ADVANCED ISSUES IN FORECLOSURE MAZYAR HEDAYAT ESQ.

ADVANCED ISSUES IN FORECLOSURE MAZYAR HEDAYAT ESQ. Page 1 of 13

The Process! Illinois foreclosures governed by Illinois Mortgage Law (735 ILCS 5/15 or IMFL)! process takes on average 9 months, but can take as long as 24 in some counties! Process can be abbreviated for non- residential or abandoned residential (735 ILCS 5/15-1200) Steps in a Case! Record the Lis Pendens with Recorder! File Complaint with the Clerk of Court! Serve Summons via a Sheriff or Posting! File A Motion for Default seeking! Order of and Sale! Reinstatement Period Expires (90 days after personal service)! Redemption Period expires (later of 7 mo. after service or 3 mo. after judgment)! Conduct the Sale! Get Sale Confirmed! Right to Possession Expires (30 days after foreclosure sale confirmed)! Eviction by Sheriff or Named Parties! Recording of Deed Implications of! Homeowners lose their home! Loss of equity by homeowner! Deficiency Judgment if personal service! Borrowers credit severely damaged Terms you should know Default:! A default begins with the date of the first missed payment! When the second payment is missed the lender has to send notice advising the borrowers that they have a 30 day period to contact a housing counselor, and if contact is made the lender will give a second 30 day grace period prior to taking legal action! If a third payment is missed the lender will send a notice of acceleration to inform the borrower it intends to foreclose and will forward the file to an attorney to begin foreclosure proceedings Page 2 of 13

under the IMFL must proceed as follows: The Complaint! Most Common: Illinois Short Form (IMFL 15-1504(a)) - not required but easier! Even if the Short Form was used, make sure the dots are connected " The original borrower? The original lender? " Has borrower gotten married; divorced; died? " How does original lender relate to current plaintiff? " Is the chain of title intact? Or are there gaps?! Note: (New) Illinois Supreme Court Rule 113(i) relates to deceased borrowers where no probate estate was opened and directs that the court shall appoint a special representative, if a party so moves.! What does the Short Form contain? " Names of Plaintiffs and Defendants " Original Mortgage, Note as Ex. A,B ( 2) " Instrument Type (mortgage, etc.) ( 3A) " Date of original Mortgage ( 3B- D) " Mortgagor, Mortgagee Names ( 3B- D) " Recording location, date, doc# ( 3E, F) " Mortgagor s interest fee simple, etc. ( 3G) " Original Mortgage Amount ( 3H) " Legal description and common address of the property, sometimes PIN is included ( 3I) " Statement of default date, balance, per diem interest, etc. ( 3J) " Present Owners of property ( 3K) " Other persons named as D and their interests ( 3L) " Deficiency against whom ( 3M) " Capacity of P to bring suit ( 3N). This is where P should connect the dots if P is not the original lender. Note that under 735 ILCS 5/2-606 any claim that is based on a writing should be attached to the complaint. So assignments should be attached; however, from a practical standpoint that doesn t always happen. " Shortened redemption period ( 3O). Longer of 7 months service of Ds or 3 Page 3 of 13

months from entry of foreclosure judgment. If seeking to shorten, must be backed up abandoned, waste, etc. " Was right of redemption waived ( 3P) " Facts in support of attorney s fee ( 3Q) " Is a receiver being sought and why? ( 3R) " Will P accept title in satisfaction of the debt w/o a sale (section 15-1402)? ( 3S) " Names of D whose possessory rights are sought to be terminated. ( 3T) " Prayer for relief " Even though on its face the short form seems deficient under fact pleading standards; however, if the form is used it is deemed to be sufficient as to the allegations made. " The Complaint should be verified or have an affidavit attached. (IMFL 15-1506(a)(2)) " (New) Illinois Supreme Court Rule 113 complaint must now attach all endorsements and allonges as well as the Note and Mortgage. Service of Summons:! Summons and Complaint must be served along with notice advising homeowner of rights, including reinstatement and redemption! Who must be a party? " Technically only parties to the mortgage are necessary parties Mortgagee(s) and Mortgagor(s) (IMFL 1501(a) and 1504) " Usually junior mortgage holders, other lienholders (judicial, mechanics, etc), tenants, unknown owners and occupants, non- record claimants. If not named, their interests are not foreclosed. (IMFL 1504, BCGS v. Jaster (299 Ill.App.3d 700). If not foreclosed, then no clear title. " Unknown owners are people or entities that may have an unrecorded interest in the property being foreclosed. (IMFL 1501(c)). Service by publication is sufficient under 735 ILCS 5/2-413, 5/2-206. P must have an affidavit and have been diligent in attempting to determine the identity. (Callner v. Greenburg, 33 N.E.2d 437) " Non- record claimants are defined in the IMFL 1210. The complaint must contain a sufficient legal description to identify the property. This way when publication occurs Page 4 of 13

