Connecticut’s Foreclosure Mediation Program

Connecticut’s Foreclosure Mediation Program provides court oversight to the mortgage modification process and can help borrowers obtain a mortgage modification that otherwise may have been beyond their reach.

The borrower must satisfy five criteria to be eligible for the program. First, the property must be the borrower’s primary residence. Second, the borrower must occupy the property. Third, the property must be a one to four family residence in Connecticut. Fourth, the person applying to the program must be the borrower. Fifth, the borrower must be the defendant in a mortgage foreclosure action.

If all five criteria are satisfied, the borrower completes and files with the court a Foreclosure Mediation Certificate together with an Appearance. Note that the “appearance” is a form; it does not require a physical appearance in court. A blank Foreclosure Mediation Certificate and Appearance form should be included with the summons and complaint. The borrower must file these forms with the court within 15 days of the return date listed on the summons but the borrower can move for permission to request mediation more than 15 days after the return date.

Shortly after the borrower files the Certificate and Appearance, the court will send the borrower a notice of the first mediation session. The mediations take place at the courthouse but not in a courtroom. They are informal. The only people present are the borrower (and if applicable the borrower’s lawyer), the bank’s lawyer and the mediator, who is a state employee but not a judge.

The program normally takes place over several mediation sessions. At the first session, the bank’s lawyer provides some information about the loan to the mediator, including the outstanding principal balance, whether there are escrows for taxes and insurance and the current payment. The mediator will discuss with the borrower the reasons why the borrower fell behind, the borrower’s employment or income situation and whether the borrower would like to stay in the home. If that is the case, the bank’s lawyer provides the borrower with some forms to complete and a list of documents to provide. The forms ask for information about the borrower’s income, expenses and assets. The documents requested usually include paystubs, bank statements and tax returns.

The court will send the borrower a notice of the next mediation session, which is usually 30-60 days after the first session. Subsequent sessions revolve around making sure the lender has all the documents and information it requested. Certain documents, like paystubs and bank statements, have to be updated as the mediation progresses.

A successful mediation results in a mortgage modification. The mediation process can be as exasperating as applying for a modification outside of the Foreclosure Mediation Program but in my experience the mediator’s oversight helps keep the lender on track.

Short Sale May Not Be All It’s Cracked Up to Be

Lenders may be touting short sales as a foreclosure alternative but the sale may not be truly “short” or even possible. In this post, I discuss how short sales are supposed to work, how they have been (not) working and why they might not work.

How A Short Sale is Supposed to Work

Think of real estate title as a ship. Think of the mortgage as a barnacle that is put on the title when the borrower takes a mortgage loan. The real estate buyer wants to buy a title that is free and clear of all barnacles. This means that the borrower-seller must scrape the mortgage barnacle off the title before she can complete a sale. The normal way to scrape the mortgage barnacle is to use the sale price to pay off the loan associated with the barnacle. If the sale price is insufficient to pay off the underlying debt, the borrower-seller has to ask the lender or mortgage servicer, who often are responsible for foreclosure and short sales, to release its mortgage barnacle even though the sale price is too “short” to fully repay the debt. The difference between what the borrower-seller owes and the net sale proceeds is the deficiency. With a true short sale, the lender takes all of the net proceeds of the sale, releases its mortgage and waives any claim to collect the deficiency from the borrower-seller.

Of course, before the lender or servicer will agree to a short sale, it has to be satisfied that the borrower-seller cannot pay the mortgage and the proposed sale price is reasonable. The borrower-seller demonstrates that he cannot pay the mortgage the same way he does when seeking a mortgage modification: he submits income and expense information and documentation to the lender or servicer, together with an affidavit explaining the hardship. The lender or servicer confirms the reasonableness of the proposed offer with its own appraisal or broker’s price opinion.

How Short Sales have been (Not) Working

Many mortgage servicers have been unwilling to waive the deficiency. The reason for this isn’t entirely clear but probably has something to do with restrictions imposed by mortgage securitization. In a mortgage securitization, the issuer pools mortgages and sells mortgage backed securities, or “MBS”, to investors. The MBS entitles the investor to receive a share of the pooled mortgage payments. The mortgage barnacle, and the personal liability of the borrower, gives the investor security that it will actually receive its proper share of the pooled payments. If the servicer waives the deficiency, the investors may claim that they had a right to that deficiency and the servicer harmed them by the waiver. It is safer for the servicer to refuse to waive the deficiency.

