Friday, November 17, 2017

The Foreclosure Process in Massachusetts in 2017

Ten years ago, I composed a document that described the foreclosure process in Massachusetts. Much has changed since then, so I finally go around to updating the document. Here it is:

The Foreclosure Process in Massachusetts (2017)

  1. In Massachusetts, a mortgage is both a contract and a conveyance of real estate. The borrower signs a promissory note agreeing to repay the lender in accordance with the terms of the note. The borrower also signs a mortgage which is a type of deed that conveys to the lender an interest in the borrower’s real estate. The right conveyed to the lender by the mortgage is the power, in the event of default, to take possession of the property or to sell it at public auction. 

  1. Upon granting a mortgage, the borrower retains “the equity of redemption” of the property, meaning that when the loan is repaid, the borrower “redeems” the property by receiving a discharge of mortgage from the lender. If the borrower fails to repay the loan, the lender can cut off (or “foreclose”) this right of redemption by taking possession of the property or by selling it at public auction.

  1. If the borrower fails to make payments in accordance with the terms of the promissory note, the lender will serve the borrower with a notice to cure the deficiency. Massachusetts law provides a “right to cure” period of 150 days during which the lender and the borrower will attempt to negotiate a modification of the mortgage or some other resolution of the deficiency.

  1. If the lender and the borrower cannot agree to a modification of the mortgage, the lender may, after the passage of the 150 day right to cure period, send the borrower a “notice of acceleration” which means the entire amount owed on the note becomes due and payable immediately.

  1. The foreclosure process has two parts. In the first, the lender files a complaint in the Land Court seeking a declaration that the borrower is not entitled to the protection of the Service Members Civil Relief Act of 2003. The only issue in this Service Members case is whether the borrower is in the military. If the borrower is, he or she has additional protections against foreclosure. If the borrower is not in the military, judgment will issue in favor of the lender.

  1. Once the Service Members complaint has been filed, the Land Court will issue an order of notice that provides the borrower, anyone else with an interest in the property, and the public, notice of the complaint. The Land Court directs the lender to serve the order of notice upon the borrower, to publish it once in the local newspaper, and to record it in the appropriate registry of deeds. 

  1. If the borrower is not in the military, the Land Court will issue judgment in favor of the lender. As soon as the judgment is issued by the Land Court, the lender may proceed to the second part of the foreclosure process which is foreclosure by possession or public auction or both. This second part of the foreclosure process in Massachusetts is conducted by the lender with no judicial oversight.

  1. There are two methods of foreclosure in Massachusetts: entry and possession and sale by public auction. Both methods have a number of pre-conditions which are described below, and most lenders foreclose by both methods simultaneously.

  1. To conduct a foreclosure by entry and possession, the lender steps onto the property and symbolically takes possession of it, recording a notice of this action at the registry of deeds. With this type of foreclosure, the borrower retains the right to redeem (or get back) the property by paying the full amount owed to the lender within three years of the foreclosure.

  1. Because of the three year right of redemption with foreclosure by entry and possession, lenders simultaneously conduct a parallel foreclosure by exercise of the power of sale contained in the mortgage. (Foreclosure by entry and possession is still used because it serves as a backup in case a flaw is discovered in the foreclosure auction more than three years after it has occurred; by that time, full title will have vested in the lender that foreclosed by entry and possession).

  1. In order to foreclosure by exercise of the power of sale, there are a number of steps the lender must take.  

  1. The lender must first take reasonable steps and make a good faith effort to avoid the foreclosure. This involves the lender comparing the anticipated net recovery from the foreclosure with the net present value of a modified mortgage. The lender must certify that it has done all this by recording an affidavit to that effect at the registry of deeds prior to the first publication of the notice of mortgagee’s sale.

  1. If the lender intends to bring an action for the amount of any post-foreclosure deficiency against the borrower, the lender must send the borrower (or any other person from whom recovery will be sought) written notice of the intent to foreclose together with a warning of liability for the deficiency at least 21 days prior to the foreclosure auction.

  1. If the mortgage has been assigned, an assignment of mortgage must be recorded at the registry of deeds prior to the first publication of the notice of mortgagee’s sale. Otherwise the assignee of the mortgage has no authority to foreclose.

  1. The lender prepares a notice of mortgagee’s sale that includes the date and time of the auction, the deposit amount, the legal description of the property and identifying information about the mortgage being foreclosed. This notice of sale must be served upon the borrower and all parties who have an interest in the property. The notice of sale must also be published in the local newspaper for three successive weeks with the first publication at least 21 days before the sale.

  1. On the scheduled day and time, an auctioneer hired by the lender conducts the foreclosure auction on the property. At the same time, a representative of the lender symbolically takes possession of the property as part of the foreclosure by entry and possession process.

  1. The high bidder at the auction immediately signs a memorandum of sale and takes the property “as is.” The high bidder/buyer typically is given 30 days to close the sale. At the closing, the foreclosing lender delivers a foreclosure deed to the buyer. The foreclosure deed will eventually be recorded at the registry of deeds, however, there is no time limit on how long after the auction that either the closing or the recording of the foreclosure deed must occur. The foreclosing lender may (and frequently does) purchase the property at the auction.

  1. The borrower is not required to vacate the home at the time of the auction (although the borrower usually does).  While the borrower no longer has a right to live in the property, the only way to remove him is through the Housing Court eviction process.

  1. While the lender is not required to obtain full fair market value of the property at the auction, the lender does have a fiduciary duty to the borrower to obtain a fair price under the circumstances. 

  1. If the property is sold for more than is owed, the lender retains from the sale proceeds the amount of indebtedness and then pays any surplus funds to junior lien holders or, if there are none, to the borrower. However, in almost all cases the amount realized at the sale is less than is owed to the lender. This leaves a “deficiency” which is the total amount owed on the note less the amount realized at the sale. For example, if borrower owes $300,000 and the property is sold at auction for $200,000, a deficiency of $100,000 results.

  1. Where a deficiency results, the lender may (and often does) file a lawsuit against the borrower on the promissory note seeking a judgment against the borrower in the amount of the deficiency.

  1. If there are other mortgages or liens on the property that are junior to the mortgage being foreclosed, the foreclosure extinguishes those junior liens and mortgages.  For example, if borrower used two mortgages to purchase the property, a first for $180,000 and a second for $70,000, and the holder of the first mortgage forecloses, the second mortgage’s security interest in the real estate is wiped out, however, that second promissory note survives as an unsecured debt which would allow the holder of the second mortgage to sue the borrower on the promissory note.

  1. Foreclosing lenders are often the high bidder/buyer at the foreclosure auction. In most cases, the former lender/new owner puts the property on the market in search of a third party buyer. Between the time of the auction and of a subsequent sale to a third party, properties owned by foreclosing lenders are often called REO which means “real estate owned” [by the lender].

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