non- record parties will be deemed to have notice. No inquiry is required by P for non- record claimants. (See Applegate Apt. v. Commercial Coin, 657 N.E.2d 1172.) " Junior lienholders should act to preserve their position if a senior lienholder forecloses can jump position of other non- responsive lienholders (See Mid America Federal Savings Bank v. Liberty Bank, 562 N.E.2d 1188). Also a timely filed counter- claim can keep the foreclosure action alive if first settles with borrower and borrower does not come current with junior lienholder. " Service on unknowns generally requires publication (once a week for 3 weeks) and must run at least 30 days prior to a default judgment is entered. Must be in a newspaper of general circulation. (IMFL 1502(c). " What if a party is in the military?! If a mortgagor defendant is in the military that was deployed to combat or on active military duty and serving overseas within the previous 12 months the court must stay the proceedings for a period of 90 days.! Increase in foreclosure filing fee.! The plaintiff is required to pay an additional $50 at the time of filing for the Prevention Program Fund.! According to the IMFL 15-1504 and Illinois Supreme Court Rule 113, the Note (with all indoresements and allonges) must be attached File the Lis Pendens After the filing of the complaint, the Notice of (the lis pendens ), is created to comply with the IMFL 15-1503. Record in the county the property is located Acts as constructive notice to all after acquired interests At the Hearing Any interested party can appear and become a party. o Junior lienholders should move to protect their position, especially if equity in the property. It doesn t matter if junior lien is in default. o If other parties have filed a foreclosure or Mechanic s lien action cases should be consolidated or counterclaims filed. o Tenants interests are not terminated by foreclosure:! If tenancy was in existence prior to the mortgage (Kelley/Lehr v. O Brien, 194 Ill.App.3d 360 (2 nd Dist. 1990)) Page 5 of 13

! If tenants were not made a party to the proceedings (IMFL 15-1504(t))! Must comply with the Federal Protecting Tenants at Act of 2009. Leases entered into prior to foreclosure must be allowed to stay for balance of the lease. Mediation is now statewide, although at the circuit s discretion. (New Illinois Supreme Court Rule 99.1) If defendant participates, can delay the proceeding for up to an additional 2 months. Most cases are simply a default. The borrowers never appear or answer. Showing up at court is not enough. Written answers and appearances. New change with regard to Defaults in Illinois Supreme Court Rule 113. There is an additional notice requirement. From the 113(d): Notice Required. In all mortgage foreclosure cases where the borrower is defaulted by court order, a notice of default and entry of judgment of foreclosure shall be prepared by the attorney for plaintiff and shall be mailed by the Clerk of the Circuit Court for each judicial circuit. The attorney for plaintiff shall prepare the notice in its entirety and deliver to the Clerk of the Circuit Court one copy for filing and one copy for mailing within two business days after the entry of default. The Clerk of the Circuit Court shall mail within five business days after the entry of default, by United States Postal Service, a copy of the notice of default and entry of judgment of foreclosure to the address(es) provided by the attorney for the plaintiff in an envelope bearing the return address of the Clerk of the Circuit Court and file proof thereof. The notice shall be mailed to the property address or the address on any appearance or other document filed by any defendant. Any notices returned by the United States Postal Service as undeliverable shall be filed in the case file maintained by the Clerk of the Circuit Court. A Sample Notice is provided in the Rule. If not a default, then usually summary judgment. There is no genuine issue of material fact. The P must produce the original note, mortgage (along with assignments) and evidence of default via affidavit. The borrower has the burden of proving their affirmative defenses or counter- claim (if any). What is an issue of material fact? If the D simply answers with the stock no knowledge of such allegation sufficient to form a belief, that is not enough to defeat a MSJ if the Complaint was verified. Also, if complaint was verified, answer must also be verified. The D must deny if there is a good faith basis to do so. D can attempt to attack the affidavit(s) attached to the MSJ. Page 6 of 13