The refusal to waive the deficiency may be a distinction without much of a difference. Though the deficiency still exists, it is an open question whether any lender or servicer would actively attempt to enforce it. Doing so would most likely require a separate lawsuit because a foreclosure deficiency presumes a foreclosure of title. In a short sale, title is not foreclosed; it is sold with the servicer’s consent. A separate lawsuit to obtain a judgment on the unpaid portion of the debt is another expense for the servicer and one that is unlikely to yield a benefit because the borrower-seller is not likely to have the financial resources to pay it. In such circumstances the borrower-seller is said to be “judgment proof.” The added expense, without any added benefit, may be enough to deter the lender or servicer from pursuing a separate lawsuit based on the deficiency.

A short sale without a waiver of deficiency may be preferable to a foreclosure and deficiency judgment in any event. In a foreclosure lawsuit where the property value is less than the debt, the foreclosing party can obtain a judgment for the deficiency, or deficiency judgment, as part of the foreclosure lawsuit. There is virtually no added expense for the foreclosing party since the foreclosure and deficiency judgment are accomplished as part of the same lawsuit. Though the risk to the borrower of anyone actually trying to collect on the deficiency judgment remains remote, the judgment itself remains viable for a long time — 15 or 20 years in many jurisdictions. That means someone could show up to collect in year 14, after the borrower has righted her financial ship. Contrast that to the short sale with no waiver of deficiency; statutes of limitation can protect the borrower-seller from attempts to collect a long unpaid debt.

Why Short Sales Might Not Work

Going back to mortgage barnacles, a real estate title can have multiple barnacles. For example, many borrowers have a first mortgage and a home equity line of credit, or HELOC. The HELOC is another barnacle. All barnacles have to be removed to sell the property. The first mortgage is usually the largest and the first mortgage lender usually wants all of the net sale proceeds (assuming the net proceeds aren’t enough to fully repay the first mortgage). The HELOC, and any other mortgages or liens, can prevent the sale by refusing to release their barnacles unless they get paid something too. If they can’t agree with the first mortgage on who gets how much, the property can’t be sold. If it takes too long for them to agree, the borrower-seller may lose the buyer, who can’t wait around forever.

The possibility of bickering barnacles and lost buyers makes it imperative for anyone considering selling a property via short sale to use a real estate broker experienced in short sales. From what I’ve seen, an experienced short sale broker can be the difference between a completed short sale and a completed foreclosure.

Motion to Dismiss for Lack of Standing

Produce the Note, An Alternate View, Parts 1, 2 and 3 explained why borrowers might be better off asking the foreclosing party to prove ownership of the debt rather than asking it to produce the note. But how and when does the borrower go about asking the lender to do either of these things? In my view, the best way to do it is by a formal motion to dismiss for lack of standing. Part 1 of the Produce the Note series explained that standing is an aspect of subject matter jurisdiction and that if the foreclosing party lacks standing, the court lacks subject matter jurisdiction. If the court lacks subject matter jurisdiction, the case must be dismissed. When a borrower asks the foreclosing party to prove ownership of the debt (or to produce the note if the borrower goes that route), the borrower is really asking the court to dismiss the case because the foreclosing party can’t prove ownership of the debt (or produce the note). Whether the borrower does this informally, by making the request at a court appearance for example, or formally, by filing a written request with the court, the borrower’s request is a motion to dismiss for lack of subject matter jurisdiction. If the borrower chooses to ask the foreclosing party to prove it owns the debt, the borrower should make a formal written motion. The mortgage industry wants to prove standing merely by producing the note and that is all the courts have been requiring. The borrower needs to why producing the note is not sufficient and that requires a written explanation.

One of the best features of the lack of subject matter jurisdiction is that in some jurisdictions, like Connecticut, it cannot be waived or conferred by consent. This means that the borrower can raise it at any time. Other jurisdictions may require the borrower to do something, like raise it as a defense in the pleadings, to preserve the right to move to dismiss later. Assuming the borrower has properly preserved it, or doesn’t have to, the question of when to move to dismiss for lack of subject matter jurisdiction is really a question of strategy in a particular case. It may not be beneficial to do it early in the case when, for example, the borrower is participating in the Foreclosure Mediation Program (CT) or the Foreclosure Settlement Conference Program (NY). The goal of these programs is to modify the mortgage to keep the borrower in the property. They are essentially “court-annexed” programs, which means that if there is no case pending against the borrower, the borrower cannot participate in the program. A successful motion to dismiss will take the borrower out of the program because it results in there being no case. On the other hand, it may be beneficial to do it early in the case when no court-annexed program is available to the borrower as in the case of an investment property. In those circumstances, the borrower might get some leverage in negotiating a workout or modification if the foreclosing party is facing dismissal.

