Foreclosure Reform Concerns

Transcription

1 Foreclosure Reform Concerns Prepared by the Cuyahoga County Vacant and Abandoned Property Action Council (VAPAC) April 5, 2016 BACKGROUND Over the past couple of years the lending industry has been advocating for legislative reforms to the mortgage foreclosure process. In late Fall 2015 the Ohio House passed HB 134 which provided for an expedited foreclosure process that foreclosing lenders can use if a property is abandoned. At about the same time lender attorneys affiliated with the Ohio Bar Association developed a draft Senate bill that included most of the provisions in HB134, but proposed more substantial reforms. The draft Senate Bill has been designated as L_131_ by the Legislative Services Commission. Most recently, HB 463 has been introduced in the Ohio House and it substantially mirrors the provisions of the not-yetintroduced Senate bill L_131_ CONSENSUS ON THE PREMISE Generally, the same reasoning and support of an expedited tax-foreclosure process on vacant and abandoned properties can be applied to a mortgage scenario. Where a property is in default of its mortgage or tax obligations, and the owner(s) have abandoned the property and said obligations, there ought to be a mechanism to more quickly address the title and lien conditions, and return the property to productive use. Timely re-occupation or demolition of abandoned properties is a critical component to neighborhood stabilization and growth, particularly in urban markets, and thoughtful changes to the law that support this ought to be implemented. This could include removing or reducing some of the due process, property law, and procedural protections that currently exist, which tend to assume occupied, non-abandoned properties. In an abandonment scenario, there is no interested owner to protect and therefore these requirements, while well-intentioned, morph into a misplaced set of procedural hurdles and a time/resource expenditure that must be dealt with by lienholders, housing advocates, governments and land banks alike. As noted above there are currently at least 3 versions of a bill that if adopted would create major changes to the mortgage foreclosure process. However, any alteration to due process and property right protections must be done with the upmost care to ensure that those protections are never wrongfully withheld. To that end, below is an outline of 3 areas of focus/concern identified by our group: Our specific concerns about the changes proposed in the draft Senate Bill can be loosely grouped into three categories: (1) changes that do not adequately protect due process rights; (2) changes that encourage the irresponsible disposition of properties following foreclosure; and (3) changes that will result in unforeseen additional delay. Specific line references below refer to text locations in House Bill 463, which mirrors Senate draft L_131_

2 Negative Impact on Due Process Rights of Property Owners 1. The proposed bill would enable banks or mortgage servicers to foreclose on occupied homes even when they can t produce the underlying mortgage or promissory note. Line 174. In recent years courts have said foreclosing lenders must prove they have the legal right to foreclose by showing they are the proper holders of the mortgage and note. This was at the heart of the robo-signing scandal where banks improperly transferred tens of thousands of notes and mortgages to other banks who later initiated foreclosure. This provision would remove a fundamental defense for borrowers still occupying their home and would lead to greater abandonment. 2. The eligibility threshold for expedited process is too lax, and could be used against homes not abandoned. Line 263. An expedited process by nature has less protection for the homeowner and should only be used when a property is truly abandoned. HB134 and L_131_ allow an expedited process if a combination of any 3 conditions exist; HB463 increases that to any 5 conditions. This removes discretion by the court to determine abandonment and creates the possibility of erroneous findings of abandonment. Here are five examples of conditions cited in the language which would be inappropriate: a. A single utility is disconnected; one utility could be disconnected temporarily while a home is still occupied. b. A house could have several cracked window panes (or storm window panes) and still be occupied. c. A house could have litter on its lawn and still be occupied. d. A house could have one or more windows without window treatments (shades or curtains) and still be occupied. e. Perceived loitering could be observed at a house and it could still be occupied. Even if all 5 of these conditions existed, a house could still be occupied. In fact, the above 5 conditions are more likely to exist in lower income neighborhoods where occupants are most at risk of being taken advantage of by over-zealous financial institutions. The last listed condition, "Other reasonable indicia of abandonment" is far too broad and inherently unreasonable since it implies that the indicia that precede it are reasonable. 3. Perhaps the most significant flaw in the eligibility threshold is not the looseness of the conditions, but the lack of an impartial party alleging them. Banks and their field service vendors have a financial self-interest in achieving expedited foreclosure proceedings. They are not impartial observers. In contrast, government officials are the more appropriate parties to inspect and verify housing abandonment. It is worth noting that a more thoughtful approach to determining abandonment in cases of foreclosure already exists in the Ohio Revised Code. ORC 2