This has changed a little with the new Illinois Supreme Court Rule 114. Rule 114 reads as follows: Rule 114. Loss Mitigation Affidavit (a) Loss Mitigation. For all actions filed under the Illinois Mortgage Law, and where a mortgagor has appeared or filed an answer or other responsive pleading, Plaintiff must, prior to moving for a judgment of foreclosure, comply with the requirements of any loss mitigation program which applies to the subject mortgage loan. (b) Affidavit Prior to or at the Time of Moving for a Judgment of. In order to document the compliance required by paragraph (a) above, Plaintiff, prior to or at the time of moving for a judgment of foreclosure, must file an affidavit specifying: (1) Any type of loss mitigation which applies to the subject mortgage; (2) What steps were taken to offer said type of loss mitigation to the mortgagor(s); and (3) The status of any such loss mitigation efforts. (c) Form of Affidavit. The form of the affidavit shall be as set forth below in Form 1, or shall be in a form specified by amendment to this rule, but, in any case, shall contain the information set forth in paragraph (b) above. (Sample affidavit is in the Rule.) (d) Enforcement. The court may, either sua sponte or upon motion of a mortgagor, stay the proceedings or deny entry of a foreclosure judgment if Plaintiff fails to comply with the requirements of this rule. New Illinois Supreme Court Rule 113 applies to prove up affidavits (text from the Rule): (1) Requirement of Prove- up Affidavits. All plaintiffs seeking a judgment of foreclosure, under section 15-1506 of the Illinois Mortgage Law (735 ILCS 5/15-1506), by default or otherwise, shall be required to submit an affidavit in support of the amounts due and owing under the note when they file any motion requesting a judgment of default against a mortgagor or a judgment of foreclosure. (2) Content of Prove- up Affidavits. All affidavits submitted in support of entry of a judgment of foreclosure, default or otherwise, shall contain, at a minimum, the following information: Page 7 of 13

(i) The identity of the affiant and an explanation as to whether the affiant is a custodian of records or a person familiar with the business and its mode of operation. If the affiant is a person familiar with the business and its mode of operation, the affidavit shall explain how the affiant is familiar with the business and its mode of operation. (ii) An identification of the books, records, and/or other documents in addition to the payment history that the affiant reviewed and/or relied upon in drafting the affidavit, specifically including records transferred from any previous lender or servicer. The payment history must be attached to the affidavit in only those cases where the defendant(s) filed an appearance or responsive pleading to the complaint for foreclosure. (iii) The identification of any computer program or computer software that the entity relies on to record and track mortgage payments. Identification of the computer program or computer software shall also include the source of the information, the method and time of preparation of the record to establish that the computer program produces an accurate payment history, and an explanation as to why the records should be considered business records within the meaning of the law. (3) Additional Evidence. The affidavit shall contain any additional evidence, as may be necessary, in connection with the party s right to enforce the instrument of indebtedness. (4) Form of Prove- up Affidavits. The affidavit prepared in support of entry of a judgment of foreclosure, by default or otherwise, shall not have a stand- alone signature page if formatting allows the signature to begin on the last page of the affiant s statements. Sample Affidavits are provided for in the Rule. While rare, the foreclosure could actually go to trial. A foreclosure trial is like any other civil trial. Allegations deemed sufficient from using the short form, must be proven at trial. Think of it as a breach of contract suit contract, breach, and damages are what have to be shown. Defenses to Page 8 of 13