Produce the Note, An Alternate View, Part 3

Parts 1 and 2 in this series explained that the produce the note defense is based on UCC 3-301 which provides a “holder” with the right to enforce the note. UCC 1-201(21)(A) defines “holder” as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” The reason that producing the note makes it easy for the foreclosing party to prove standing to foreclose stems from the principle that the possessor of a note payable to bearer has a right to enforce the note. UCC 3-205 tells us that a note becomes payable to bearer through an endorsement in blank, which occurs when the person to whom the note is payable writes on it “pay to the order of”, leaves a blank space and then signs below the blank space. The endorsement can be on the note itself or on a page attached to the note called an “allonge.” Endorsing the note in blank makes the note “bearer paper” which means that whoever “bears,” or possesses, it has the right to enforce it.

Calling for production of the note plays right into the foreclosing party’s hand. If the note is endorsed in blank, and virtually all notes that were part of mortgage securitizations were endorsed in blank, all the foreclosing party needs to do is produce the note to show possession (together with evidence that it possessed the note at the time it started the foreclosure lawsuit). But it does not even have to do that. UCC 3-309 provides that a person who does not have possession of the note can nonetheless enforce the note as long as it can prove that it once had possession and had a right to enforce the note when it had possession. Foreclosing parties do this with a “lost note affidavit.”

For these reasons, borrowers would be better served by taking the position that the foreclosing party has to own the debt to have the right to foreclose and merely producing the note does not establish ownership (see Parts 1 and 2 of this series). It is far more difficult for a foreclosing party to produce compelling evidence of ownership than it is for that party to produce a bearer note or a lost note affidavit. In fact, I have raised this argument many times and have yet to see a single foreclosing party produce any credible evidence of ownership. That’s not to say that all the cases where I have raised the argument have been dismissed. The trial courts have been grappling with the owner-holder distinction. The Connecticut Supreme Court has agreed to resolve the issue in one of my cases and I expect the case to be heard in the Fall of 2011. In the same case, the Supreme Court will consider the validity of MERS mortgages, which I will make the subject of future posts.

Produce the Note, An Alternate View, Part 2

Picking up where I left off in Produce the Note, An Alternate View, Part 1, UCC 3-301 is entitled “Person Entitled to Enforce Instrument.” It provides in relevant part that the “Person entitled to enforce” an “instrument” is the holder of the “instrument.” UCC 3-104 defines “instrument” as “an unconditional promise or order to pay a fixed amount of money.” In other words, as far as the UCC is concerned, an instrument is a promissory note. Instruments under the UCC do not include mortgage deeds or deeds of trust. This is the main problem with the produce the note defense. By the express terms of UCC 3-301, the party that can produce the note has nothing more than the right to enforce the note. But, the foreclosing party is not trying to enforce the note. The foreclosing party is trying to enforce the mortgage deed or deed of trust because it’s the mortgage deed or deed of trust, not the note, that describes the lender’s rights to the property and how to exercise those rights.

Not only is UCC 3-301 expressly limited to the enforcement of notes, no court can expand its reach to mortgage deeds or deeds of trust. The statute provides that “[a] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.” We saw in Part 1 that at common law the owner of the debt is directly injured by its non-payment (“common law” is judge made law as opposed to legislature made law). UCC 3-301 does not require any injury. It gives the right to enforce the note to a nonowner or even a thief, i.e., a person “in wrongful possession of the instrument.” Because the statute provides a right to sue without requiring an injury, it is “in derogation of the common law” or, more simply, changes common law. It is a fairly universal principal that statutes in derogation of the common law must be “strictly construed.” That’s just a complicated way of saying that a judge can’t expand a statute that changes the common law; the statute means only what it says and nothing more. Under this principle, a judge can’t expand UCC 3-301 to apply to the enforcement of mortgage deeds or deeds of trust.