3 Section provides for expedited foreclosure in cases of tax foreclosure on abandoned property. That section provides stronger assurance of abandonment, and is more heavily weighted toward the impartial determination of governmental authorities. 4. In the case of no bid at a first sale, removing the 2/3 minimum bid requirement at a second sale will encourage irresponsible bottom-feeder investors. Line 802 and In distressed urban markets the selling of abandoned property for as low as $1 encourages irresponsible "bottom-feeding", and fuels harmful practices such as those recently documented in a New York Times article 1. Irresponsible flipping and churning of property in distressed markets places greater costs and burdens on local municipal code enforcement authorities. 5. Removing the 2/3 minimum bid requirement also leaves the foreclosed homeowner with a higher deficiency judgment. A homeowner/borrower who s foreclosed on not only loses their home but is also saddled with a judgment against them in the amount of the unpaid loan. The judgment is reduced by the proceeds from the Sheriff Sale; the 2/3 minimum bid helps reduce the remaining deficiency judgment after sale. Irresponsible Disposition of Properties Following Foreclosure 1. Allowing banks to bypass the Sheriff Sale Process and conduct their own private sales invites the potential for fraud and makes it less likely an abandoned property will end up in responsible hands. Line 439. The Ohio legislature wisely put control of the foreclosure process into the hands of the Courts and County Sheriffs. Both national and local media reports as well as academic research over the past decade have documented abuses by the lending industry and their willingness to off-load distressed low value property to irresponsible investors 2. The disposition of abandoned property poses inherent risks for communities and their residents and, as the legislature intended, should be overseen by proper authorities: the courts and county sheriffs. The proposed bill would allow banks to circumvent that oversight and conduct their own private sales. There should be much greater accountability incorporated into the bill: for example, insuring that property tax payments will be remitted to the proper authorities by buyers in a timely manner, and providing adequate information to local municipalities so they will know who to serve with notices for code compliance. 2. Allowing banks the option of conducting private sales on the internet (line 557) and requiring all Sheriff Sales to be conducted that way after one year (line 658) opens the door for fraud and abuse. There is nothing inherently wrong with taking advantage of the latest technology, it can save time and expense. But some of the worst abuses of post-foreclosure buying and selling 1 See 2 The Role of Investors in the One-To-Three Family REO Market: The Case of Cleveland. Harvard University,

4 over the past decade have occurred via the latest technology of online and web-based sales 3. As currently drafted there are only minimal requirements for the registration, vetting and oversight of online bidders. If speed is the only result sought, then this makes sense, but if we want responsible disposition of property that minimizes harm to communities, then this provision needs to be strengthened to give the court proper oversight. 3. The proposed state-wide Sheriff Sale website, as drafted, does not provide sufficient components to protect communities from the sale of abandoned properties. Line 588. As drafted this proposal misses an opportunity to include information that would help protect communities and minimize costs incurred by local municipalities having to address code violations at abandoned properties. For example, the site should be linked with local code enforcement data, so properties coming up for sale will be tagged with condemnations, pending demolitions, and other code violation complaint info; the site should maintain a list of Sheriff Sale bidders who 1) have failed to register with the Secretary of State, 2) failed to pay property taxes, or 3) failed to comply with local housing and safety codes. 4. In the case of no bid at a first sale, removing the 2/3 minimum bid requirement at a second sale will encourage irresponsible bottom-feeder investors. Line 802 and In distressed urban markets the selling of abandoned property for as low as $1 encourages irresponsible "bottom-feeding", and fuels harmful practices such as those recently documented in a New York Times article 4. Irresponsible flipping and churning of property in distressed markets places greater costs and burdens on local municipal code enforcement authorities. 5. Allowing foreclosing Tax Lien Buyers to conduct private sales, and conduct them on the internet, is a problem for the reasons stated above. Line Municipal law departments and code enforcement officials in Cincinnati, Columbus and Cleveland have had negative experiences with foreclosing tax lien buyers. The Ohio legislature should be concerned about placing management of the foreclosure sale process in the hands of those tax lien buyers. Proposals that Will Result in Additional Delay 1. Allowing banks to arbitrarily delay a sale for 6 months is contrary to achieving an expedited process. Line 497. This provision permits a bank to delay a sale for 6 months, without providing any reason to the Court, and takes away from the court its ability to oversee the process and consider the negative consequences of such delay. 3 Buying Foreclosed Homes With A Mouse Click, Wall Street Journal, See 4

5 2. Extending the Statute of Limitations for enforcement of a note secured by a mortgage to 21 years runs contrary to the idea of an expedited process. Line 127. If the purpose of these reforms is to bring distressed abandoned property back into productive use, that purpose is undermined by allowing financial institutions to wait 21 years before bringing an action to enforce their note. Interested parties who might be able to restore an abandoned property will be reluctant to do so if the property s title is clouded by an unresolved mortgage lien. Areas for Improvement (1) The statute could create a rebuttable presumption of vacancy. In the event that a foreclosing party (1) posts an appropriate bond at the time of filing of the case or the motion to expedite process and (2) obtains an affidavit from a representative of a municipal our county body certifying their review of the eligibility criteria, and certifying that a sufficient number of those criteria had been met. This affidavit would need to be accompanied by a geocoded, dated, time-stamped photo of all four sides of the property. (2) We would advocate the inclusion of a notice provision for municipalities when a motion to expedite foreclosure is filed. (3) Online buyers at Sheriff s sales should have to (1) be Ohio corporations; (2) be Ohio persons; (3) be a foreign corporation registered in Ohio; or (4) appoint an agent or POA for service of process in Ohio. (4) The broad statement of purpose in the opening section (line 15) to state the intent of the General Assembly on the relationship of state and local laws regarding mortgage foreclosure actions, should be reconsidered. Is it the intent of the General Assembly to pre-empt any local municipal ordinance that may impact foreclosing banks? This broad language could be used as a basis for striking down municipal vacant property registration ordinances that hold financial institutions accountable for the condition of property acquired after foreclosure. For additional information contact: Gretchen Bowman gbowman@nhscleveland.org Frank Ford fford@wrlandconservancy.org 5