! Force- placed Insurance: Situation where a lender purchases insurance believing that the homeowner let theirs lapse, and if in fact the homeowner has their own insurance the homeowner does not have to pay for force placed insurance! Tax Sale: Real estate taxes are unpaid and sold, the buyer should not have to pay any increased costs if the buyer made all time mortgage and escrow payments and responded to all lender inquiries! Lost Payments: When a loan is so sold or transferred and payments are not applied properly! Failure to accelerate the Note: If the loan documents require notice of acceleration, and notice is not sent the foreclosure can be defeated! Suit after Assumption: If the original Mortgagor sells the property without a release there will be personal liability in a foreclosure action. The original mortgagor should be dismissed without adverse credit consequences.! FHA- Insured Loans: FHA loans have special requirements. These include a notice of counseling mailed to the homeowner within 45 days of default, a face to face meeting with the borrower within 90 days of default, and a notice of available counseling. If these rules are not complied to there is an affirmative defense.! Accepting Payments after : If the lender accepts payments after filing foreclosure and there is no bankruptcy this may be a defense to the foreclosure.! Truth in Lending and HOEPA Violations: the original documents must be reviewed to see if there were any violations.! Fraud, Abuse, Collusion: Must be proven and may be used as an equitable defense to foreclosure.! Fair Debt Collection Practices Act: All Fair Debt Collection Practices must be followed by the attorneys who file foreclosure papers for they are debt collectors! It is not a defense, but can help to give rise to a claim of damages or statutory claim! Failure to attach note and mortgage to complaints: Note and mortgage must be attached to the complaint or the complaint can be struck.! Incorrect Notice or Service: All information must be accurate! If mistakes are made the order can invalidated. Judgment and Order of Sale:! After a default, summary judgment or a trial, there will be a Judgment of and Order of Sale.! IMFL 15-1506 sets forth what needs to be in the Judgment of. o Last dates for redemption and/or reinstatement o Provide for seller other than county sheriff o Ruling made pursuant to the prayer for relief Page 9 of 13

Reinstatement:! Payment of past due amounts- the total that is owned including all principal, interest, escrow, costs and fees to make the account current Redemption:! Redemption is the payment of all amounts that are due to the lender, principal, interest, fees, and costs! If the property is residential the redemption period ends 7 months from the date the lender was served or 3 months from the date of the judgment Judicial Sale:! If the rights to reinstate and redeem are expired the lender may sell the home by judicial sale! Notice must be given to all parties who have appeared and that were not found in default! This must also be served in the newspaper for 3 weeks, and must be posted between 7 and 45 days prior to the judicial sale! The Lender can credit bid up to the amount of their judgment. Any amount less than the judgment is a deficiency.! The procedures for the sale vary some by county. In Will County, the sale occurs at the courthouse on Wednesdays. Judgment creditors specify an opening bid. Any 3 rd party bidders must put up 10% of their bid (cash or certified funds) and pay the balance within 24 hours. The sale is an auction, open to the public and publicized according to IMFL 15-1507(c)! IMFL 15-1507(c) the sale can occur any day after the redemption period has passed. Publication of the sale must be published in a paper of general circulation for the county where the property is located. The notice must be published once a week for 3 consecutive weeks. The notice cannot be published more than 45 days before the sale and not less than 7 days before the sale. Also parties not in default must be sent notice via regular US mail. (It s generally best to mail notice even if defaulted. See your local rules.)! If a sale is continued (not held), republication is not needed if less than 60 days.! Remember than a low sale price does not render a sale invalid.! The selling officer will produce a Certificate of Sale and send it to the P. This document is generally recorded.! The sale is not done unless it is confirmed by the judge. P will petition the court to confirm the sale. Page 10 of 13

