R. PORTER FEILD Burch, Porter & Johnson, PLLC 130 North Court Avenue Memphis, Tennessee (901) Unusual Issues in Today s Economy

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1 R. PORTER FEILD Burch, Porter & Johnson, PLLC 130 North Court Avenue Memphis, Tennessee (901) Unusual Issues in Today s Economy

2 Real Estate Concerns in an Unstable Market Foreclosure by Non-Judicial Sale 1 A deed of trust creates a lien on the debtor s real property that may be foreclosed upon default. 2 Notice 3 (Power of Sale Contained in Trust Deed) o In any foreclosure sale, at least 3 different advertisements must be made in some newspaper published in the county where the sale is to be made Caveat, ; Newspaper advertising is not required where no newspaper is published in the county in which the land is to be sold. When newspaper advertising is not possible, publication must be made 30 days prior to the sale by written notices posted in at least five (5) of the most public places in the county, one (1) of which shall be the courthouse door, and another in the neighborhood of the defendant; if of realty, in the civil district where the land lies o First publication must be made at least 20 days prior to the sale o Notice of sale must be sent to the debtor and any co-debtors on or before the first date of publication by registered or certified mail. o Content Notice Must Include Names of interested parties 1 T.C.A , et.seq Tenn. Prac., Debtor-Creditor Law and Practice 4:1 ( ). 3 T.C.A , : Failure to provide notice does not render a sale void or voidable, but renders selling officer guilty of a class C misdemeanor and liable to party(ies) injured by noncompliance

3 Description of the land in brief terms Time and place of sale List of all state or federal liens on property Redemption 4 o 2 year right of redemption May be waived by the borrower in the deed of trust or mortgage Tax Sales Taxes assessed upon real property become first liens on January 1 of the year for which they are assessed. 5 Consequently, such sale extinguishes junior liens. 6 Delinquency o Prior to enforcing tax lien for delinquent taxes, a notice of delinquency must be published in one or more newspapers of the county once a week for two consecutive weeks in the month of January. 7 Taxpayers with delinquent property taxes must also be sent notice that their property may be sold. This notice is to be included in the taxpayer s current tax bill. 8 Sale o A tax sale shall be ordered for cash subject to the equity of redemption 9 o Sale must be advertised in one sale notice setting forth owners names, a property description, and the amount of judgment. 4 T.C.A T.C.A Tenn. Op. Atty. Gen. No , 2008 WL (Tenn.A.G.) 7 T.C.A T.C.A T.C.A.S

4 o At tax sale the clerk is required to establish a minimum bid amount that is equal to the taxes due on the property, plus interest, penalties, and collection costs. 10 o A tax deed shall be an assurance of perfect title to the purchaser 11 Redemption o Property may be redeemed by tendering to the clerk of the court that sold the property the amount paid for the delinquent taxes, interest and penalties, court costs and any court ordered charges, and interest at the rate of ten percent (10%) per annum computed from the date of the sale on the entire purchase price paid at the tax sale. 12 o Period of redemption is 1 year. Title Concerns o Title insurance cannot be obtained prior to the end of the 1 year redemption period. While some purchasers have been able to obtain clear title and title insurance soon after the redemption period expires, an additional problem prevents many title insurance companies from granting title insurance for several years after a tax sale. 13 Tennessee provides a 3 year statute of limitations on actions to invalidate a tax title. 10 Tenn. Op. Atty. Gen. No , 2005 WL (Tenn.A.G.); Tenn. Code Ann (a)(2) (2003). 11 T.C.A T.C.A , Robert J. Notestine, Property Tax Sales In Tennessee: The Good, The Bad And The Ugly (2008).

5 o If the previous owner was under a disability at the time of sale, he has one year to bring suit after the disability is removed. 14 o Consequently, no action to quiet title may be brought for at least 3 years after sale. Judicial Sales 15 Foreclosure on an instrument containing no Power of Sale clause. Initiated by filing a complaint with Chancery court. Chancery Proceedings 16 Where, upon the foreclosure of a mortgage or deed of trust, or in any case, the specified land to be sold is mentioned in the decree, the court, upon the application of the complainant, may order that: (1) The property be sold on a credit of not less than six (6) months nor more than two (2) years. (2) When the sale is made, and reported and confirmed, no right of redemption or repurchase shall exist in the debtor or his creditors, but that the purchaser's title shall be absolute. (3) The surplus of the purchase money, or the bonds or notes taken therefor, over and above what is necessary to pay the complainant's debt, be paid to the debtor or his other creditors entitled to the same. FORECLOSURE ALTERNATIVES 17 Short Sale Sale of property threatened by foreclosure for less than the amount owed to the lender. Lender will accept the sale proceeds though they are less than the debt owed. 14 T.C.A (d); Inman v. Raymer, 2004 WL at *2 (Tenn.Ct.App. 2004). 15 Rare in Tennessee; notice provisions of T.C.A , et.seq. apply. 16 T.C.A How To Avoid Foreclosures, Findlaw.com,

6 Advantages o Lender may not obtain deficiency judgment for shortage in proceeds, as with a standard foreclosure or deed in lieu of foreclosure. Tax Consequences o Prior to 2007, taxpayers would be required to report to the IRS any debt discharged under a short sale. o The Mortgage Forgiveness Debt Relief Act of amended the Internal Revenue Code to exclude discharges of indebtedness on principal residences from gross income. Deed in Lieu of Foreclosure Foreclosure alternative that is the equivalent of a voluntary repossession of real property, whereby the lender agrees to take a homeowner s deed and may cancel his debt. 19 Motivation o Often lenders will agree to a Deed in Lieu of Foreclosure when a debtor is judgment proof or the value of the property exceeds the value of the debt. 20 o Time and money are saved Lender obtains immediate possession of property Eliminates attorney expense required for foreclosure Advantages o Does not cause a foreclosure to be reported to the credit bureaus Disadvantages 18 Public Law No: (Dec. 31, 2007). 19 Cancellation of debt is within the discretion of the lender. 20 John D. Waller, Deeds In Lieu Of Foreclosure: Who, What, When, Where, Why and How,

