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Summer 2012

Finance, Banking & Bankruptcy Bulletin

Massachusetts Amends Nonjudicial Foreclosure Statute

By Gregory S. Bombard, Esq.

Click here for a printable copy of the bulletin.

On August 3, 2012, Massachusetts Governor Deval Patrick signed into law House Bill No. 4323 (“H4323”), which adds significant procedural hurdles to foreclosing on real property in Massachusetts. The provisions of the law go into effect on November 1, 2012. H4323 substantially rewrites M.G.L. c. 244, §§ 14 and 35A. It also adds two entirely new sections to Chapter 244—Sections 35B and 35C. This bulletin provides a summary of the changes most likely to affect mortgage servicers.

New Requirement that Mortgage Assignments be Recorded

Under new Section 14, a foreclosure may not proceed unless the entire chain of mortgage assignments from the original mortgagee to the foreclosing entity is recorded. Previously, the foreclosing entity had to possess, but did not have to record mortgage assignments before foreclosing. See U.S. Bank Nat. Ass’n v. Ibanez, 458 Mass. 637, 651 (2011) (“We do not suggest that an assignment must be in recordable form at the time of the notice of sale or the subsequent foreclosure sale, although recording is likely the better practice.”).

Under the new law, no foreclosure notice will be valid unless “(i) at the time such notice is mailed, an assignment, or chain of assignments, evidencing the assignment of the mortgage to the foreclosing mortgagee has been duly recorded in the registry of deeds . . . and (ii) the recording information for all recorded assignments is referenced in the notice of sale required in this section.”

New Requirement to Modify Certain Mortgage Loans

New Section 35B will require mortgagees to attempt to modify “certain mortgage loans” instead of foreclosing. The requirements to attempt to modify are onerous, but only apply to “certain mortgage loans.”i Unfortunately, Section 35B presumes that mortgage loans are “certain mortgage loans” unless the mortgagee can show that they are not.

For “certain mortgage loans,” a mortgagee must take reasonable steps and make a good faith effort to avoid foreclosure before commencing foreclosure. A mortgagee is only presumed to act in good faith if, in all cases where the net present value of a modified mortgage exceeds the anticipated net recovery at foreclosure, the mortgagee offers the borrower a modification.

In addition, new Section 35B requires mortgagees of “certain mortgage loans” to engage in a protracted negotiation process with the borrower before foreclosing. As part of that negotiation, the mortgagee must disclose to the borrower the net amount it anticipates recovering from a foreclosure. Such a disclosure could serve as a weapon in later litigation over the commercial reasonableness of the price obtained at the foreclosure sale, particularly where the mortgagee recovers less than it earlier anticipated.

New Section 35C: A Statutory Add-On to Eaton

New Section 35C will incorporate the SJC’s recent holding in Eaton v. Fed. Nat. Mortg. Ass’n , 462 Mass. 569, 571 (2012). There, the SJC held that a foreclosing entity must be both the assignee of the mortgage and be either note holder or acting on behalf of the note holder. New Section 35C prohibits a creditorii from publishing a foreclosure notice if the creditor “knows or should know that the mortgagee is neither the holder of the mortgage note nor the authorized agent of the note holder.” It also requires the creditor to record an affidavit swearing to its compliance with the new section. The affidavit will shield third-party buyers from claims under Eaton or Section 35C, but will not shield creditors from potential liability to the borrowers. Eaton suggested the use of affidavits, but now the statute requires it.

Potential for More Foreclosure Litigation

H4323 could produce an immediate wave of foreclosure-related litigation for several reasons. First, it creates a new right of action for third parties to recover the cost, including attorney’s fees, of “correcting, curing or confirming documentation relating to the sale, transfer or assignment of a mortgage loan.” Unfortunately, this new section does not define “third party.” It defines “Borrower” as “a mortgagor of a mortgage loan.” Plaintiffs in postforeclosure wrongful foreclosure litigation could therefore argue that they are “third parties” because they are no longer a mortgagor of a mortgage loan. If a court agreed, they would then be entitled to their costs for “confirming” the foreclosure documentation. Worse, the act does not limit a “third party’s” efforts to reasonable, or even successful, efforts, although courts may very well do so.

More broadly, each of the new restrictions imposed by H4323 implicates the Massachusetts Consumer Protection Act, Chapter 93A. Mortgagees’ conduct can violate Chapter 93A if it is “within the penumbra of a common law, statutory, or other established concept of unfairness.”Akar v. Fed. Nat. Mortg. Ass’n, ___ F. Supp. 2d ___, 2012 WL 661458 at *21 (D. Mass. Feb. 8, 2012) (quoting Morrison v. Toys “R” Us, Inc., 441 Mass. 451, 457 (2004)). So, a mortgagee’s failure to comply precisely with the new foreclosure restrictions may be found to be a violation of Chapter 93A. A violation of Chapter 93A carries with it the potential for an award of multiple damages and attorney’s fees.

Therefore, in addition to greatly increasing the burden on foreclosing mortgagees in Massachusetts, H4323 will undoubtedly expand the number of foreclosures that result in litigation. Please feel free to contact the following attorneys in our office with questions regarding the new legislation:

Donn A. Randall [email protected] (617) 368-2520
Felicity Hardee [email protected] (413) 272-6283
Mary Ellen Manganelli [email protected] (617) 368-2503

This bulletin provides only general information and should not be relied upon as legal advice.

[i] Those loans are commonly referred to as “predatory” loans and are defined as meeting one or more of the following conditions, inspired by, and expanding on, the factors adopted by the SJC in Com. v. Fremont Inv. & Loani, 452 Mass. 733, 739 (2008):

  1. an introductory interest rate granted for a period of 3 years or less and such introductory rate is at least 2 per cent lower than the fully indexed rate;
  2. interest-only payments for any period of time, except in the case where the mortgage loan is an open-end home equity line of credit or is a construction loan;
  3. a payment option feature, where any 1 of the payment options is less than principal and interest fully amortized over the life of the loan;
  4. the loan did not require full documentation of income or assets;
  5. prepayment penalties that exceed section 56 of chapter 183 or applicable federal law;
  6. the loan was underwritten with a loan-to-value ratio at or above 90 per cent and the ratio of the borrower’s debt, including all housing-related and recurring monthly debt, to the borrower’s income exceeded 38 per cent; or
  7. the loan was underwritten as a component of a loan transaction, in which the combined loan-to-value ratio exceeded 95 per cent.

[ii] “Creditor” is a defined term under new Section 35C, and is much broader than the term “mortgagee” as interpreted by the SJC in Eatonii. It includes “a person or entity that holds or controls, partially, wholly, indirectly, directly, or in a nominee capacity, a mortgage loan securing a residential property, including, but not limited to, an originator, holder, investor, assignee, successor, trust, trustee, nominee holder, Mortgage Electronic Registration Systems or mortgage servicer, including Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. The term creditor shall also include any servant, employee or agent of a creditor.”