In Part 3, I will discuss how producing the note actually makes it easier for a “lender” to overcome challenges to its standing.

Produce the Note, An Alternate View, Part 1

“Produce the note” has been a popular mortgage foreclosure defense since the revelation that lenders often do not have the “paperwork” necessary to foreclose.  This is the first post in a series that will explain why the defense may be a misstatement of the law and actually may make it easier for a lender to overcome what might otherwise be an insurmountable problem.

The produce the note defense is rooted in the requirement of standing, which is an aspect of subject matter jurisdiction.  If the foreclosing party lacks standing, the court lacks subject matter jurisdiction and the foreclosure action must be dismissed.  This does not mean that the debt or mortgage is unenforceable.  It means that the wrong party commenced the foreclosure action.  The right party can try again but make no mistake — a dismissal is a fantastic result for a borrower.

To have standing, the foreclosing party must have a direct injury or be authorized by statute to foreclose.  The purpose of a foreclosure action is to remedy the injury resulting from the non-payment of the debt.  The party who is owed the debt is the one that is injured by non-payment.  The owner of the debt is the party who is owed the debt.  In short, the owner of the debt has a direct injury from the borrower’s failure to pay and thus has standing to foreclose.

In my experience, foreclosing parties do not try to establish standing by direct injury.  Instead, they claim statutory authority to foreclose.  More specifically, they rely on section 3-301 of the Uniform Commercial Code (commonly called the “UCC”).  Section 3-301 provides the “holder” of the note with the right to enforce the note.  For our purposes, “holder” under the UCC means the person in possession of a note.

The produce the note defense is based on theory that a party who cannot produce the note does not possess the note and so does not have the right to enforce it.  The flaw in the defense, as we’ll see in future posts in the series,  is that the right to enforce the note, without more, is irrelevant to the right to foreclose the associated mortgage.

Foreclosure is Not Neccessarily Flipping a Switch

When you took your mortgage loan, you signed a mortgage instrument, which gave the lender an interest in your real estate as collateral for repayment of the mortgage loan. The mortgage instrument normally is called a “mortgage deed” or “deed of trust” depending on the state where the property is located. The mortgage instrument provides that if you do not pay the loan, you are in default. This activates the lender’s right to take the collateral. “Foreclosure” is the process by which the lender takes the collateral.

The steps in the foreclosure process are determined by the state where the property is located. Some states, like Connecticut and New York, are “judicial” foreclosure states. This means that the lender must start a lawsuit against you in order to foreclose. The lender’s goal is a foreclosure judgment. The lawsuit is, for the most part, like any other lawsuit, which is to say that it can take considerable time for the lender to obtain the foreclosure judgment. The borrower has rights that it can exercise as part of the foreclosure lawsuit that can delay the foreclosure judgment or, in some circumstances, stop the lawsuit entirely. This is “foreclosure defense.” So, in Connecticut and New York (and possibly any other judicial foreclosure state) a lender does not foreclose merely by flipping a switch. With proper assistance, the property owner can often retain the property for an extended period.

I frequently use a train analogy to describe the foreclosure lawsuit process. The first stop on the train is the summons and complaint, which starts the lawsuit. The foreclosure judgment is the last stop. There are a number of stops between the summons and complaint and foreclosure judgment. Foreclosure defense is trying to make sure the lender moves as slowly as possible between stops and attempting to insure that the lender makes every stop. Sometimes a borrower can derail the train, which means that the lender has to start the process all over again.

Connecticut and New York have programs associated with foreclosure lawsuits that are designed to help homeowners and lenders achieve a mortgage modification. The programs, in addition to helping with modification, slow the foreclosure lawsuit process. Connecticut’s program is called “Foreclosure Mediation” and New York’s is the “Foreclosure Settlement Conference Program.” Borrowers are admitted to these programs when the foreclosure lawsuit starts.

The foreclosure process is closer to flipping a switch in nonjudicial foreclosure states because the lender does not need to involve the courts. Instead, it follows the procedure set forth in the mortgage instrument, which ordinarily provides the lender the right to sell the property at an auction on a specified number of days notice to the borrower.

Some states provide for both judicial and nonjudicial foreclosures. Click here for RealtyTrac’s state-by-state listing of foreclosure procedures. I don’t know how RealtyTrac calculated the “Process Period” but my experience in Connecticut and New York has been different.