7 o Multiple lien holders on a property A lender may not agree to a deed in lieu of foreclosure because it would be required to negotiate releases of those leans in order to obtain clear title. Tax Consequences o Prior to 2007, taxpayers would be required to report to the IRS any debt discharged under a deed in lieu of foreclosure. o The Mortgage Forgiveness Debt Relief Act of amended the Internal Revenue Code to exclude discharges of indebtedness on principal residences from gross income. Mechanics Liens 22 Commencement o Lien attaches and takes effect from the time of the visible commencement of operations Scope 23 o The lien shall extend to, and only to, the owner's right, title or interest in the real property and improvements on the real property existing at the time of the visible commencement of operations or thereafter acquired or constructed. Duration o A prime contractor's lien shall continue for one (1) year after the date the improvement is complete or is abandoned, and until the final decision of any suit 21 Public Law No: (Dec. 31, 2007). 22 T.C.A , et seq 23 T.C.A

8 properly brought within that time for its enforcement. Lien Involving a Mortgage 24 If the contract for an improvement is made with a mortgagor, and the lienor has served the mortgagee with written notice of the same by certified or registered mail before the work is begun or materials furnished by the lienor, and the mortgagee gives written consent thereto by certified or registered mail, the lien provided by this chapter to that lienor shall have priority over the mortgage; and if the mortgagee fails to serve a written objection by certified or registered mail within ten (10) days after receipt of the notice, the mortgagee's consent shall be implied; provided, that the person giving notice shall include a name and return address to which the written objection shall be served. If notice is not served in accordance with the provisions of this section, then the lien shall not have priority over a mortgage otherwise entitled to priority over the lien under applicable law. Enforcement 25 o May be enforced only by the filing of an action seeking the issuance of an attachment in the manner as follows: For a prime contractor, the lien shall be enforced in a court of law or equity by attachment or in a court of general sessions having jurisdiction by a warrant for the sum claimed and writ of attachment, filed under oath, setting forth the facts, describing the real property, to be served on the owner; Reverse Mortgages (Home Equity Conversion Mortgage) Definition under Tennessee Law 26 5) Home equity conversion mortgage loan means a loan for a definite or indefinite term: 24 T.C.A T.C.A T.C.A , et. Seq.

9 (A) Secured by a first mortgage or first deed of trust on the principal residence of the mortgagor; (B) The proceeds of which are disbursed to the mortgagor in one (1) or more lump sums, or in equal or unequal installments, either directly by the lender or the lender's agent; (C) That requires no repayment until a future time, upon the earliest occurrence of one (1) or more events specified in the reverse mortgage loan contract Features o Must be insured by FHA or a similar federal agency, or be a Fannie Mae Reverse Mortgage Loan. 27 o Proceeds are not taxable o Owner retains title to home Thus remains responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses o No monthly payments o Loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence o Debt owed shall never exceed the value of the subject property. 28 Enforcement 29 o May only be enforced through the sale of the property o Lender shall not obtain a deficiency judgment against the borrower Devaluation The recent sharp decline in real estate sales and respective increase in foreclosures has had a negative impact on real property values. Tax appraisals 30 o State board of equalization provides guidelines for local assessors in valuing property and assessing taxes 31 Valuation in Shelby County, TN 32 o Sales activity is the basis for tax appraisals and valuation o Only qualified sales are used to make value determination because they most accurately reflect market conditions 27 T.C.A T.C.A (a),(b). 29 T.C.A (c). 30 Shelby County Tax Assessor, 31 T.C.A , Shelby County Tax Assessor, supra

10 o Qualified sales are defined by the assessor as: Sales transactions between two unrelated parties each seeking to maximize their position in an arms-length transaction Qualified sales do not include: Trustee Deeds (foreclosures), or Impact of Foreclosures on Valuation Special Warranty Deeds (bank sales and/or a sale in which the seller does not warrant against prior title defects before they owned the property). o A large number of foreclosures in a neighborhood require valuation based on a smaller number of qualified sales. Qualified sales in these instances will likely be non-reflective of the true value of a property. A large number of foreclosures in a neighborhood (selling at sharply reduced prices), causes property owners to sell for less than their property's true value to stay competitive. 33 The end result: devaluation. Property Owner s Remedies Where Home has been Assessed a Low Value o If a property owner is dissatisfied with the tax assessor's appraisal of his home, he may initiate a contested case with the state board of equalization to have his individual case reviewed. 34 Abandonment Memphis City Ordinances o Definition of Abandoned Structure 35 A vacant structure without obvious supervision and the structure or any portion thereof is in such a condition as to constitute a danger, nuisance or in any way a hazard to the Government Action 36 o Inspection Whenever the director of fire services believes that a building or structure is a abandoned, director shall cause an inspection to be done to determine if it complies with the housing code, the fire code, the building code and this chapter, and all other applicable housing maintenance and building 33 The Real Costs Of Home Foreclosures, 34 ADC Memphis City Ordinance Id. at

11 codes. A fee shall be assessed for this inspection Penalties may be assessed o Lien on Property. Should the owner fail to pay accumulated inspection fees and penalties, the city shall effect a lien on the property to recover the fees and penalties. o Special Tax The fees and penalties for this section are declared to be a special tax to be collected as general taxes levied by the city.