! The Court must confirm the sale unless (IMFL 15-1508(b)): 1. Notice was deficient 2. The terms of sale were unconscionable 3. The sale was conducted fraudulently 4. Justice was not otherwise done.! Obviously #4 gives the court the most latitude.! Order of possession will also be entered and stayed for 30 days! Personal liability for deficiency is established, and the order is the final order open for appeal and other motions The (Closing or) Judicial Sale with 3 rd Party Bidders A 3 rd party bidder is anyone other than the judgment creditor at the sale. Only the judgment creditor can credit bid. All others must conform to the conditions of the sale, generally cash in full or 10% down (cash or certified funds) and the balance in 24 hrs. 3 rd Party bidders used to be rare; however, they have become more popular. Investors are looking at getting a good deal. Holding onto the property or renting it out. Issues can arise where the Judgment of is silent on the terms or the terms differ from the conditions actually at the sale. (See World Savings v. AmerUs (1 st Dist, Nov. 16, 2000)) IMFL 15-1509(a) grants the buyer a deed at confirmation. Special Redemption:! Under IMFL 15-1604 a Special Right to Redeem is a redemption that applies if the purchaser of a resident is the mortgagee and the sale price is less that the total amount of principal, interest, costs and attorney s fees! The mortgagor has a right to redeem up to 30 days after the foreclosure sale by paying the sale price, all costs incurred by the mortgagee is due to sale and confirmed by the court and Tenants! Tenants cannot have their right to possession terminated by the Order Approving Sale! Plaintiff must obtain a Supplemental Order of Possession or file a forcible entry and detainer action! A lease is still valid even after a foreclosure has been filed! If the plaintiff becomes the new owner as a result of a foreclosure the bank must notify the tenant! If the bank does not notify the tenant tee bank cannot demand rent Page 11 of 13

! Before an eviction case can be filed the bank must serve the tenant with written notice to vacate giving the tenant at least ninety (90) days after their lease ends to move out of the building! If eviction is due to a building foreclosure the tenant s eviction should be sealed by the court! If the tenant is a Section 8 housing Voucher holders, the bank is required to accept rental payments from the tenant and the Chicago Housing Authority (CHA) New legislation and amendments! A copy of the notice must be sent by first class mail, postage prepaid where the property is located! Confirmation of sale must be sent where the property is located! Lender contact information must be given! The grantee or mortgagees name, street, mailing address, telephone must be listed! No foreclosure action may be brought until required notice is served on the mortgagors and notice period has expired! This notice period is 30 days from the mailing of the notice, or if an approved counseling agency provides written notice The exceptions to these are:! Property is non- residential! Mortgagor has previously filed for relief under the Bankruptcy Code! The residential real estate is not occupied as mortgagor s principal residence. Deficiencies IMFL 15-1511 a foreclosure of a mortgage does not affect a mortgagee s rights to obtain a personal judgment for a deficiency. A deficiency is essentially the amount of the judgment less the amount that the property sold for at the sale. A deficiency is like any other judgment in Illinois and can get statutory judgment interest. IMFL 15-1508(e) allows for the deficiency to be entered as part of the judgment confirming the sale. The language in 15-1508(e) states the court shall enter a deficiency if requested in the complaint and proven in the report of sale. Lately Judges have been using the report of sale requirement to require banks to jump thru many hoops to get a deficiency. In many instances, banks have stopped asking for them. This depends on the judge. (There is a well- known judge in Will County that makes it very difficult for banks to get deficiencies.) Page 12 of 13

In many instances the sale will be confirmed, but damages (deficiency will be scheduled for a different time) As part of the prove up for a deficiency a court may require: a copy of the complaint showing a deficiency was sought, certified appraisals (pre- mortgage and post- sale), loan history and affidavits, copy of the report of sale, etc This will vary by county and sometimes even by judge. Cook County can also make it difficult for lenders to obtain a deficiency. Remember a deficiency is only available against parties that were personally served. If only served by publication, no deficiency is available. Don t forget that a sale for less than the judgment amount triggers the special right to redemption under IMFL 15-1604. This gives the borrower an additional 30 days after the sale to redeem. However, the lender can still get an in rem deficiency against the property to protect their interest. Note that an in rem deficiency can be turned back into an in personam deficiency if there is a subsequent action to enforce the deficiency. Remember no personal deficiency can be sought or granted against a borrower who was discharged in bankruptcy (and did not reaffirm the debt). Page 13 of 13