Legislation Summary: An Act Preventing Unnecessary and Unlawful Foreclosures

Friday, January 11, 2013

By Kaitlyn Sprague, 2014 J.D. Candidate at Suffolk University Law School

Foreclosures have been a hot legislative topic since 2007 when Massachusetts foreclosures reached levels unseen since the mid 1990’s.  Just two years ago the state peaked in recorded foreclosure deeds in the state at 12,233.[1]  The legislature has since taken various actions to protect tenants throughout the foreclosure process, and more recently has provided some relief to homeowners.

In 2010, the Legislature passed Chapter 258, An Act Relative to Mortgage Foreclosures which provided certain protections for tenants from eviction as a result of foreclosure and extended the foreclosure negotiation process.  Foreclosing banks or lenders can no longer evict tenants in foreclosed buildings without just cause, which basically constitutes any violation of their existing lease.  This provision was a reflection of the fact that despite multi-unit buildings making up only 10% of the housing market in Massachusetts, these properties represented about 30% of foreclosures in 2007,[2] resulting in a disproportionate number of tenants in low income communities being suddenly evicted from their homes.   A landlord facing foreclosure who sells a property may still evict tenants upon a sale, but a bank or lender that forecloses on a property cannot, preventing an accumulation of bank-owned vacant properties.  Additionally, the Legislature extended the “cooling off” period for negotiation between lender and property owner from 90 days to 150 to provide more time to work out a solution.[3]

In the most recent legislative session, foreclosure prevention remained on the forefront of the legislative agenda.  In August 2012, Governor Patrick signed Chapter 194 of the Acts of 2012, An Act Preventing Unnecessary and Unlawful Foreclosures.  This is an attempt by the legislature to encourage renegotiation of mortgage terms, especially in cases where it is more cost-efficient to keep the homeowner in their home.   Creditors are required to take reasonable steps to avoid foreclosure, like assessing the ability of a homeowner to make an affordable monthly payment (factoring in assets, debt burden, and current financial circumstances), comparing the net value of a modified mortgage vs. the net recovery following foreclosure, and the interests of the creditor, including their investors.   The law defines a good faith effort to avoid a foreclosure as determining an affordable monthly payment for the borrower; establishing a modified mortgage loan that achieves an affordable monthly payment, which may reduce principal but may not exceed a 15 year increase in the amortization period or exceed 45 years total; conducting an analysis of the value of the net present value of the modified mortgage loan and the creditor’s anticipated net recovery.  If it’s determined that the net present value of the mortgage exceeds the anticipated net recovery at foreclosure, they are required to offer a modified mortgage loan to the borrower.  The creditor must notify the borrower that no modified mortgage loan will be available where the net value of the modified mortgage loan does not exceed the anticipated net recovery.  The creditor has 150 days to determine whether a modified mortgage loan will be available for a borrower.  First, the creditor must notify the borrower of their right to pursue a modified mortgage loan.  A copy of that notice must be filed with the Attorney General. The borrower has 30 days to pursue a modified mortgage loan and provide a list of their debts and obligations at present, to elect to pursue an alternative to foreclosure, such as a short sale, to pursue a right to cure, or to proceed to foreclosure.  Failure to respond to notice within 30 days will waive the 150 day negotiation period and reduce it to 90.  Should a homeowner pursue a modified mortgage loan, the creditor has 30 days to provide an assessment including the borrower’s income, debts and obligations, creditor net value analysis of the loan, the net recovery potential at foreclosure, the interest of the creditor, and the modified mortgage loan offer.  The borrower may then accept the offer, make a counteroffer, or proceed to foreclosure.  The right to a modified mortgage loan may only be granted once during any three year period.  The law also requires a creditor to file an affidavit with the registry of deeds in that jurisdiction certifying compliance with this section and indemnifies any third party purchaser from liability for failure of a creditor to comply with any part of this section.

The 2012 law also creates a 13 member task force, consisting of an appointee of the Attorney General, who will act as chair of the task force, a representative of the Massachusetts Bankers Association, 3 appointees of the Governor, 2 of whom must represent a legal organization representing consumers or homeowners of Massachusetts, and 8 legislative appointments.  The task force will conduct two major studies over the course of the following year.  First, the commission will investigate how Massachusetts can encourage the prevention of unnecessary vacancies following foreclosures; for instance, by allowing a foreclosed homeowner to remain in the foreclosed property until a purchase and sale agreement has been completed by a purchaser who intends to occupy the housing as their primary residence.  The task force will also evaluate existing mediation programs throughout the country, including a report on the potential fallout from credit and borrowing programs from jurisdictions with mediation programs in comparison to the number of borrowers who utilize mediation and ultimately remain in their homes after the process.  This committee will report to the legislature by the end of December 2013 with their findings.  The Division of Banks will also annually report on the outcome of the loan modification process and deliver the report to the Joint Committee on Financial Services for the next five years, with this requirement ending on December 31, 2017.

The major provisions of this bill became effective November 1, 2012, meaning that realistically it will be a full year or longer before the effects from this legislation will be visible. The Division of Banks is preparing regulations regarding the foreclosure process as a result of this legislation.  With a seemingly limitless number of factors affecting the foreclosure process, it will likely be difficult to tell whether this legislation was effective or if the economy simply improved.  Still, preventing creditors from refinancing mortgages where the creditor stands to earn more through a modified mortgage than through the recovery process in a foreclosure is a common sense way to keep people in their homes without unnecessarily hurting the bottom line.  This law creates a reasoned, pragmatic approach to the foreclosure process that will help homeowners and creditors alike for years to come.

[1] Massachusetts Foreclosure Statistics – Updated, CHAPA.org, http://www.chapa.org/housing-policy/foreclosure_browse/massachusetts-foreclosure-statistics-updated (last visited Dec. 10, 2012).

[2] Massachusetts Foreclosure Statistics – Updated, CHAPA.org, http://www.chapa.org/housing-policy/foreclosure_browse/massachusetts-foreclosure-statistics-updated (last visited Dec. 10, 2012).

[3] Steve LeBlanc, New Mass. Law toughens foreclosure safeguards, Boston Globe, Aug. 7, 2010, http://www.boston.com/news/local/massachusetts/articles/2010/08/07/new_mass_law_toughens_foreclosure_safeguards/