In the aftermath of the 2008 recession, the bursting of the housing bubble, and the decline in the value of real estate, governments have taken various steps to assist and support homeowners in keeping their homes. In early 2009, under the authority of the Financial Stability Act of 2009, the U.S. Department of the Treasury launched the Making Home Affordable program to help struggling homeowners avoid foreclosure. The components of this program include the Home Affordable Modification Program (HAMP), which seeks to provide a process and incentives for lenders to modify home mortgages by lowering monthly payments to levels affordable for eligible homeowners at risk of foreclosure. In 2010, an amendment to the Massachusetts foreclosure statute extended to 150 days (up from 90 days) the right of homeowners to cure a mortgage default unless the lender makes a good faith effort to negotiate a commercially reasonable alternative to foreclosure as described in the statute.
Although these efforts and other factors, most notably court decisions and legal challenges based upon the question of loan ownership at the time of commencement of the foreclosure action, slowed down foreclosure activity in Massachusetts in 2010 and 2011, there was a marked increase in foreclosure activity in Massachusetts in the first half of 2012. Consequently, the Massachusetts legislature considered another amendment to the foreclosure statute and on August 3, 2012, Governor Patrick signed into law An Act Preventing Unlawful and Unnecessary Foreclosures purporting to establish stronger consumer protections and provide homeowners with a real opportunity to receive loan modifications.
The Act changes foreclosure practice by, among other things, requiring additional undertakings in advance of certain foreclosures pursuant to new Section 35B added to MGL Chapter 244 (the Massachusetts foreclosure statute) by the Act and applicable to borrowers effective immediately.
Section 35B prohibits a lender from publishing a notice of foreclosure sale with respect to “certain mortgage loans” without first having taken reasonable steps and made a good faith effort to avoid foreclosure. Not all owner-occupied, residential mortgage loans are covered – it must have one or more certain features that characterize many subprime mortgage loans, such as a low introductory interest rate, interest-only or less than fully amortizing loan payments, less than full documentation of income or assets, excessive prepayment penalties, or with a loan-to-value ratio in excess of 95% (or 90% if housing payments exceed 38% of the borrower’s income). In order to comply with its obligation to take reasonable steps and make a good faith effort to avoid foreclosure, a lender must assess the borrower’s ability to make an affordable monthly payment and consider the net present value of receiving payments under a modified mortgage loan as compared to the anticipated net recovery following foreclosure. Although the statute includes definitions of some of the operative terms and some basic guidelines, the details are limited and the Division of Banks is charged with adopting regulations to aid in the application and operation of the new requirements.
A lender is presumed to have complied with its obligation (i) if it agrees to modify the loan in a manner that provides for the affordable monthly payment in a case where it has determined that the net present value of the modified mortgage loan exceeds the anticipated net recovery at foreclosure, and (ii) if it notifies the borrower that no modified loan will be offered and provides a written summary of its analysis of all the relevant factors in a case where it has determined that the net present value of the modified mortgage loan is less than the anticipated net recovery of the foreclosure, or does not meet the borrower’s affordable monthly payment.
In all cases, the lender must first notify the borrower of the borrower’s rights to pursue a modified mortgage loan in accordance with the basic guidelines of Section 35B. If the borrower wishes to pursue a modified mortgage loan or an alternative to foreclosure, such as a short sale or deed-in-lieu of foreclosure, the borrower must so notify the lender (including a statement of the borrower’s income and list of debts and obligations if pursuing a modified mortgage loan) within 30 days of the borrower’s receipt of the lender’s notice. Within 30 days following receipt of the borrower’s notice of intent to pursue a modified mortgage loan, the lender must provide the borrower with the lender’s assessment of the borrower’s affordable monthly payment, the net present value of the mortgage, and the anticipated net recovery at foreclosure, and whether or not the lender will offer a modified mortgage loan.
A borrower who receives a modified mortgage loan offer must respond to such offer within 30 days of receipt of the offer and may propose a reasonable counteroffer, to which the lender has another 30 days to respond. Section 35B provides that the process for determining whether to offer a modified mortgage loan shall not take longer than 150 days.
Due to the complex nature of this process and the concern for the future marketability of the subject residential property, Section 35B does provide that the lender shall certify compliance by affidavit and the recording of such affidavit shall be conclusive evidence of compliance in favor of an arm’s-length third party purchaser for value at or subsequent to the resulting foreclosure sale. Following the recording of the affidavit of compliance, title to the foreclosed property should not be affected if it is later determined that the foreclosing lender failed to comply with its obligations under Section 35B.
The Division of Banks is required to track the outcome of the loan modification process under Section 35B and report thereon annually. It will be interesting to check back in the next couple of years to learn if the promise of the Act is fulfilled.