8. Consideration of action on default of Transformation Home Loan. (AS)

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1 8. Consideration of action on default of Transformation Home Loan. (AS) A. REFERENCE AND BACKGROUND EDA Agenda: 5/13/15 The EDA is asked to review information related to an EDA Transformation Home Loan which is in default and to take action as to next steps related to the default. In 2007, the EDA entered into a third mortgage agreement with borrower Felicia L. Whitmore for a Transformation Home Loan related to property at 312 East River Street, in the amount of $9, The Transformation Home Loan program, developed by the HRA, was developed to allow homeowners of properties within the core city the opportunity to make repairs and renovations to their homes, intending to encourage retention of owner-occupied housing in the core city and to increase the value and aesthetics of the properties. The target criteria identified homes which would meet the redevelopment qualifications requirements for structurally substandard as defined with TIF law. The third mortgage and promissory note are dated September 27 th, The Transformation Home Loan program allows for forgiveness of the loan if the property is not sold within 5 years of the closing date of the loan. The Finance Department had been tracking the loan and noted in 2010 that 312 East River Street had gone into foreclosure. At that time, the Finance Department and Economic Development Department decision was to wait for the title company to contact the EDA as part of the title research. Unfortunately, the City and EDA s records show no record of contact by the title company. The title company has been contact to show verification that the city was contacted regarding the mortgage in any sale transaction. To-date no information has been provided. The property then went to sheriff s sale on March 31, The sheriff s certificate shows only the first (primary) mortgage. There was no document filed to satisfy the HRA mortgage or release it. The property was purchased in May of 2014 by a private party and is no longer bankowned. The City s attorney has reviewed the EDA s options related to default for such loan programs and provided a summary of possible actions. Unfortunately, as the property has already gone through foreclosure and sheriff s sale, it would appear that the EDA s only recourse at this time is to pursue legal action against the borrower. The attorney has further indicated that successful action related to the title company and title insurance is also unlikely. The third position on the mortgage represented a risk for recovery in this situation. Therefore, the EDA is asked at this time to determine whether to take further action against the original property owner or to declare the amount unrecoverable and close out the loan.

2 B. ALTERNATIVE ACTIONS 1. Motion to declare the amount unrecoverable and close out the loan. 2. Motion to pursue legal action against the 312 East River Street Transformation Home Loan mortgagee for recovery of outstanding loan amount and expenses. C. STAFF RECOMMENDATION Staff recommends Alternative #1. The costs to pursue action against the mortgagee are likely to be commensurate with the outstanding loan amount. Additionally, the mortgagee s ability to pay the outstanding amount with a successful judgement is questionable. Moreover, the program was designed to improve housing stock within the core downtown, which was achieved in this case. D. SUPPORTING DATA A. Loan Documents B. Attorney Background 2

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14 CITY S RIGHTS AND REMEDIES WHEN FIRST MORTGAGE HOLDER FORECLOSES ON PROPERT THAT CITY HOLDS A MORTGAGE ON UNDER A CITY TRANSFORMATION LOAN As you and I discussed, I have set forth below the City s rights and remedies when a person signing the City s, Transformation Loan Documents, ( City Loan Documents ), the ( Borrower ) defaults under the terms of a mortgage that is prior to the City s Transformation Mortgage on the real property ( Property ) securing the City s Transformation Loan, the ( First Mortgage ) and the holder of the First Mortgage ( First Mortgagor ) forecloses on the Property. 1. City s Rights Prior to Sheriff Sale of Foreclosure by First Mortgagor. The City can bid in and purchase the Property at the time of the Sheriff s Sale of the Property. This would require that the City know when the Sheriff s Sale is to take place and bring certified funds in the amount that the First Mortgagor claims is due under the First Mortgage. The City can find out when the Sheriff s Sale is going to be, by filing with the County a Request for Notice of Foreclosure that would require the First Mortgagor to provide notice to the City, of the date of the Sheriffs sale. This is probably not an approach that the City would take since the amount that the City would be required to pay for the Property would be substantial and the Property might not even be worth what the First Mortgagor is owed. If the City did take this approach, they would have to wait for a period of six (6) months (the Redemption Period ), before they could get clear title to the Property and be able to sell it, unless the Borrower vacated the Property, in which case the City could apply to the Court s to shorten the Redemption Period to five (5) weeks. 2. City s Rights After Sheriff s Sale. The City can file a Notice of Intent to Redeem and if the City believes that it can sell the Property for more than the amount owed the First Mortgagor, plus the cost of holding the Property, paying a real estate broker to sell the Property and recover what the City is owed under the Transformation Loan, they could redeem the Property by paying the Sheriff the amount owed the First Mortgagor and get a Sheriff s Certificate of Redemption and then sell the Property. Again, this is not a very likely approach since the Property most likely is not going to be worth the amount it would cost to redeem plus the cost of holding the Property and selling the same v1

15 If the City does not exercise either of the foregoing, then the City will lose all of its rights in the Property in that the First Mortgagor would have title to the Property and the City could only take action against the Borrower to collect the amount owing the City under the Transformation Loan. If the City is going to try to collect from the Borrower under the Transformation Loan it would involve suing the Borrower in District Court to obtain a judgment against the Borrower and trying to collect from the Borrower. Before starting a collection action against a Borrower under the Transformation Loan, the City should try to determine if the Borrower is collectible i.e. is working and may be able to pay the City over a period of time or have other property that the City could get title to. Collection actions can be expensive when you take into account the Court filing fees, service of process fees and attorneys fees and if the Borrower is not collectible, it is just throwing good money after bad. After your review let me know if you have any questions v1