major mortgage lenders, raises, among other issues, the note and mortgage “unity” question that is at issue in the Eaton case, with which the SJC is currently struggling.
- Under an agreement with the Office of the Comptroller of the Currency, the nation’s 12 largest loan servicers are reviewing thousands of foreclosed loans to identify (and rectify) procedural problems.
- Some state and local governments have begun requiring lenders to assume responsibility for monitoring and maintaining the properties on which they foreclose.
- Flooded with foreclosure challenges and uncertain how to unravel the procedural mess they see, some courts are requiring lenders to substantiate virtually everything they do, in some cases insisting on an affidavit to verify the legitimacy of a notary’s signature. The notary’s seal, apparently, is no longer sufficient.
Lenders, struggling to keep up with regulatory actions and court decisions and uncertain where the next challenges will arise, have become gun shy about foreclosing, to say the least. The minute anyone says “boo,” they put everything on hold. And community associations are feeling the effects, as foreclosure actions are dragging on not just for months, but in some cases, for years.
Association boards have assumed that lenders are dragging their feet because they don’t want to assume responsibility for paying common area fees on units on which they foreclose. But that’s the least of their concerns. It’s the likelihood that a foreclosure action will be challenged and the uncertainty about what procedures will or won’t pass judicial muster with different courts that have slowed foreclosure actions in Massachusetts and elsewhere.
For community associations, foreclosures delayed may mean essential revenue denied unless they take steps to protect the community’s interests. In Massachusetts, that means dealing proactively with owners who fall behind on their common area payments (or file for bankruptcy protection) to make sure delinquent payments do not fall outside the six-month window covered by the state’s super lien statute. And it means moving quickly to foreclose on owners who are unable or unwilling to pay their fees.
An efficient collection process, which we have always recommended, is more essential than ever in light of the current foreclosure morass. Because we have good relationships with banks and their attorneys, if we contact the lender holding the mortgage on a delinquent owner’s unit, in most cases, the lender will pay the back fees — but not always. And with lenders moving slowly, if at all, on foreclosures, there is little reason for community associations to delay their actions and every reason to accelerate them.
Because of the Ibanez title problems described earlier, condominium lien foreclosure actions may also take longer, as the due diligence required becomes more extensive. We can no longer assume that the current title is valid and now need to order a full title search back to the recording of the master deed to ensure that there are no invalid foreclosures in the chain of title. If an Ibanez issue is found, we have to amend our complaint to name the owner originally foreclosed on in order to extinguish that individual’s right — a time-consuming exercise.
Dealing with Delays
With delays now virtually baked into the foreclosure process, boards should anticipate and budget for potential lags in their revenue stream.
Equally important, boards must be aware of the risks posed by vacant units, as more financially strapped owners are abandoning units they know they are going to lose in foreclosure, leaving the properties unoccupied until the lender or the association completes the process. Boards must take steps to ensure that problems in these vacant units (the biggest risk is frozen pipes in the winter) do not damage other units and common areas. Insurance companies are refusing to cover some frozen pipe claims, arguing that the board’s failure to prevent a foreseeable problem in a vacant unit constitutes negligence, making the association responsible for the resulting damage and the repair costs.
Boards should use the emergency power that most condominium documents authorize to enter vacant units and either turn off the water (if that is an option) or turn the heat up to 50 degrees, even if that means (as it often does) the association must pay the utility bill. Those bills could mount in a prolonged foreclosure process, but paying for the heat will be far less costly than repairing the potentially uninsured damage from broken pipes.
These costs aren’t covered by the priority lien, so the association can’t count on recovering them from the lender or from a foreclosure sale. But the board really has no choice. Remember, the bank holding the mortgage on the unit has no legal obligation to pay the utility costs or any other expenses until it actually forecloses, and, for all the reasons outlined here, that could take a very long time.