Foreclosures post-Dodd-Frank: the Federal 120-day Rule
The "year of the mortgage regulation" continues with a discussion of one particular new mortgage servicing rule. What it is, and one way to avoid some of the heartache it has created.
Foreclosure is a last resort for both lenders and borrowers -- borrowers want to keep their family home and lenders want the borrower to keep maintaining the asset, making mortgage payments, and staying current on property taxes and insurance.
But sometimes enough is enough (even before considering the safety & soundness concern of stringing along an obviously bad asset with repeated modifications and temporary forbearance approvals for too long ). But don't think borrowers will just give up without a fight ... our Rich Jackmauh once attended a foreclosure in a bulletproof vest after the attorney (who also sported a bulletproof vest that day) received threats from a borrower with alleged mob connections! (maybe they saw Michael Moore's "Roger & Me" showing foreclosures on Christmas, and sheriffs throwing an unemployed GM worker's Christmas tree out of his house and onto the street). It goes without saying you don't want the bad PR of, just for a wild example, throwing a widow out of her house for $6.30 in unpaid interest.
If foreclosure is necessary, there's at least one 2014 rule change that you should be aware of: The New Federal 120-day Rule. The federal law says that "the first notice of filing required by applicable law [cannot be given until] a borrower's mortgage loan obligation is more than 120 days delinquent."
Many predicted that the 120-day rule would have an unusually large impact on states that already have pre-foreclosure mediation and right-to-cure limitations. For example, experts interpreted the rule to mean that, in Massachusetts, the foreclosure process cannot begin until 270 days after the delinquency begins (Mass. has a 150-day notice of right to cure). Check out the ABA's Comment II.B. on page 6. Other states, such as Florida, D.C., Nevada, Utah, Alabama, and California would have been similarly affected. But good news! It does appear that lenders do not have to wait 270 days, and that the 120- and 150-day periods are not added together.
Lengthy Foreclosure = Problems
The longer a foreclosure process, the more likely there are to be problems. The more likely the house will be vandalized or burglarized, the more likely it will fall into disrepair - don't always expect borrowers in this position to keep mowing the lawn or to maintain the plumbing. (Not to mention the longer you've got a non- performing asset on the books).
Sounds pretty tough, but please be aware that the 120-day rule only applies to loans secured by the borrower's principal residence. You don't have to wait the 120 days if the borrower has given this up and abandoned it, or if this is the borrower's vacation home.
Great news! Right? Well, this leads to another issue. How do you tell if it is the borrower's principal residence? Many people are saying that, "the 120-day rule does not apply to vacant property." That's not technically true ... a vacant home (i.e., gas off, shuttered) may still be the borrower's principal residence (i.e., not abandoned) if, for example, the borrower is on active duty in Iraq. Unfortunately, the regulations do not define these terms, or help determine how to tell when a home is a principal residence or not. In a recent public appearance, the CFPB's advice on this issue is to have policies & procedures determining: (a) HOW you tell if a property is abandoned, and (b) WHO is responsible for making this determination. As so often is the case, the only clear answer is that it should be spelled out in P&P.
Will this be extraordinarily difficult? Maybe not - play it safe and assume a property is not abandoned in close cases (not worth risking threatening an otherwise good foreclosure- especially when borrowers will argue they were on vacation, etc.) Identify clear cases to take advantage of the exemption, and take steps to ensure they're not just on vacation (or active duty) - maybe you can get borrowers to admit abandonment in writing? Of course, the conservative approach will just be to wait the full 120 days (or 150 in MA), but you tell us -- is it worth it to try and get to foreclosure faster?
Note: Do the same principles apply in state-specific regs.? Similar language with the Mass. right-to-cure law, which only protects properties that are the "principal residence of a person" ... but do the same principles apply? Maybe not, but that's a discussion for another day! **Make sure you're meeting both the Federal 120- day rule and the MA 150-day right-to-cure rule (or any other state- specific rules) before starting a foreclosure action.
Small Servicers
Please keep in mind that this rule applies to everyone. Although "small servicers" are exempt from most of the new "loss mitigation" requirements, they are still subject to this 120-day rule.
Meaning of "delinquent"
The rule is also problematic because "delinquent" is undefined. That's a topic for another day, but notice the rule says delinquent on the "mortgage loan obligation" (as opposed to on property taxes, perhaps).
In other news:
As a reminder, the DOB is focusing on policies, procedures, and staffing this year for ATR/QM compliance, according to its December press release
Another ABA On the Lighter Side joke: "Target just announced that it is dropping health insurance for part-time employees and they're blaming it on Obamacare. I guess now if Target employees need to pay for healthcare, they'll just have to use their customers' credit cards." - Jimmy Fallon Elizabeth Warren has had some tough words for the U.S. Supreme Court, including from a speech in 2013: she cited an academic study that called the current Supreme Court's five conservative-leaning justices among the "top 10 most pro- corporate justices in half a century. . . You follow this pro- corporate trend to its logical conclusion, and sooner or later you'll end up with a Supreme Court that functions as a wholly owned subsidiary of Big Business"
Time to update social media policy (probably a good idea for your originators anyway)? FFIEC releases social media guidance
Thinking of attending FHLB Boston's Secondary Market Conference? John Spillane and I will be speaking, come see us! The seminar is May 6 (York Harbor, ME), May 7 (Canton, MA), and May 8 (Cromwell, CT).
Have you seen the political ads claiming a new bill will "bring Obamacare to the mortgage industry? Here is one example ... misleading? Spot on? Other thoughts?
The months behind us have been dire, stressful, and negative. Many of us have had to tighten our belts, losing co-workers/friends, and worrying about our own futures. We keep asking, "How will we survive this down-turn?" Well, John tells me enough is enough. It's time to stop thinking in down-turn mentality ... we've already been down, it has turned, and it's time to get on board and move on.
The ultimate measure of a man is not where he stands in moments of comfort and convenience, but
where he stands at times of challenge and controversy.
- Dr. Martin Luther King, Jr.
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